-,

4OTH),N~UAL REPORT OF THEt~ECURITIES AND EXCHANGE COMMISSION

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

Headquarters Office

500 North Capitol Street

Washington, DC 20549

COMMISSIONERS

RAY GARREn, JR, cneirmen

PHILIP A. LOOMIS, JR.

JOHN R. EVANS

A. A SOMMER, JR

IRVING M POLLACK

GEORGE A. FITZSIMMONS, Secretary

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

Washmgton. DC 20402 Price $2 05

Stock Number 04lHlOO-OO101

-
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

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

the honor to transmit to you the Fortieth Annual Report of the

Commission covering the fiscal year July 1,1973 to June 30,1974, In

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

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

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

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

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

Woods Agreement Act; Section 11(b) of the Inter-American

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

Bank Act.

Respectfu!ly,

RAY GARRETT,JR.

Chairman

THE PRESIDENTOF THE SENATE

THE SPEAKEROF THE HOUSE OF REPRESENTATIVES,

Washington, D.C.

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COMMISSIONERS AND

PRINCIPAL STAFF OFFICERS

(As of January 1, 1975)

COMMISSIONERS Term expires

June 5

RAY GARRETT, JR., of llhnors, Chairman 1977

PHILLIP A. LOOMIS, JR., of California 1979

JOHN R. EVANS of Utah 1978

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

IRVING M. POLLACK of New York 1975

Secretary: GEORGE A. FITZSIMMONS

Executive Assistant to the Chairman: HARVEY L. PITT

PRINCIPAL STAFF OFFICERS

ALAN F. BLANCHARD, Executive Director

ALAN B. LEVENSON, Director, Divrsron of Corporation Finance

RALPH C. HOCKER, Associate Director

RICHARD H. ROWE, Associate Director

NEAL S. McCOY, Associate Director

STANLEY SPORKIN, Director, Division of Enforcement

IRWIN M. BOROWSKI, Associate Director

WALLACE L. TIMMENY, Associate Director

THEODORE SONDE, Associate Director

LEE A. PICKARD, Director, Divisron of Market Regulation

SHELDON RAPPAPORT, Associate Director

ROBERT LEWIS, Associate Director

ALLAN S. MOSTOFF, Director, Drvrsion of Investment Management

Regulation

ANNE P. JONES, Associate Director

AARON LEVY, Director, Drvrsron of Corporate Regulation

GRANT GUTHRIE, Associate Director

LAWRENCE E. NERHEIM, General Counsel

DAVID FERBER, Solicitor

PAUL GONSON, Associate General Counsel

S. JAMES ROSENFELD, Director, Office of Public Information

CHILES T. A. LARSON, Assistant Director

JOHN C. BURTON, Chief Accountant

A. CLARENCE SAMPSON, Associate Chief Accountant

GENE L FINN, Chief Economist, Office of Economic Research

BERNARD WEXLER, Director, Office of Opinions and Review

WILLIAM S. STERN, Associate Director

HERBERT V. EFRON, Associate Director

WARREN E. BLAIR, Chief Administrative Law Judge
ANDREW P. STEFFAN, Director, Office of Policy Planning

FRANK J. DONATY, Comptroller

CHARLES A. MOORE, Records Officer

RICHARD J. KANYAN, Service Officer

ALBERT FONTES, Director, Office of Personnel

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

RALPH L. BELL, Director, Office of Data Processing

VI
REGIONAL AND BRANCH OFFICES

REGIONAL OFFICES AND ADMINISTRATORS

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

New York, New York 10007

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

Hampshire, Maine.-Floyd H. Gilbert, 150 Causeway St., Boston,

Mass. 02114.

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

Carolina, Georgia, Alabama, MiSSissippi, Flortda, part of

Louisiana.-Jule B Greene, Suite 138, 1371 Peachtree St., N.E., Atlanta, Georgia 30309.

Region 4. Ilhnors, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Minnesota, Missouri, Ohio, Wlsconsin.-William D. Goldsberry,

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

Chicago, III. 60604.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except Kansas Clty).-Robert F. Watson, 503 U.S. Court House, 10th &

Lamar Sts., Fort Worth, Texas 76102.

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

New MeXICO, Utah.-Robert H. Davenport, Two Park Central, Room

640, 1515 Arapahoe Street, Denver, Colorado 80202.

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

Room 1043, U.S. Court House, 312North Spring St., Los Angeles, Cal.

90012.

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

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

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

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

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

BRANCH OFFICES

Cleveland, Ohio 44199.-Room 899 Federal Office Bldg., 1240 E. 9th at

Lakeside.

Detroit, Michigan 48226.-1044 Federal Bldg.

Houston, Texas 77022.-Room 7615, Federal Office & Courts Bldg., 515

Rusk Ave.

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

Boulevard Way.

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

St. LOUIS, MIssouri 63101 -Room 1452. 210 North Twelfth St.

Salt Lake CIty, Utah 84111.-Room 6004, Federal Reserve Bank Bldg.,

120 South State St

San Franctsco. California 94102 -450 Golden Gate Ave, Box 36042

VIII
COMMISSIONERS

RAY GARRETT, JR., Chairman

Chairman Garrett was born on August 11, 1920, in Chicago, illinois. In

1941 he was graduated from Yale University and he received his LL.B

from Harvard Law School In 1949 Immediately prior to joining the

Commission as Chairman, Mr. Garrett was a partner In the Chicago law

firm of Gardner, Carton, Douglas, Children and Waud where he had

been since 1958 From 1954 to 1958,he wason the staffofthe Securities

and Exchange Commission, serving for most of that period as Director

of the Division of Corporate Regulation. In 1965, Mr. Garrett was Chairman of the Section of Corporation Banking and Business Law of the

American Bar Association and has also served as Chairman of the ABA

Committee on Developments in Corporate Financing. He IS presently

Chairman of the Advisory Committee for the Corporate Department

Financing Project of the American Bar Poundatron, a member of the

Board of Editors of the American Bar Association Journal, and consultant to the" Reporter" for Codification of Federal Securities Laws Project of the American Law Institute. Prior to JOining the SECstaff, he was a

teaching fellow at Harvard Law School and Assistant Professor of Law

at New York University. For several years he was a visiting lecturer at the

Northwestern University School of Law. Mr. Garrett was sworn in as

Chairman of the Securities and Exchange Commission on ~ugust 6,

1973, for a term expiring on June 5, 1977.

PHILIP A. LOOMIS, JR.

Oomrnissroner Loorrus was born in Colorado Springs, Colorado, on

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

Princeton Universrty in 1938 and an LL.B. degree, cum laude, from Yale

Law School in 1941, where he was a Law Journal editor. Pnorto joining

the staff of the Securities and Exchange Oommrsslon, Oornrmsstoner

Loomis practiced law with the firm of O'Melveny and Myers In Los

Angeles, California, except for the period from 1942 to 1944, when he

served as an attorney with the Office of Price Administration, and ,the

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

Aircraft, Inc. Commissioner Loomis joined the Commission's staff as a

consultant in 1954, and the following year he was appointed Associate

Director and then Director of the Division of Trading and Exchanges. In

IX
1963, Commissioner Loomis was appointed General Counsel to the

Commission and served In that capacity until his appointment as a

member of the Commission. Commissioner Loomis is a member of the

American Bar Association, the American Law Institute, the Federal Bar

Association, the State Bar of California, and the Los Angeles Bar Association. He received the Career Service Award of the National CIVil

Service League in 1964, the Securities and Exchange Commission Distinguished Service Award in 1966, and the Justice Tom C. Clark Award

of the Federal Bar Association In 1971. He took office as a member of the

Securities and Exchange Oommlssron on August 23,1974, for the term

of office expiring June 5, 1979

JOHN R. EVANS

Comrnlssroner Evans was born in Bisbee, Arizona, on June 1, 1932 He

received hrs B.S. degree In Economics In 1957, and his M S. degree in

Economics In 1959 from the University of Utah. He was a Research

Assistant and later a Research Analyst at the Bureau of Economics and

Business Research at the University of Utah, where he was also an

Instructor of Economics dunnq 1962 and 1963. He came to Washington

In February 1963, as Economics Assistant to Senator Wallace F. Bennett

of Utah. From July 1964 through June 1971 Commissioner Evans was a

member of the Professional Staff of the US. Senate Committee on

Banking, HOUSing and Urban Affairs serving as minority staff director.

He took office as a member ofthe Securities and Exchange Commission

on March 3, 1973, for the term expiring June 5, 1978.

A. A. SOMMER, JR.

Oornrrussroner Sommer was born In Portsmouth, Ohio on April 7,

1924. He received hrs B A degree from the University of Notre Dame In

1948 and LL.B. degree from Harvard Law School in 1950 At the time he

was appointed to the Commission, he was a partner in the Cleveland law

firm of Calfee, Halter, Calfee, Griswold & Sommer. Mr. Sommer was

formerly Chairman of the American Bar ASSOCiation's Federal Regulation of Securities Committee and a member of the committee on Corporate Laws and Committee on Stock Certificates He was also a member

of the Board of Governors of the National Association of Secuntles

Dealers, a lecturer on secuntles law at Case-Western Reserve Law

School and a lecturer at various institutes and programs dealing with

securrtres law, corporation law and accounting matters. Commissioner

Sommer was formerly a member and Past-Chairman of the Corporation

Law Committee of the Ohro State Bar ASSOCiation He has authored

articles dealing With corporate reorganization, conglomerate disclosure and other secuntles and accounting tOPiCS. He took office as a

member ofthe Securities and Exchange Commission on August 6,1973,

for the term of office expiring June 5, 1976.

IRVING M. POLLACK

Commissioner Pollack was born In Brooklyn, New York, on April 8,

1918 He received a B.A. degree cum laude from Brooklyn College In

1938 and an LL.B. degree magna cum laude from Brooklyn Law School

In 1942. Prior to JOining the Comrnrssron's staff he engaged In the

practice of law In New York City after serving nearly four years In the

United States Army, where he gained the rank of Captain Mr Pollack
joined the staff of the Commission's General Counsel In October 1946

He was promoted from time to time to progressively more responsible

posrtions In that office and In 1956 became an Assistant General Counsel. A career employee, Mr. Pollack became Director of the Division of

Enforcement in August. 1972 when the SEC's drvtsions were reorganized. He had been Director of the Divrsron of Trading and Markets

since August, 1965. and previously served as Associate Director since

October, 1961. In 1967 Mr. Pollack was awarded the SEC Distinguished

Service Award for Outstanding Career Service and In 1968 he was a

co-recipient of the Rockefeller Public Service Award In the field of law.

legislation and regulation Mr. Pollack took the oath of office on February 13. 1974 as a member of the Securities and Exchange Commission, for the term expiring June 5, 1975.

XI

TABLE OF CONTENTS

Organizational chart ., IV

Commissioners and principal staff officers .. V

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

Biographies of Commissioners IX

PART 1

IMPORTANT DEVELOPMENTS .

Market regulation. . . .. . .

Industry advisory committees . . . . . . . . . . . . . .. . ..

Central market system .

Broker-dealer reports and registration requirements .

Broker-dealer model compliance guide .

Cornmrssron rates . .

Rule 19b-2 .

Non-member access to the exchanges ..

Foreign access to United States securities markets

Consolidated tape . .

Option market regulation. .. . .

Legislative Initiatives. . . . . . . . . . . . . . . . . .. . .

H.R. 5050 . .

S. 2519 .

S. 2474 .

Disclosure related matters , .

The rule 140 series .

Rule 144 .

Rule 145 .

Rule 146 .

Rule 147 .

Campaign fund disclosure .

Fuel shortages, extractive reserve and natural gas

supplies .

Annual reports to security holders .

Proposed Rule 240 .. . .

Textual analysis of summary of earnings or operations .

Disclosure of professional litigation .

Real estate matters .

3

3

4

4

4

5

5

6

6

7

7

8

9

10

11

12

12

12

12

13

13

13

14

14

15

16

16

17

17

XIII
IMPORTANT DEVELOPMENT~ontlnued

Investment companies .. .. . . . . .. . ..

Variable life insurance .. .. . .

Enforcement matters. .. .. . . .. . .

JOint SEC-NASD task force. . .. .

Municipal bonds. . . . .. .., . . . . . .. . .

Whiskey mterests . . . ..

Significant cases .. .,.

17

17

17

17

18

18

18

PART 2

THE DISCLOSURE SYSTEM. . . . .. . .. 25

Public offering: the 1933 Securities Act. 25

Information provided. . . . . . . . . . . .. .. 25

ReVieWing process. . . . . .. .., 26

Time for registration . . .. .. 26

Financial analysis and exammation .. 26

Investment company disclosure .. 27

Office of 011 and gas . .. 27

Tax shelters.. . . .. . 27

Commercial paper-filing fees. .. 28

Registration summary rule . .. 28

Small Issue exemption . . . .. .. 28

Regulation A . 28

litigation involving Regulation A . 29

Regulation B. .. 30

litigation mvolvmq Regulation B . . . . .. 30

Regulation E .. .., .. . 31

Regulation F .. 31

Proposed Rule 239: residential first lien mortgages 31

Continuing disclosure. the 1934 Securities Exchange Act 31

Registration on exchanges . . . . 31

Over-the-counter registration. . . . . . . . . . . . . . .. 32

Exemptions . .. 32

Penodic reports . . . . . . . . . . . . .. 32

Proxy solicitations. . . .. . . 32

litigation on proxy rules .. . . . . . .. .. 33

Takeover brds, large acqursrnons 34

Insider reporting . 34

Short-SWing trading litigation. . . . . . . . . . . . . . . . .. .. 34

Accounting 35

Relations with the accounting profession 36

Accounting and auditing standards. . .. 36

Other developments . . . . . . .. 37

Exemptions for international banks 38

Trust Indenture Act of 1939 . 40

Information for public inspection' Freedom of Information Act . . . . . . . . . .. 40

Freedom of Information Act litigation 42

Publications. . .. 42

PART 3

REGULAnON OF SECURInES MARKETS. . . . . . . . . . . . . . . . . 47

Regulation of exchanges 47

Registration. .. . ,. . 47

XIV
REGULATION OF SECURITIES MARKET-Continued

Delisting . . . . .. . .

Exchange disciplinary actions. . . . . .. ..

New commission record keeping rules .

Exchange rules. . . . . . . . . . . . . . . . . . . . . . .. . .

litigation on exchange rules ..... . . . . . . . .. . ..

Exchange inspections. . . .. .. . . . . .. .. . .

NYSE Specialists inspection .

Amex compliance inspection . .

PBW stock exchange Inspection. .. . . .

Supervision of NASD . . . . . .. .. .,. .. . .

NASD Rules .

Tax shelters. . . . . .. . . . . . . . . .. ..

Mandatory bonding. .. . .

Commission abrogation of NASD rules .

NASD inspections . . .

NASD disciplinary actions.. .. . .

Review of NASD disciplinary actions .

Review of NASD membership action .. . .

Broker-dealer regulation ., .

Registration . .

Recordkeeplng . .. . .

Financial responsibility. .. . .

Financial reporting . .

Rule 17a-18, Rule 17a-19 and related Form X-17A-19

Broker-dealer examinations . . ..... ;...... . .

Early warning and surveillance programs .

Examination program.. . .

Training program. . . . . . . . . . . . . . . . .. . .

Financial and operational combined Uniform single

report-FOCUS report . .

Regulation of small broker-dealers. . . .

Clearance and settlement .

Securities Investor Protection Corporation (SIPC) ..

Rule changes related to SIPC .. . .

Litigation relating to SIPC . .

SECO broker-dealers . .

Other commission rule changes . ..

Mortgage market exemptions .

Real estate investment contract securities

Corporate repurchase programs. . . . . . . . . . .. .. ..

Confirmation requirements for periodic transactions

Short sale regulation. .. .. .. ..

PART 4

ENFORCEMENT. . . . . . . . . . . . . . . . . . . . . . . .. . .

Detection . .

Complaints , . .

Market surveillance .

Investigations . .

litigation involving commission investigations .

Enforcement proceedings. . . . .. . .

Administrative proceedings. . .

Trading suspensions .

47

48

48

48

49

49

49

50

51

51

52

53

53

53

54

55

55

56

56

56

56

56

57

58

58

59

59

61

61

62

64

64

65

65

65

66

66

66

67

67

67

73

73

73

73

74

74

75

76

77

xv
ENFORCEMENT-Continued

Delinquent reports program . . . . .. 77

Civil proceedings. . . . .. 78

Multidistrict litigations 89

Participation as amicus curiae. 90

Criminal proceedings .. 93

Organized crime program 95

Cooperation with other enforcement agencies. . . . 96

Foreign restricted list .,. 97

PART 5

INVESTMENT COMPANIES AND ADVISERS . .. .. 103

Proposed legislation. ........ ..... .. . 103

Proposed 011 and gas investment act........ 103

Sale of investment adviser.. . 104

Institutional disclosure..... 104

Rules 105

Amendment of Rule 17g-1 105

Investment company shareholder account processing requirements . 105

Amendmentsof Rule 17d-1 . . 105

Temporary Rule 6c-2(T) and proposed Rule 6c-2

regarding Alaska Native ClaimsAct Corporation 106

Mutual fund distribution 106

Litigation relating to mutual fund distribution 107

Variable annuity illustrations..................... 108

Reciprocal brokerage practices... 108

Number of registrants....................... .. 109

Applications.. 109

litigation involving applications . . . . . . 110

PART 6

PUBUC UTIUTY HOLDING COMPANIES.................. 115

Composition . 115

Proceedings. . . . . . . . . . . . . . . .. 115

Financing 117

Volume 117

LeaSing 117

Competitive bidding............................. 118

Revenuebonds. .. 118

PART 7

CORPORATE REORGANIZATIONS....... 123

Summary of activities........... 123

Administrative matters 124

Trustee's investigation and statements................ 126

Plans of reorganization. 127

Activities with regard to allowances. . . . . . . . . . . . . . . . . . . 130

Intervention in Chapter XI ..... . . . . . .. . . .. . . .. . . .. .... 130

PART 8

SEC MANAGEMENT OPERATIONS 137

Organizational changes .. 137

XVI
SEC MANAGEMENTOPERATIONS-Contlnued

Executive management conference 137

Personnel management.............................. 138

Recruitment. . . . . . . . . . . . . . . . . . . . .. I138

Training and development. . . . . . . . . . . . . . . . . . . . . . . . 138

Personnel management evaluation. . . . . . . . . .. . .. . . 138

Information dissemination............................ 138

Automated information systems 139

Financial management............................... 139

PART 9

STATISTICS............................................. 143

The securities industry. . . . . .. . .. . . . . . . . .. . .. . . .. . .. .. 143

Income and expenses. 143

Table 1: Broker-dealer income and expenses..... 144

Securities industry dollar............ 144

Chart: Securities Industry dollar: 1973 145

Assets and liabilities 147

Table 2: Assets and liabilities of broker-dealers.... 146

Registered broker-dealers . .. 147

Chart: Broker-dealer registrations 147

Table 3: Location of broker-dealers. 148

Broker-dealers, branch offices, employees 150

Chart: Broker-dealers and branch offices 149

SECObroker-dealers 150

Table 4: Principal business of SECObroker-dealers 150

Financial institutions , 151

Stock transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Table 5: Common stock transactions and activity

rates of selected financial institutions: 1965-1973 151

Stockholdings . . . .. . .. . .. .. . . . .. . . .. . .. .. .. ..... 152

Table 6: Stockholdings of institutional investors and

others: 1965-1973 , 152

Table 7: Companies registered under the Investment

Company Act of 1940as of June 30,1974....... 153

Number and assets of registered Investment com.

panies 153

Chart: Number and assets of registered Investment

companies 154

Investment company registrations. 155

Table 8: New investment company registrations... 155

Table 9: Investment company registrations terminated 155

Private noninsured pension funds: assets... 156

Table 10; Assets of private noninsured pension

funds: 1963.1973 157

Private noninsured pension funds: receipts and disbursements 156

Table 11: Receipts and disbursements of private

noninsured pension funds: 1963-1973. 157

Securities on exchanges . . . . . . . . . . . . 158

Exchange volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Table 12: Exchange volume: 1973 158

XVII
STATISTICS-Contlnued

NASDAQ volume.......... . . 158

Table 13: Share volume and dollar volume by exchanges. . . . . . . .. 159

Third market volume.......................... .. 160

Chart. 'Third market' volume in NYSE stocks. 160

Table 14: Comparison of third market and NYSE volume . . . . . . . . . . . . . 161

Special block distribution... ... ....... 162

Table 15. Special block distributions reported byexchanges .. ... .. .... ... 162

Value and number of securities listed on exchanges 163

Table 16: Securities listed on exchanges. . . . . . . . . 163

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

stock exchanges 164

Table 17: Value of stocks listed on exchanges. . . . . 165

Securities on exchanges .... . . . . . . . . . . . . . . . . . 166

Table 18: Undupllcated count of secuntres on exchanges. . . . . . . . . . .. .... .... . 166

Table 19: Securities traded on exchanges 166

1933 act registrations.... . 167

Effective registrations. statements filed , 167

Table 20 Effective registrations... .. 167

Chart. Securities effectively registered with SEC 168

Purpose of registration 169

Table 21 : Effective registrations by purpose and type

of security: fiscal 1974 ........ ... ...... 169

Chart: Effective registrations cash sale for account of

issuers . . . . . . .. 170

Regulation A offerings .. 171

Table 22: Offerings under Regulatron A . .... 171

Enforcement . . . .. .., . . . . . . . . . . . . . . . . . 172

Types of proceedings.. 172

Table 23' Types of proceedings . 172

Enforcement proceedings. . .. 175

Table 24: Administrative proceedings. . . . . . . . . . .. . 175

Table 25: Injunctive actions 175

Table 26' Criminal cases .... . . . . . .. .. . 175

Public Utility holding companies. . . .. 176

Assets . . . .. .. . . . . . . . . . . . 176

Table 27: Public-utility holding company systems. . 176

Financmq . .. 177

Table 28. Financing of holding-company systems 177

Corporate reorganizations. . . . .. .. . .. 178

Commission participation... 178

Table 29: Reorganization proceedings under Chapter XI of the Bankruptcy Act in which the Commission participated. . . . . . .. 178

SEC operations . . . . . . . . .. .. 180

Net cost. . . . . .. . 180

Chart: Appropriated funds vs. fees collected 181

Table 30: Budget estimates and appropriation 182

XVIII
PART 1

IMPORTANT

DEVEl PMENTS

MARKET REGULATION

During the pastyear, major developments

affecting the Commission's regulation of

the nation's securities markets took place.

First, the Commission made significant

progress toward Implementation of the

market structure principles enunciated In

its March 1973 Policy Statement on the

Structure of a Central Market System. It appointed an Advisory Committee on the Implementation of a Central Market System,

composed principally of industry representatives, and oversaw the establishment of a

consolidated transactional reporting tape

under a plan filed jointly by several exchanges and the NASD

Next,in September 1973,the Commission

announced that registered exchanges must

fully implement competitive commission

rates after April 30, 1975. Looking toward

that event, It endorsed the proposals advanced by the exchanges to initiate an experiment In negotiated public commission

rates on orders not exceeding $2,000.That

experiment went Into effect April 1, 1974,

and has been morutored closely by the

Commission and the exchanges. The

Commission also announced its intention

to examine the question of whether intramember rates should be negotiated rather

than fixed. And, in May and June It held

hearings to gather information on that subject. Other developments in this area included the expansion of the secondary trading markets tor listed call options, further

refinement of the rules pertaining to nonPART 1

IMPORTANT

DEVELOPMENTS

member access to exchange markets, continuing Commission Inquiries into the

NASDanti-reciprocal rule, and the initiation

of an inquiry Into the conditions under

which foreign access to United States secuntles markets should be permitted.

At the sametime, the Commission greatly

Improved during the fiscal year its early

warning and examination program for

broker-dealers. The designation of principal examining authorities for brokerdealers pursuant to Section 9(c) of the Securities Investor Protection Act of 1970has

eliminated unnecessary duplication in the

oversight procedures of the Commission

and the self-regulatory organizations. In

addition, the Commission hasstrengthened

the effectiveness of its oversight both by

visiting the self-regulatory organizations to

reviewand Improvetheir early warning, surveillance and examination programs, and

by visiting selected broker-dealer members

In order to monitor the effectiveness of

self-regulatory organizations' programs.

Finally, the Commission and its staff devoted substantial amounts of time in assistIng subcommittees of both Houses of Congress in their consideration of proposed

legislation that would both facilitate the establishment of a central market system and

aid the Commission in its oversight of the

national secu rities exchanges and securities associations. These Congressional

deliberations foreshadow basic changes in

the structural and regulatory framework of

the securities industry; the Commission anticipates that if the legislation currently

3
being considered by Congress becomes

law these changes will result In a truly competitive and efficient capital market

system-one capable of meeting the Nation's need for Investment capital while

operating In the public interest and serving

to protect the public Investor.

Industry Advisory Committees

1. Central Market System

On March 29, 1973, the Commission issued its Policy Statement on the Structure

of a Central Market System, setting forth the

results of an extensive review of the recommendations of its three industry advisory

committees,' two Congressional studles2

and an analysis by its staff with respect to

the development of a central market system

for listed securities. The Policy Statement

was intended to give direction to the development of the structure and regulatory

framework within which such a system

would operate. It also announced the

Commission's general intention to establish an Industry committee to advise It on

ways of implementing its proposals for a

central market system. On March 18, 1974,

In compliance with the Federal Advisory

Committee Act, the Commission announced ItS plans to establish a Central

Market System Advisory Committee and ItS

intended chairman.e on May 10, 1974 the

Commission named some of ItSrnernbers.s

Four additional members, one the Director

of the Commission's Division of Market

Regulation, were named In Securities Exchange Act Release No. 10826 (May 24,

1974), 4 SEC Docket 348. The Committee

has generally been asked to study and to

submit recommendations to the Commission on such matters as:

1. The appropriate structure for regulatory supervision of the central market system;

2. The nature and scope of the Commission's role dunnq the process of implementing the central market system;

3. The ways in which a central market

system should be structured In order to

meet effectively the needs of our capital

markets, the public Interest, the protection

of Investors and the maintenance of fair and

orderly markets for securities;

4

4. The needs and perspectives of users of

acentral market system including issuers of

and Investors in securities, as well as secuntles professionals; and

5. The appropriate resolution of fundamental policy Issues relating to the central

market system's operations.

One of the chief matters which the Committee will study ISthe role of competing

market makers In a central market system.

This study, along with parallel studies bythe

staff of the Dlvrsron of Market Regulation,

will aid the Commission In determining the

proper role of the third market in a central

market system and the extent to which

comparable regulation of the exchange and

third markets may be necessaryto foster an

appropriate level of competition In the public Interest.

2. Broker-Dealer Reports and Registration Requirements

Recognizing that broker-dealers might be

subject to duplicative and unnecessary

regulatory and reporting requirements, the

Commission in September 1972established

an Advisory Committee on Broker-Dealer

Reports and Registration ReqUirements to

study this problem. As previously reported,

the Advrsory Committee submitted Its report to the Commission In December 1972.

A Commission Staff Task Force considered

the report and the Commission subsequently announced a program to Implement the proposals thereln.s

In general, the Commission, based upon

the recommendations of the Advisory

Committee Study, the program of implementation outlined by ItSstaff, and other

sources, IS undertaking steps to achieve

four substantive objectives:

1. A self-regulatory program which assures that in regard to financial responsibility and related record keeping a brokerdealer will be examined by and report to

only one self-regulatory organization;

2. The development and implementation

of a key regulatory report for use by the

Commission and the industry, incorporatIng uniform definitions and reporting

periods. The form would replace a number

of forms currently in use;

3. The establishment on a continuing

basis of a Report Coordinating Group under
the Federal Advisory Committee Act composed of knowledgeable persons from the

secunties industry, the accounting and

legal professions, and elsewhere to advise

the COmmission regarding ways of providing for long-term simplification and standardization in reportmg by broker-dealers, to

advise the Commission on proposed new

reports and forms, and to advise and assist

the COmmission in the development of the

key regulatory report, and

4. The completion of a program already

undertaken m cooperation with the state

securities administrators and others to develop a uniform form for the registration of

brokers and dealers for use by the states,

the Commission, and the self-regulatory organizations, and the completion of the joint

securities industry effort to develop a uniform form for the registration of principals

and agents

On May 16,1974, the Commission named

the members of its previously announced

Report Coordinating Group.s The Group IS

expected to be a standmg committee for a

penod of two years and, within the first six

months of its formation, is expected to develop a uniform key regulatory report.

3. Broker-Dealer Model Compliance

GUide

The AdVisory Committee appointed m

1972 by the Commission to assist It in developing a model compliance program for

the broker-dealer community has completed and made available to the public a

draft of the Model Compliance Guide.

Among the subjects covered are supervision, broker-dealer and personnel registranon, financial and operations responsibility, and customer accounts. The proposed

GUide is intended to assist each brokerdealer in preparing or supplementing its

own compliance manual; and not to

supplant it.

The Advisory Committee solicited and received suggestions on the proposed Guide

from the broker-dealer community, the securities industry, the securities bar, the accounting profession and other interested

members of the public. The Advisory Committee has met several times to discuss revisions and hopes to complete its work on the

Guide during the fiscal year 1975.

Commission Rates

On September 11, 1973,7 the Cornrrussron

announced that It would act promptly to

term mate the fixing of commission rates by

stock exchanges after Apnl 30, 1975, If the

exchanges did not in the meantime adopt

rule changes achieving that result. At the

same time, the Commission announced that

It would not object to a proposal by the New

York Stock Exchange (NYSE) to increase

fixed commission rates by 10 percent on

orders up to $5,000 and by 15 percent on

larger orders up to $300,000, effective

through March 31,1974. However, to retain

those Increases beyond March 31, 1974, exchanges would have to permit member

firms to provide customers less than a full

range of brokerage services and discounts

of up to 10 percent from the then effective

commission rate schedule. Subsequently,

after drscussrons with representatives of the

exchanges and the member firm community, the Commlssron determined that It would

entertain proposed alternatives to the 10

percent discount but would adhere to the

objective which the discount was mtended

to serve, t,e., a meaningful experimental

period pnor to the rntroductron of completely unfixed commission rates on May 1,

19758

In a letter dated February 7, 1974, the

NYSE submitted to the Commission a proposal providmg for competitive commissions on orders of $2,000 or less and recissron of the prohibition against chargmg

commissions exceeding minimum rates. In

a February 21, 1974 letter, however, the

NYSE modified that proposal so that Intramember commission rates would remain

fixed for all orders up to $300,000. On March

7,1974, the Commission announced that it

would not object to the NYSE's proposals

and that it would study further whether to

Include Intra-member rates in the expenmental perrod of limited pnce competition 9

From May 29 through June 4, 1974, the

Commission held public heanngs10 to

gather comments, views and data concerning (1) whether the Initiation in the near future of a limited experiment in competitive

intra-member rates of commission on orders

not exceeding $2,000 would cause substantial and irreparable harm to floor brokers or

5
to the market-making function of

specialists, and (2) whether exchanges

should maintain any prescnbed schedules

of Intra-member rates of commission. The

matter IS under further study by the Commission's staff and is expected to be resolved during fiscal year 1975

Rule 19b-2

As previously noted," on January 16,

1973, the Commission adopted Securities

Exchange Act Rule 19b-2. The Rule directed each securities exchange registered

with the Commission to adopt rules requrring every member "to have as the principal

purpose of its membership the conduct of a

public securities business." For purposes

of the Rule, a member is presumed to be

conducting a public securities business If at

least 80 percent of the value of exchange

securities transactions effected by it consists of business effected for or with persons other than affiliated persons (as defined in the Rule) or consists of certain

kinds of transactions which contribute to

the liquidity or stability of the markets, such

as those effected by a stock exchange

specialist in a security in which he is registered. A phase-in penod was Included in the

Rule whereby exchange members who acqurred their memberships pnor to January

16, 1973, were given up to three years to

comply fully with its provisions.

Rules adopted by the New York and

American Stock Exchanges to comply with

Rule 19b-2 require all members to abide by

the public business requirement, no matter

when they JOined the exchanges. Rules

adopted by other exchanges which have

compiled with Rule 19b-2 apply that requirement only to members who joined on

or after January 16, 1973.

After the adoption of Rule 19b-2, various

parties, including the PBW Stock Exchange

filed petitions for review In the United States

Court of Appeals for the Third Circuit to test

ItS validity. On March 19, 1973, that Court

stayed the effectiveness of the Rule as to

PBW members whose membership antedated the Rule's adoption.

As previously reported 12 the court of appeals dismissed the petitions to review Securities Exchange Act Rule 19b-2 on the

ground, as urged by the Commission, that

6

the court lacked [unsdlctron directly to review the rule.13 On January 21, 1974, the

petitioners filed a petition for a writ of certiorari In the Supreme Court; that petition

was denied on Apnl 29, 1974.14

Thereafter, three lawsuits were filed In

various United States District Courts, seeking to declare Rule 19b-2 Invalid and to enJoin the Rule's operation and enforcement.15 These suits are presently pending.

On July 29, 1974, the Commission announced!" that, during the pendency of

these actions, it would continue In effect the

partial stay of the Rule, in effect slqce March

1973,17 All exchanges which had not yet

complied with Rule 19b-2 would be required to do so subject to these conditions:

(1) all members who [omed an exchange

after January 16,1973, the date of the Rule's

adoption, would be expected to comply

fully with its terms; (2) those members who

joined prior to that date could continue

membership, if their exchange so decided,

without complying with the Rule's public

business requirements, provided that their

volume of business did not increase substantially pending the outcome of litigation

as to the Rule's validity.

The Commission's determination to continue the partial stay was based, in part, on

the fact that pendmg legislation would

clarify and resolve most of the fundamental

questions relating to the appropriate utilization of stock exchange membership, with

which Rule 19b-2 is concerned.

Non-Member Access to the

Exchanges

In its release announcing the adoption of

Rule 19b-2,18 the Commission stated that

exchanges would be required to amend

their non-member access provisions to

eliminate any parent or related test as a

condition to qualification for the 40 percent

non-member discount from fixed exchange

commission rates.t" In addition, the Comrnlsston made it clear that exchanges

should amend their non-member access

rules to provide that the discount would be

available only on non-member transactions

effected for or with persons other than affiliates.

There has been substantial compliance

with the Commission's request. In amend-
109 ItS non-member access provislons.s?

however, the NYSE submitted to the Comrrnssron a restricnve Interpretation of the

term "affiliated person, found in Rule 19b2." The proposed interpretation delineated

certain circumstances under which the

term would include an lnstttutlonal account

over which a money manager exercises investment discretion. In response to the

NYSE submission, the Commission informed the NYSE that the terms "affrhated

person" and "control" (which IS an essential part of the definition of "affiliated person") were assigned by the Commission

their traditional legal meanings, and should

be construed flexibly depending on the errcumstances of each case. The NYSE's interpretation was deemed not to be in accord

with these flexible standards of Rule 19b2.21

In a related development the NYSE has

submitted an amendment to its rules which

would prohlbrt member and non-member

money managers from creditmq commission savings against advisory fees.22 The

Ocmmlssron has soliorted public comment

on this proposal.23

Foreign Access to United States

Securities Markets

On February 8, 1974, the Commission requested public comment on questions, the

answers to which would enable It to decide

whether foreign entrttes should be permitted to participate fully in the United States

securities markets, or to what extent, if any,

their parncrpation should be limited or

otherwise condltioned.24 Currently, the participation of foreign persons in U.S. securities markets is a matter subject to the discretion of the self-regulatory organizations,

which may elect whether to permit them to

seek mernbershrp or otherwise participate

In the benefits bestowed on domestic

non-member broker-deatsrs.s"

When the comrmsston eliminated the

parent test from exchange membership requirements by Rule 19b-2, it stated that exchanges could permit firms with foreign

parents to become members, at least until

that subject could be studied and its respective merits and shortcomings explored,

provided that such exchanges could satisfy

themselves and the Commission that such

members were In compliance with Rule

19b-2.

Consolidated Tape

As previously noted,26 Securities Exchange Act Rule 17&:-15 requires registered

national securities exchanges, national secuntles associations and broker-dealers

which are not members of such organizations, to file "plans" with the Cornrnrssron,

on a [ornt basis if desired, for the consolidated reporting of price and volume data as

to completed transactions in exchangelisted secuntres Such a plan was filed

Jointly by the American, Midwest, Pacrtrc,

PBW and New York Stock Exchanges and

the NASD,27 and was the subject of two

Commission letters of comment to ItS sponsors 28 It was subsequently refiled with the

Oornrmsslon'" and was declared effective

by the Commission asof May 17, 1974.30The

plan, which specifies the manner in which

the last sale reports Will be collected and

disseminated, provides for a 40-week

period of development and testing before

the consolidated tape becomes fully operational.

The plan's sponsors were working to implement by October 4, 1974 the 20-week

pilot phase-a testing period using 15

Widely traded NYSE securities.

In this area, the Commission also proposed an amendment to Rule 17&:-15 to establish procedures for appeal to the Commrssron from certain actions which may be

taken pursuant to the consolidated tape

plan." and exempted from the provislons of

Rule 17&:-15 the reporting of transactions In

listed secunnes not eligible for reporting

pursuant to the plan.32

On October 3, 1974, the Commission,

pursuant to a request by the New York Stock

Exchange, announced that It would not object to a postponement to October 18, 1974,

of Phase I of the pilot phase of the consolidated tape, provided that Phase II of the

pilot phase would commence as scheduled

in February 1975, and that any further educational, mechanical and regulatory problems

that may arise In connection with the consolidated tape would be remedied during

operation of the tape. Securities Exchange

7
Act Release No. 11036 (October 3, 1974), 5

SEC Docket 213.

Option Market Regulation

When the Chicago Board Options Exchange (CBOE)33 began as a pilot operation

on April 26, 1973, It had 305 members and it

listed call options on 16 NYSE-listed stocks

By the end of fiscal year 1974 It had 560

members and listed call options on 32

NYSE-listed stocks. The average daily volume of options traded reached approxrmately 23,000 contracts, representing

2,300,000 shares of the underlying stocks.

Because of the Increased Interest by the

public and other secunties exchanges In

trading options, the Commission held public hearings in February 1974 to consider

va no us questions regarding options trading on and off the exchanges.34 The scope

of the Commission's mquiry was broad and

Included such matters as whether the trading of options serves a useful economic

purpose In relation to the securities markets, whether the vanous forms of option

trading on and off registered secunnes exchanges serve the public interest, and the

impact of exchange option trading on public Investing and trading habits The hearIngs also focused on the questions whether

more than one exchange should trade options, what type of regulatory scheme the

Commission should adopt If such multiple

trading IS permitted, and whether different

exchanges should be competitive in tradIng.

The staff of the Commission, based at

least partly upon the hearings, recommended strengthened financial responsibility requirements for CBOE market makers,

Improvements In the CBOE floor trading

procedures, and adoption of appropriate

exchange rules to deal with problems arising from trading in away-from-the-money

options. The staff also recommended that,

prior to expanding the CBOE pilot or the

initiation of multiple exchange options tradIng, all exchanges concerned add ress

themselves to the achievement of a common clearing system, standardization of option terms and conditions, a common tape

for reporting transactions In all listed options, and, in view of present non-member

8

broker exchange access provisions (and

potential elimination of fixed commission

rates) a system enabling all option quotations to be made available on a current basis

to all qualified non-members as well as to

members.35 By the end of the fiscal year the

Oornmlssron had noted that substantial

progress In resolving these problems had

apparently been made by the CBOE and the

exchanges interested In multiple exchange

option tradlng.36

On December 15,1973, the Commission

announced the adoption of Rule 9b-1 under

the Securities Exchange Act, effective

January 17, 1974.37 ThiS Rule, which was

onginally proposed on January 9, 1973, and

subsequently revised, provides that a national secunnes exchange which effects

transactions In options or allows its

facilities to be used to effect transactions In

options must file with the Commission a

plan, which contains those requirements of

the exchange that relate solely or significantly to transactions In options on the exchange The plan must be declared effective

by the Commission before any transaction

In options can take place on that exchange.

To permit continued CBOE operation, its

plan for trading options was declared effective simultaneously with the adoption of

Rule 9b-1.39

FollOWing the adoption of Rule 9b-1, two

additional exchanges, the Amencan Stock

Exchange (Am ex) and the PBW Stock Exchange (PBW),39 announced and filed with

the Commission plans to begin pilot programs in call option trading. Under both of

these plans, the exchanges proposed to rely

on their existlnq specialist systems for makIng markets In options on their floors rather

than to utilize a multiple market-maker system like that of the CBOE.40 The PBW plan

contemplates the trading of options on

stocks which are also traded on the PBW.

The proposals of both exchanges are currently under review.

The CBOE made numerous changes to ItS

option plan under Rule 9b-1, which became

effective. Among other things, It eliminated

fixed minimum Intra-member clearance

commission rates. It also altered ItS floor

trading procedures to provide improved

market continuity and competitiveness. For

example, multi-member market Units were
eliminated and market-making responsibilities were given to individuals. In addition, the board broker was given the ability

to call upon market-makers (who are appointed for a particular class of options) to

make bid~ and/or offers not only in the

interest of a fair and orderly market but also

in the Interest of a competitive market. In an

effort to give the public more adequate

notice of when out-of-the-money options

transactions would be restricted, the

CBOE has proposed other changes in ItS

plan that were under consideration by the

Commission at the end of the fiscal year

On August 22,1974, the Commission announced that It had approved In pnnciple,

subject to further submissions by the Amex,

the CBOE and the PBW, and final Commission review: (a) the formation of a central

options clearing organization, (b) a proposal for dissemination of last sale information and quotations for exchange options,

and (c) proposed standardized terms and

cond itrons for exchange options. The

Commission also considered and determined not to object to CBOE's Issuance of

195 additional memberships, nor to CBOE's

proposal to list additional underlying securities subject to the adoption of satisfactory rules relating to trading away-fromthe-money options, nor to CBOE's proposed financial responsibility rules. Further, the Oornmrssron advrsed the Amex

that, subject to certain conditions and

understandings it would be prepared to

make effective that exchange's option plan

(Securities Exchange Act Release No

10980, August 23,1974,5 SEC Docket 40)

As previously reported,42 the Commission

has proposed Securities Act Rule 238 and

secunnes Exchange Act Rule 9b-2, which

would govern put and call options and

those who deal in them These proposed

Rules were revised and republished for

comment In late 1973.43 Rule 238, as proposed, would exempt put and call options

from the registration requirements of the

Securities Act if certain conditions were

met. These conditions are. (1) that the ISsuer of the underlying security be subject to

the reporting requirements of the Exchange

Act and, in brief, be current In ItS reporting

obligations; (2) that the security underlying

the option be registered on a national securitres exchange or quoted by at least 5

market makers on an automated quotation

system of a national secunties association,

and such security have a current pnce, of at

least $5, (3) that the gross proceeds received from the sale of specified related

options do not exceed $500,000, (4) that the

writer of the option be neither the issuer of

the underlyrnq secunty not an underwriter

of such security, nor a control person of the

Issuer; and (5) that the option be endorsed

by a broker or dealer registered under

Section 15 of the Exchange Act. Because

of conditions (3) and (5), the Rule would

apply neither to current CBOE option

trading nor to the trading contemplated by

the Amex and the PBW. Those exchange

options would be fully registered under the

Securities Act

The present version of the proposed rule,

unlike that previously proposed, IS not

available for limited price options, those involving a feature by which the option terminates prior to the stated terms, In the event

the market pnce of the underlying security

reaches a specrned level

The Rule does not purport to be exclusive; Issuers of options can rely upon other

exemptions from registration

Proposed Rule 9b-2 as revised specifies

standards of surtabilrty for customers dealIng in options, requires the disclosure by

brokers and dealers to customers of the nature and nsk Involved In options, and requrres endorsers of options to report their

transactions and maintain a net capital of

not less than $50,000

Legislative Initiatives

At the close of the fiscal year, there were a

number of bills pending In Congress which

If enacted would effect major changes In the

structure and regulation of the secuntres

Industry Among the bills as to which the

Cornrrussron commented, suggested revisions and testified were (1) S 470, which

would require all stock exchange members

to conduct a public sscuntres busmess after

the breakpoint In commission rates IS lowered to $100,000, (2) S 3126, which would

give the Commission authonty to prohibit

over-the-counter trading of secunnes listed

on registered national securities ex9

"
changes; (3) S. 2058, a bill designed to regulate the transfer, clearance and settlement

of securities; (4) S. 2234, a bIll to require

regular and full disclosure by institutional

Investors of their portfolio holdings and

transactions, (5) S 2707, which would give

the Commission limited authority over the

securities actrvitles of banks offering automatic investment plan services; (6) S.

2842, which is desiqned to limit the amount

of assets which institutions could invest In

any single security and to decrease the rate

of taxation on capital gains, and (7) H.R

8951, a bill to limit foreign private investment In the United States.

Described In more detail below are three

bills on which the Oornrrussion and its staff

particularly devoted substantial amounts of

time.

(1) H.R. 5050

In 1972 the Subcommittee on Commerce

and Finance of the House Committee on

Interstate and Foreign Commerce completed a comprehensive examination of the

securities mdustry.v' After taking voluminous testimony, the Subcommittee Issued a

report setting forth the information and

analysts obtained, along with conclusions

and legislative recommendations concernIng almost every aspect of the securities

Industry with which the DIVision of Market

Regulation IS concerned.w On March 1,

1973, a bill entitled theSecuntJes Exchange

Act Amendments of 1973, desiqnated H.R.

5050, was Introduced In the House and referred to the Committee on Interstate and

Foreign Commerce On August 13, 1974, the

bill was reported by the Subcommittee on

Commerce and Finance to the House

Committee on Interstate and Foreign Commerce.

Title I of H.R. 5050 would amend the Exchange Act provrsrons relating to the selection of members of and administration of

the Comrmssion. It would provide for concurrent transmission, to Congress and the

executive branch, of legislative recommendations, testimony, comments on legiSlation and budget estimates. Title I would

affect the tenure of the Oornmrssron's

Chairman, authorize the comrntssion to

conduct ItS own CIVil litigation, direct the

10

commrssron to supply requested documents to ItS legislative oversight committees in Congress and modify the provisions

on Commission appropriations.

Title II ISdesrqned, among other things, to

conform Section 6 of the Exchange Act to

Section 15A of that Act so that national secuntres exchanges and national securities

assocratrons, as well as their members,

would be subject to substantially Identical

regulation. Title II would expand the oversight authority of the Commission over exchange rules and over disciplinary actions

by exchanges. It would permit the Commission to eliminate duplicative oversight responsibrlrtres by the self-regulatory organizations. It would also phase out fixed commission rates on national securities exchanges on orders exceeding $300,000, and

on orders under $300,000 unless the CommISSIon acted to retain fixed rates, and

would prohibit persons from providing both

management and brokerage services to the

same institutional account.

Title III would amend Exchange Act

prOVISIonS relating to the regulation of brokers, dealers and exchange members. The

revrsions would affect, among other things,

the tlnancral responsibrhty requirements,

the broker-dealer application, registration

and examination process, and certain of the

reporting requirements. The revisions

would also clarify the Oomrrussion's authorIty to adopt rules With respect to securities

information processors and to require a

composite transaction tape and a composrte quotation system, and would grant the

Oornmrsslon expanded authority over the

accounting procedures of broker-dealers

and exchange members.

Title IV provides for the development of

an Integrated national system for the

prompt and accurate processing and settlement of secuntles transactions and includes provrsrons relating to the regulation

and registration of clearing agencies, secunnes depositories and transfer agents. It

also directs the Oornrnlssron to eliminate by

December 31, 1976 the use of the stock cernncate as a means of settlement, and

clarifies the Commission's authority as to

missmq or stolen sscunnes.

PrOVISiOnS of Title IV wou ld designate the

Commission as the sole regulator of clear-
Ing agencies and depositories regardless of

whether these entities are incorporated and

authorized to operate as banking organizations. The Commission would beauthorized

to set standards for such entitles, administer registration requirements, conduct inspections and ensure compliance with the

standards It has set Similarly, the Commission would be the sole regulator for those

transfer agents which are not banking organizations; In the case of transfer agents

organized as banking organizations, the

Commission would set the standards and

the Federal banking authorities (I.e., the

Board of Governors of the Federal Reserve

System, Comptroller of the Currency and

Federal Deposit Insurance Corporation)

would administer registration requirements, conduct Inspections and ensure

compliance with the standards set by the

Oornrrusslon.w

Title V contains several miscellaneous

provisions relating to the Commission's

Annual Report to Congress and registration

fees. In addition, that title would make uniform the criminal penalties which may be

imposed for violations of the vanous Federal securities laws.

Title VI provides for the development of a

national securities market system, includIng a transactional reporting system for eligible securities traded within the system, a

composite quotation system for reporting

bid and offered quotations In eligible securities, and rules or regulations designed to

provide fair competition between competitors Inthe system.Title VIwould grant to

the Commission broad authority to regulate

the national market system, to determine

whether trading In listed securities should

be confined to exchanges and to promulgate rules to eliminate unfair competitive

advantages among securities dealers resulting from unjustifiable disparities in the

regulation of such dealers by the selfregulatory organizations. The Commission

would also be directed to study the feasibility of establishing a national market board

to regulate the system.

Title VI would, In addition, prevent selfregulatory organizations from limiting,

without Commission approval, after July 1,

1975,the ability of their members to transact business on any other exchange, or

otherwise than on an exchange. Title VI

would also amend the Investment Advisers

Act so that, unless expressly provided

otherwise by state statute, fiduciary money

managers might exercise their reasonable

business Judgments in evaluating brokerage services and In paying brokerage comrrussronsat reasonable rates even If such

rates were Inexcess of what another broker

would have charged

(2) S. 2519

The Subcommittee on Securities of the

Senate Committee on Banking, Housing

and Urban Affairs held hearings In November and December 1973 on S. 2519

which deals primarily with the subjects of

Title II of H.R 5050 S 2519 ISdesigned to

facilitate the development of a central market systemfor listed securities and to render

more comparable the Commission's oversight of securities exchanges and secunties

associations registered under the Exchange Act. The Subcommittee reported

the bill with amendments to the full Committee, which voted its approval In May 1974.

The Senate approved the bill, as amended,

later that month.

The bill provides for the regulation of securities communications systems by bringIng under the Commission's Jurisdiction all

organizations engaged In the business of

collecting, processing, or publishing information relating to quotations for or transactions In securities. The Commission would

be granted broad authority to regulate and

oversee the acnvines of these newly designated "registered securities information

processors," as well as the activities of national securities exchanges and associations.

The bill also would impose upon the

Commission an affirmative obligation to review the rules of a secuntres exchange or

association to assure that they do not impose any burden on competition, and to

amend or otherwise alter such rules if it

finds that competition has been impeded.

The bill further provides that public securities orders should be given priority over the

orders of secunnes professronals, It seeks

to strengthen the capacity of the securities

markets to handle orders of Institutional

11
size and to govern the activities of market

makers In a central market system.

The bill would require the Commission to

include In ItS annual reports to Congress

information concerning development of a

national market system and the actlvrtres,

capabilities and plans of the self-regulatory

organizations relating to development of

that system.

The bill also provides for procedural

standards which would have to be applied

by the self-regulatory organizations in dealIngs with members and non-members for

various purposes Each organization would

be required to make available to the Comrrussrona concise general statement of the

basis and purpose of each regulatory

amendment it proposed to makeand to publish each such amendment for public comment. The bill also would give the Commission broad authority to review the rules of

the self-regulatory organizations and would

require the Commission to approve any

amendment of a rule before the amendment

could take effect.

Finally, S. 2519 would authorize the

Commission, after making specified findings as to competitive factors, the viability

of exchanges and the public Interest, to

limit trading in listed securities to exchange

floors, or to take such other action as It

believes maybe warranted This provision IS

designed to remedy possible senous rrnparrrnent of the auction trading markets

(currently the exchange markets) which

might attend the implementation of fully

competitive commission rates.

(3) S. 2474

On September 11, 1973,the Commission

transmitted to the Senate a proposal to

amend the Securities Exchange Act to provide for regulation of trading In municipal

securities by secuntres professionals, including banks. That proposal precipitated

the introduction of S. 2474 In the Senate on

September 24, 1974

S. 2474 would provide a new statutory

framework for the regulation of rnurucipal

securities professionals closely paralleling

existing provrsrons of the Act governing

brokers and dealers and their transactions

In nonexempt secunties. S. 2474 would (i)

12

amend the definition of the term "exempted

security" to exclude rnurucrpal securities

for purposes of Section 15 and 15A of the

Act; (ii) create a new class of dealers called

"municipal securities dealers", which

would Include a bank or a "separately Identifiable" division or department of a bank to

the extent Itengages Inthe business of trading municipal securities for its own account

other than in a fiduciary capacity, (IIi) provide for a new Industry rulemaking board to

establish rules governing municipal secunties professionals; and (iv) provide for

Commission regulation of municipal securities professionals, Including banks.

DISCLOSURE RELATED

MATTERS

The Rule 140 Series

In the Commission's 1969Disclosure Policy Study,47a number of recommendations

were madeto Improve the overall disclosure

process under the Securities Act and the

Securities ExchangeAct and to promote objectivity In the operation, administration

and enforcement of certain provisions of

the Securities Act. The principal recommendations of the Study are embodied in a

series of Commission rules known as the

"Rule 140Senes", comprised of Rules 144,

145, 146 and 147, adopted pursuant to the

Secunties Act. Rules 144 and 145 were

adopted in 1972 and 1973, respectively;48

during the last fiscal year, the Commission

adopted Rules 146 and 147.

Rule 144

Rule 144, "Persons Deemed Not to be

Engaged in a Distribution and Therefore

Not Underwriters," provides a method of

resale of secuntres acquired In private

placements and for securities held by affiliates. During the fiscal year, the Commission adopted several amendments to the

Rule.Among others, subparagraph (g)(2)of

the Rule was amended to permit brokers to

continue to insert bid and askquotations for

aclass of securities In an inter-dealer quotation system while selling secunties in the

class, subject to certain conditions. The

amendment also allows a broker to make
inquiries of his customers who have indicated a bona fide unsolicited Interest In the

securities within the ten business days preceding the broker's receipt of the order to

sell secunnes pursuant to the Rule. The

Commission amended also subparagraph

(h) to require transmittal of all amended

notices of proposed sale on Form 144 to the

principal stock exchange on which the secuntres to be sold are listed for tradlng.49

Rule 145

Rule 145, generally, provides that an "offer" or "sale" of securities is deemed to be

involved when there IS submitted for the

vote or consent of security holders a plan or

agreement for (1) reclassifications other

than stock splits and changes in par value;

(2) mergers, consolidations and similar

plans of acquisition except where the sole

purpose of such a transaction ISto change

an Issuer's domicile; and (3) certain transfers of assets for securities where there ISa

subsequent distribution of such securities

to those voting on the transfer of assets On

February 28, 1974 the Commission published a release setting forth the DIVision of

Corporation Finance's interpretations of

Rule 14550 The release deals with the relationship of Rule 145 to certain statutory exemptions; the application of Rule 145 to

various types of reclassifications and

business combination transactions; the

type of communications deemed not to be a

"prospectus" for purposes of Rule 145, resales of securities acquired in Rule 145

transactions, and related matters. On July 2,

1974, the Commission published a second

Interpretive release regarding the registration procedures applicable to open-end

Investment companies Issuing securities In

business combination transactions subject

to Rule 134.51

Rule 146

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

Act, Section 4(2), provides that offers and

sales by an issuer not involving any public

offering will be exempt from registration.

The section has long been a source of uncertainty for Issuers wanting to sell their

securities in private placements. In April

1974, the Commission adopted Rule 146

under the Securrtles Act, "Transactions by

an Issuer Deemed Not to Involve Any Public

Offering," which IS desrqned to protect investors while at the same time providing

more objective standards to curtail uncertainty as to the meaning of Section 4(2) to

the extent feasible 52

In general, the Rule provides that transactions by an Issuer meeting all the conditions

of the Rule do not involve "any public offermq." Major condltrons to be met In general

are that (1) there must be no general advertising or solicitation In connection With the

offering; (2) offers can be made only to persons who the Issuer reasonably believes

have the requisrte knowledge and experience in financial and busmess matters, or to

persons who the Issuer reasonably believes

can bear the economic risk, (3) sales can be

made only to persons who the Issuer reasonably believes have the requisite knowledge and experience, or who can bear the

economic risk and have an advisor (meeting

certain standards) who can provide the reqursite knowledge and experience, (4) all offerees either must have access to or must be

furnished with the type of information that

registration would disclose, (5) there can be

no more than 35 purchasers of securrnes In

the offering; and (6) reasonable care must

be taken to prevent resale of the secuntles

In Violation of the registration provrslons of

the Securities Act. _~

Rule 146 does not provide the exclusive

means for offering and seiling securities in

reliance on Section 4(2). Issuers may continue to rely on the Section 4(2) exemption

by complying With relevant administrative

and Judicial criteria at the time of a transaction. The staff of the Commission will Issue

interpretative letters to assist persons In

complying with the Rule, but will Issue noaction letters relating to Section 4(2) only In

the most compelling circumstances

Rule 147

Section 3(a)(11) of the Securities Act, the

Intrastate offering exemption, which

exempts from registration secuntres that

are part of an issue offered and sold only to

persons resident in a specific state by an

issuer that is also resident and doing busl13
ness in that state, has been widely relied

upon, but has also been the source of inquiry, misunderstanding, and uncertainty

over the years. On January 7, 1974 the

Commission adopted Rule 147 under the

Secuntres Act which defines certain terms

In, and clannes certain conditions of, the

intrastate offenng exemptlon.53 The Rule

provides some objective standards for determining when a person is considered a

resident within a state and whether an issuer IS "doing business Within" a state for

purposes of the exemption. The Rule does

not define which offers and sales constitute

"part of an issue" but relies Instead on the

traditional understanding of when offers

and sales will be Integrated; It does however

provide a "safe harbor" as to certain offers

and sales. The Rule benefits only Issuers

and IS nonexclusive. Since the adoption of

Rule 147, the staff of the Commission has

ceased responding to requests for noaction letters under Section 3(a)(11) except

In the most compelling circumstances; but

the staff does provide Interpretative guidance as to the use of the Rule.

Campaign Fund Disclosure

r Dunng the fiscal year, the Oommtssron I ~~nounced that It had denied a ruternakmq

petition which had proposed that the Commission amend its proxy rules to require

disclosure In proxy soliciting materials or In

corporate annual reports of Information required to be filed With the Congress or with

the Comptroller General under the Federal

Election Campaign Act of 1971 ("FECA").54

The Information relates to "the establishment, administration and solicitation of

contributions to a separate segregated fund

to be utilized for political purposes by a corporation. . ," as permitted by FECA. The

Oornrmssron noted that Congress had expressly specrned the channels for the dissemination of information filed under the

Act, and that the Commission could not assume that those channels were Inadequate

to achieve the Congressional goal of "wide

dissemination" of the information. The

Commission found itself unable to conclude that the information contained in the

reports filed under FECA was of sufficient

relevance to security holders to warrant

14

adoption of the suggested amendments to

the proxy rules.

In a separate action on March 8,1974. the

Commission announced the views of the DIvision of Corporation Finance as to whether

disclosure should be made when the issuer

and/or ItS officers or directors have been

charged In an information or indictment

With, or convicted of, making Illegal campaign contributions In Violation of 18 U.S.C.

610. That law makes It unlawful, among

other things, for a corporation to make a

contnbution In connection With any election for President, Vice-President, Senator

or Congressman or any pnmary election or

convention or caucus to select nominees

for any of such offices.55 In the Divlsron's

view, the conviction of a corporation, its

officers or directors for haVing made illegal!

campaign contributions In Violation of 18

U.S.C. 610 is a matenal fact that should be

disclosed to the public and specifically to

shareholders particularly In the context of

proxy statements In which such shareholders are being asked to vote for management. The release explains, In addition, that

disclosure of such convictions, or pleas of

guilty or nolo contendere, should be made

In penodic reports under the Exchange Act,

and in registration statements filed under

the Securities Act.

The release states that such a conviction

IS material to an evaluation of the integrity of

the management of the corporation as it

relates to the operation of the corporation

and the use of corporate funds. The Division's position as to disclosure of a pending

indictment or information IS that management IS usually In the best position to determine whether disclosure is necessary.

Fuel Shortages, Extractive

Reserve and Natural Gas

Supplies

In view of present energy shortages and

the actual or potential impact that such

shortages may have on the operations of

issuers subject to the registration and reporting provrslons of the Federal secunties

laws, on December 20, 1973, the Oomrmssron Issued a release reiterating the importance of making prompt and accurate drsclosure of information, both favorable and

•
unfavorable, to security holders and the Investing public.56 The Comrmssron recognized that the extent of possible energy

shortages and the impact of shortages on

particular industnes or Issuers might not be

determinable at the time and stated It was

not in a position to publish gUidelines for

disclosure. The Commission emphasized,

however, that under the secunties laws, the

responsibility for making full and fair disclosure in filings with the Commission rests

with the issuers required to make those filings; and that management has the responsibility to make full and prompt announcements of material facts concerning its issuer's operations.

On July 3, 1974, the Commission announced that Guide 28, "Extractive Reserves," of the Guides for Preparation and

Filing of Registration Statements 57 under

the Securities Act of 1933 had been

amended to require that when using Forms

8-1 and 8-7 under the Securities Act, registrants engaged In the gathering, transmission, or distribution of natural gas must disclose material Information based upon the

facts and circumstances of their particular

situation, with respect to the current availability of gas supplies.58 The GUide sets forth

certain nonexclusive factors that firms In

the gas Industry should consider in making

disclosure of their capacity to respond to

users' needs for natural gas. GUide 28 was

also recaptioned "Disclosure of Extractive

Reserves and Natural Gas Supplies."

The Commission also adopted the substance of Guide 28, as amended, as Guide 2

of the GUides for Preparation and Filing of

Reports and Registration Statements under

the Securities Exchange Act of 1934. Paragraph (a) of Guide 2 requires that companies engaged in extractive operations include, where appropriate, the quantitative

amount of their estimated reserves on Form

10. Paragraph (b) applies to issuers

engaged in the gathering, transmission or

distribution of natural gas and provides for

disclosure in Forms 10 and 10K similar to

that required of registrants by Guide 28.

On June 14, 1974, the Commission announced certain practices followed by the

Division of Corporation Finance in connection with the processing of filings which require information of registrants as to

natural gas reserve estlmates.s? The DiVIsron will request registrants to explain differences between natural gas reserve estimates contained in filings with trus Commission and estimates reported to any other

regulatory authority Within one year prior to

the filing. In addition, copies of prospectuses filed by registrants subject to the Federal Power Commission will be submitted to

that agency for comments and generally

appropriate technical personnel from the

FPC Will be mvrted to attend conferences

where supplemental natural gas reserve

information submitted by a registrant IS

reviewed.

Annual Reports to security

Holders

On January 10, 1974, based in part on

certain recommendations of the Commission's Industrial Issuers AdVISOry Committee,60 the Commission proposed various

amendments to ItS proxy rules dealing With

the Information required to be furnished to

security holders In connection with meetings of security holders and the sollcrtatton

of proxtes.'" The proposals deal with Improving both disclosure In and dissemination of annual reports to security holders.

Generally, the proposals would require

that an Issuer's annual report to security

holders disclose the nature of its business, a

hnes-ot-busmess breakdown as to sales

and profits and a summary of its operations,

all of which would be comparable to that

information set forth In the issuer's annual

report filed With the Commission, usually on

Form 1D-K. The issuer's annual report to

security holders would also be required to

disclose textual Information regarding the

nature and scope of the Issuer's hquidrty

and working capital requirements based

upon such consrderanons as peak seasonal

demands for working capital, availability

and cost of credit, polrcies followed With

respect to the magnitude of Inventory to be

maintained, and future financmq plans and

requirements. Additionally, the proposals

would require that the annual report to secunty holders disclose certain background

information regarding an Issuer's directors

and executive officers; certain statlstrcal rnformation regarding dividends paid and the

15
high and low prices for the issuer's securities for each quarter dunnq the past two

years; and a statement of the Issuer's drvrdend policy.

With respect to dissemination, the proposals would require an issuer to make inqurnes of brokers, dealers, banks and votIng trustees to determine whether other

persons are the beneficial owners of securities held of record by such persons If there

are such other benencrat owners, an issuer

would have to obtain information as to the

number of proxy statements and annual reports required, supply the record holder

with sufficient copies for distribution to the

benetrcral owners, and pay reasonable expenses of the record holder for rnarlrnq the

material to the benencral owners.

Finally, the proposals would require that a

proxy statement contain a boldface undertaking that an issuer Will furnish a copy of an

annual report filed with the Comrnlssron

(usually on Form 1Q-K) upon receipt of a

written request from any person solicrted In

connection with the annual meeting

Proposed Rule 240

On June 3, 1974, the Commission published for comment Proposed Rule 240 (and

related Form 240), "Exemption of Certain

LImited Offers and Sales by Closely Held

Issuers," wruch would exempt from registration under the Securities Act limited offers and sales of small dollar amounts of

secunties to a limited number of purchasers

by an issuer that, after the transactions pu rsuant to the rule, would continue to have a

small number of benencral owners of ItS securities.62 The rule would be adopted pursuant to Section 3(b) of the Act. The Rule

would not be available for resales.

In general, the proposed rule would exempt transactions by an Issuer (other than a

limited partnership) where (a) there was no

general advertising or solicitation, (b) no

renumeration was paid for solicrtmq prospective buyers; (c) the aggregate sales price

of securities of the Issuer sold by the Issuer

was not more than $100,000 in a twelve

month period. (d) there were no more than

25 purchasers of the Issuer's secuntres from

the Issuer In any twelve month period, (e)

the securities of the Issuer were beneficrally

16

owned, before and after the transaction, by

50 or fewer persons; and (f) the Issuer informed the purchasers of restrictions on resale. In addition, the issuer would be requrred to file a notice of proposed sales on

Proposed Form 240. In connection with the

proposal, the Oommlssion proposed an

amendment to Rule 144 that would make

that Rule available for secuntres acquired In

a Rule 240 transaction. The staff is now consrderinq the comments received on the proposed rule

Textual Analysis of Summary of

Earnings or Operations

On August 12, 1974 the Oornrrussron

amended Guide 22, "Summary of Earnings,"

of the Guides for Preparation and FIling

of RegIstration Statements under the Secuntres Act of 1933 as well as Guide 1,

"Summary of Operations," of Guides for

Preparation and Filing of Reports and Regrstration Statements under the Secunties

Exchange Act of 1934 63

Under the GUides, the Issuer is required to

make an analysts and give an explanation of

the Summary of Earnings or Summary of

Operations, as the case may be, whenever

there are material changes In the amount

and source of revenues and expenses, including tax expenses, or changes m accounting pnncrples or methods or their application that have a material effect on net

Income or loss. The Issuer should include,

In the explanation, a discussion of material

facts, whether favorable or unfavorable, requrred to be disclosed or disclosed In the

prospectus, registration statement, or report which In the opinion of management

may make historical operations or earnings

as reported in Summary of Earnings or

Summary of Operations not Indicative of

current or future operations or earnings

In announcing the adoption of these

Guides the Cornrnissson stated that investors should understand the extent to which

accounting changes, as well as changes in

busrness activity, have affected the comparability of year to year financial data included in the Summary of Earnings or

Summary of Operations and should be in a

position to assess the source and probabilrty of recurrence of net Income (or loss).
Disclosure of Professional

Litigation

On July 25, 1973 the Commission announced an inquiry by the Divrsron of Corporation Finance In conjunction with the

Office of the Chief Accountant, to obtain

information and ascertain views of interested persons relating to the disclosure

In filings with the Cornmlssron of litigation

Involving professionals, such as accountants and lawyers, who practice before the

Oornrrusslon.w The Commission received

36 letters from professionals, corporations

and Interested associations who expressed

their views and add ressed themselves to the

eIght POints raised In the release. The staff

has the matter under conslderatron.

Real Estate Matters

The continued development of new ways

to finance and sell real estate and the

applicability of the Federal securities laws

to such transactions continued to be an

area of evolving Interpretations and practice.

On March 1,1974,65theCommlssion published proposed Guide 60, "Preparation of

Registration Statements Relating to Interests in Real Estate Limited Partnerships," of

the Guides for Preparing and Filing RegiStration Statements under the Securities Act.

The proposed GUide contains comments

and suggestions developed by the Division

of Corporation Finance In processing registration statements relating to real estate IIrnited partnerships. The comments received

on the proposed GUide are being studied by

the staff. The DIVision will continue to apply

the substance of the GUide to filings during

the comment period and thereafter, unless

the Guide is adopted in an amended form

See the discussion in Part 2 for a descnpnon of other developments related to

real estate

INVESTMENT COMPANIES

Variable Life Insurance

In the past nscat year, the Commission

conducted further hearings to determine

whether to amend rules which presently

exempt certain variable life insurance from

the requirements of the Investment Company Act and the Investment Advisers Act.66

Basrcally, the term variable life Insurance

refers to Insurance contracts In which the

death benefit, cash surrender value and

other benefits vary to reflect the investment

experience of a life insurance company's

separate account which invests primarily in

equity securrtles.

The Commission was persuaded to adopt

Rule 3c-4 under the Investment Company

Act and Rule 202-1 under the Advisers Act

largely In recognition of the developing system of state insurance laws and rsqulanon

covering variable life, which the Commission believed would provide protections for

purchasers substantially equivalent to relevant protections afforded by the 1940 Acts.

However, In September 1973,67 the Comrnlsston expressed concern that contracts

might be sold In certain states prior to adoption by such states of necessary protections. In January 1974,68 the Commission

ordered hearings to assist It In determining

whether Rules 3c-4 and 202-1 should be

condrtroned so that exemption from the

Acts would be available only upon specific

determination by the Oomrmssion that applicable state laws and regulations provide

protections for purchasers substantially

eq uivalent to relevant provrsions of the 1940

Acts.

The Commission indicated It would conSider whether the Model Variable Life Insurance Regulation developed by the National

Association of Insurance Oommlssroners

would meet the terms of the proposed

amendments. Public hearings were conducted between March 25 and 28. 1974. and

the staff is presently considennq the substantial comments received from many interested persons

A petition for review filed in the United

States Court of Appeals In Washington, D.C.

by a group of large mutual fund complexes

seeking review and reversal of the adoption

of the Rules69 was stayed by the court In

reliance upon the Oommtssrcn's announced intention to review them.

ENFORCEMENT MATTERS

Joint SEC-NASD Task Force

In 1973, the Commission announced that

it would partrcipate In tne formation of a

17
JOint Task Force with the NASD to investigate certain abuses emerging In the overthe-counter market. The Task Force was established to mobilize efficiently the resources ofthe Oornmtssron and the NASD to

prevent the consummation of manipulative

activities. Broker-dealers were selected as

the focal POints of investigation because of

their strategic position in the securities industry.

During the past fiscal year, the Task Force

was utilized In the New York, Salt Lake City

and Los Angeles regions with very Impressive results In the breadth and number of

enforcement actions instituted. As a result,

of its efforts, ten injunctive actions lnvolvmq

approximately 43 defendants, and thirteen

administrative proceedings naming nearly

110 respondents have been brought by the

Comrnlssron, In addition, trading In the securitles of ten Issuers was suspended to

prevent the consummation of ongoing

frauds. There has also been a criminal convrction for conduct uncovered by the Task

Force. The NASD Itself recently terminated

the membership of a broker-dealer and

sanctioned ItS principal. The Task Force is

to continue ItS work In the three locations

named above and consideration Will be

given to moving into new areas In the near

future

Municipal Bonds

The Divrsron's staff IScontrnurnq ItS investigation of sales and trading practices

within the municipal bond industry. In this

area, dunnq the fiscal year 1974, four civil

actions were filed or pending In which 50

defendants, including 11 municipal bond

dealers, were charged with violations ofthe

Federal secuntres laws. While brokers and

dealers who transact business only in murucrpal bonds are not required to register

with the Commission as brokers and dealers, their activities generally are subject to

the antifraud provrsions of the secunttes

Act and the Sec unties Exchange Act.7°

Whisky Interests

On January 7, 1974, the Comrnlssron in

coordination with the Office of Consumer

Affairs, Issued a release on Investment In

18

whisky Interests?' The release was designed to warn the American public of the

dangers of investing in Scotch Whisky

stored In casks In Scotland and held for

promised capital gains over a four-year

penod. The release stated that the sales of

such Interests were usually made under

such circumstances as to bring them within

the definition of the term "security" in the

Federal secuntles laws. The release further

advised that many false and misleading

statements were made In the promotion of

such Interests. The release pointed out that,

among other things, promoters promised a

20-25 percent return per annum, made no

disclosure regarding the quality of the

whisky sold, failed to state that the price of

the whisky sold to Americans was far in excess of the normal market price in Great

Bntain (sometimes 100 percent in excess of

that pnce) and that the relatively limited

quantities of whisky sold to indivrdual investors often make resale very difficult.72

Significant Cases

u.s. v, Stanley Goldblum.73-ln connection with one of the largest and most shockIng frauds In recent years, 22 individuals

associated with Equity Funding Corporation

of America were Indicted Basically, defendants were alleged to have created

trctrtrous life Insurance pohcies which were

then sold to other Insurance companies

for Immediate cash. The indictment also

charges that bank documents, secunties

purchase confirmations and bonds were

counterfeited for the purpose of falsely

portraying the income and assets of Equity

Funding. The indictment alleges that this

false financial picture was Instrumental In

Increasing the market price of Equity

Funding stock and in assisting Equity FundIng's efforts to borrow money, make suecussful debenture offerings and conclude

mergers.

Thirteen of the 22 defendants pled gUilty

to various counts of the indictment. The

case is scheduled for trial as to the remainIng defendants in fiscal year 1975.

National Student Marketing Corporation

(NSMCj14-0n January 17, 1974, a Federal

Grand Jury in the Southern District of New

York returned a 14-count Indictment nam-
ing, among others, Cortes W. Randell, the

former President of NSMC, and Bernard J.

Kurek, its former chief accounting officer,

Robert C Bushnell and Dennis M. Kelly,

former salesmen and executives of NSMC

and John G. Davies, formerly its chief internal counsel They were alleged to have conspired to violate the Federal mail and wire

fraud statutes, antifraud provisions of the

secunnes Act and Securities Exchange Act

and filing provisions of the Securrtres Exchange Act, in connection with the Issuance

In 1968 and 1969 of false and misleading

financial statements and reports concernIng the assets and earnings of NSMC.

The indictment also charges Anthony M.

Natelli, a partner In the firm of Peat, Marwick, Mitchell & Co., outside auditors for

NSMC, Joseph Scansaroll, a former employee of that firm, Randell, Kelly, Bushnell

and Kurek, with making false and misleadIng statements In a proxy statement filed

with the Commission in mld-1969.

The indictment charges that In March

1968, Randell and the four former employees of NSMC began a fraudulent scheme for

recording income and assets on the financial statements of the corporation with respect to "contracts In progress," although

they knew the income and assets resulting

from those contracts were largely nonexistent, and that Randell used false reports of

the corporation's sales, earnings and future

prospects in attempting to Induce financial

institutions, pnvate investors, and the

shareholders of acquisition candidates to

accept NSMC stock for money, property

and securities. According to the indictment,

shareholders of NSMC received an annual

report for the company containing misleading financial statements for the fiscal year

ended August 31, 1968 and misleading

interim reports for subsequent penods.

In connection with the sale of more than

2,000,000 shares of NSMC stock In late

1969, Randell IS alleged to have failed to

disclose that NSMC's Internal youth marketing division had operated at a loss during

the fiscal year ended August 31, 1969 and

was being substantially disbanded; that

published reports and projections of substantial earnings by the corporation were

based in large part on the earnings of other

companies acquired by the corporation

after August 31, 1969; that pnor favorable

reports as to the corporation's sales and

earnings had been based In part on nonexistent contracts; and that unfavorable accountmg adjustments had been made to the

sales and earnings figures which had been

reported previously for the year ended

August 31, 1968 and for the nine-month

penod ended May 31, 1969.

The Indictment also alleges that the stock

of NSMC was manipulated from ItS Initial

offenng price of $6 per share to $70 per

share (after a 2 for 1 stock split). Finally the

indictment charges that Randell, Bushnell

and Kelly profited from the sale of their

NSMC stock dunng 1969 and that Randell,

individually, made $3,000,000 on the sale

of hrs stock dunng 1969

In carrying out the conspiracy, Randell,

Bushnell and Kelly are alleged to have used

forged letters purporting to be commitments from the Pontiac DIVISion of the General Motors Corporation, Eastern Air Lines

and Amencan Air Lines to purchase National Student Marketing services

S.E.C v. Amertcen ShIpbuIlding

Company75-ln Apn11974, the Commission

sued American Shipbuilding and ItS chief

executive officer, George M. Steinbrenner

III, for having failed to disclose In documents filed With the Commission and to ItS

shareholders, as allegedly required by the

Securities Exchange Act, that corporate

funds were being used for illegal contnbutions to political campaigns This action

was the first one instituted by the Commission making such allegations.

S.E.C v. U.S. Financial, Inc. (USF); In the

Matter of Touche Ross & Co.-On February

25,1974, the Commission, In major related

actions, (1) filed suit in the United States

Court for the Southern District of California

against USF, ItS former chairman, president, special outside secuntres counsel,

and four purchasers of USF's assets, allegIng the issuance and filing by USF of false

financial reports.?" and (2) censured

Touche Ross & Co and Imposed certain

other remedial sanctions on it, in connection With ItS audits of USF for the years 1970

and 1971 77

The court action charged defendants With

having schemed to publish financial statements reflecting ncnnous earnings of mil19
lions of dollars for USF from 1969 through

1972 by causing USF to engage in purportedly arm's length transactions with purchasers of USF properties who were in fact

nominees of USF (and In some Instances

nominees of USF's former chairman) Pursuant to the alleged scheme, the purchasers

obtained down payments either directly or

indirectly through loans or loan guarantees

furnished by USF or USF's chairman who

pledged hrs own USF common stock as security for the bank loans. USF also continued to bear the nsks of ownership of the

properties through secret guarantees

against loss. USF's funds were also alledgedly diverted to the purported purchasers to fund their repayments to USF

and USF's former chairman. USF and one of

the alleged purchaser-nominees consented

to the Issuance of permanent Injunctions.

The matter IS stili pending as to USF's

former chairman, president, special counsel and three alleged nominees.

As to Touche Ross, the Commission

found that the firm had failed to obtain suffrorent Independent evidence and supporting materials to support ItS protessronal

opinion In regard to the phony purchases of

USF properties and that Touche had failed

to appraise fully the significance of information known to It and to extend sufflcrently ItS

auditing procedures under conditions

which called for great professional skepticism. Touche Ross consented to the findIngs and sanctions Without admitting ordenYlng the charges

S E.C. v Robert L. Vesco, and IDS Ltd.7B

As a direct result of the Commission's suit

against Robert Vesco, IDS Ltd. and others

filed in November 1972, liqurdators have

been appointed outside the United States

for IDS Ltd, Transglobal Financial Services

Ltd , and Fund of Funds Ltd. The Commission has been cooperating With the hqurdators In their efforts to protect and reclaim

the assets of the various funds Involved.

Lawsuits have been filed by the Special

Counsel to International Controls Corp.,

appointed by the U.S. Federal Court,

against Vesco and others to reclaim money

allegedly misappropriated from the company.ln addition, two of the funds have filed

SUitSasserting claims for monies they assert

20

were fraudulently misappropriated from

them.

A committee of regulatory authorities

from the United States, Canada, Luxembourg, and the Netherlands Antillies has

been established which is overseeing the

actlvrtres of the vanous liquidators. In the

meantime, the Commission's suit is being

pursued.

S.E.C. v. Westgate-Callforma Corp.79-

This case involved the allegedly fraudulent

inflation of earnings of this public company

by C. Arnholt Smith and others through control and misuse of the assets of United States

National Bank of San Diego. The alleged

scheme consisted in part of effecting purported sales of Westgate's assets to

nominees at grossly Inflated prices. The

nominees paid the purchase prices with

money from loans by United States National

Bank arranged and approved by Smith. As a

result of the conduct Involved In this case,

both Westgate-California and United States

National Bank went bankrupt. The bankruptcy of the bank lnvolvrnq over $400 million In loans of doubtful collectability, was

the largest ever of a national bank In the

United States.

During the past year, Judgments of injunction by consent were entered against all

of the defendants.s? Defendant Smith was

:urther ordered to resign as an officer or

director of all public companies of which he

was then acting. More recently, the United

States Attorney in San Diego obtained indictments against Smith and Philip A. Toft,

another defendant in the Commission's action, relating In part to their conduct With

respect to Westgate-California and United

States National Bank

NOTES TO PART 1

1AdVISOry Committee on Market Disclosure (April-September 1972); Advisory

Committee on a Central Market System

(April-December 1972); and AdVISOry Committee on Block Transactions (April-August

1972).

2Securitles Industry Study, Report of the

Subcommittee on Securities of the Senate

Committee on Banking, Housing and Urban

Affairs, 93d Cong., 1st Sess. (Comm. Print,

1973); Securities Industry Study, Report of

the Subcommittee on Commerce and FInance of the House Committee on Interstate

-
and Foreign Commerce, H.R. Rep. No. 92-

1519, 92nd Cong , 2d Sess (1972).

3Securlties Exchange Act Release No.

10688 (March 18, 1974), 3 SEC Docket 722.

4Securities Exchange Act Release No.

10790 (May 10, 1974),4 SEC Docket 273

5Securities Exchange Act Release No.

10612 (January 24, 1974),3 SEC Docket 423

6Securlties Exchange Act Release No.

10808 (May 16, 1974),4 SEC Docket 304.

7Securities Exchange Act Release No

10383 (September 11, 1973), 2 SEC Docket

425.

8Securities Exchange Act Release No.

10560 (December 14,1973),3 SEC Docket

250.

9Securities Exchange Act Release No.

10670 (March 7,1974),3 SEC Docket 654.

loThe hearings were announced in Securities Exchange Act Release No.1 0751 (April

23,1974),4 SEC Docket 191.

1139th Annual Report, p. 9.

1239th Annual Report, p. 9.

13PBWStock Exchange v. secunues and

Exchange Commission, 485 F 2d 718 (CA

3,1973). 1473-1134.

15Connectlcut Nutmeg securmes, Inc. v.

Securtttes and Exchange Commission, D.

Conn., No N-74-114 (May 8, 1974); PBW

Stock Exchange, Inc. v. Securities and Exchange Commission, ED. Pa., No. 74-1198

(May 10,1974); Equity Services Inc., Glicoa

Associates, Inc. and Penn Mutual Securities

Corporation v. Secunttes and Exchange

Commission, E.D. Pa, No 74-1589 (June 21,

1974).

16SecUrlt,es Exchange Act Release No.

10934, 4 SEC Docket 658.

17SecUritles Exchange Act Release No.

10052 (March 22, 1973), 1 SEC Docket No.8,

p.3.

18SecUritles Exchange Act Release No.

9950 (January 16, 1973).

19Under the so-called "parent test" an

exchange member and any parent of a

member had to be engaged primarily in the

transaction of business as a broker or dealer in securities or commodities. The effect

of that rule was to prevent those not engaged primarily In the securities or commodities business from entering the securities business through an exchange member

subsidiary.

20NYSE Rule 385.

21See Securities Exchange Act Release

No. 10391 (September 13, 1973), 2 SEC

Docket 429.

22See NYSE Rule 440A.ll.

23See Securities Exchange Act Release

No. 10824 (May24, 1974),4 SEC Docket 342.

24Securities Exchange Act Release No.

10634 (February 8, 1974), 3 SEC Docket 507.

25For example, the NYSE and Amex have

prohIbited foreign brokerage firms or

banks, or U.S. subsidiary broker-dealers

owned or controlled by foreign persons,

from obtaining membership or profitable

access. Other exchanges, such as the PBW

and Midwest Stock Exchange have permitted foreign entrties to purchase direct

membership as well as permitting foreign

entities, Including banks, to gain membership through ownership of a U.S subsidrary company.

2639th Annual Report, p 9.

27Securities Exchange Act Release No

10026 (March 5,1973),1 SEC Docket NO.6

at 1.

28SecUrities Exchange Act Release No

10218 (June 13, 1973), 1 SEC Docket No. 20

at 6, Securities Exchange Act Release No

10671 (March 8, 1974),3 SEC Docket 655

29 Securities Exchange Act Release No.

10760 (April 26, 1974),4 SEC Docket 199.

30Securities Exchange Act Release No

10787 (May 10,1974),4 SEC Docket 271.

31Securities Exchange Act Release No.

10788 (May 10,1974),4 SEC Docket 272.

32SecUrities Exchange Act Release No.

10851 (June 13, 1974),4 SEC Docket 425.

3339th Annual Report, pp 10-11.

34SecUrlt,es Exchange Act Release No.

10490 (November 14, 1973), 3 SEC Docket

39.

35Letters to Joseph Sullivan, President of

CBOE and Paul Kolton, Chairman of Amex

from Lee A. Pickard, Director, DIVIsion of

Market RegulatIon dated April 25, 1974.

36Securlties Exchange Act Release No

10981 (August 22,1974),5 SEC Docket 41

37Securities Exchange Act Release No.

10552 (December 13,1973),3 SEC Docket

224.

38/d.

39Securlties Exchange Act Release No.

10602 (January 15,1974),3 SEC Docket 395.

40 CBOE has split the traditional specialist

tunctions between a board broker (agent)

and market-makers (dealers).

41The proposed CBOE rule defines as an

out-of-the-money option one which IS seilIng at $.50 or less or one where the underlyIng security is 5 points away from the exercise price.

4239th Annual Report, pp. 10-11.

43Securlties Act Release No. 5444 (December 13,1973),3 SEC Docket, 204; Securrtles Exchange Act Release No. 10550 (December 13, 1974), 3 SEC Docket 213.

44See Study of the Securities Industry,

Hearings Before the Subcommittee on

Commerce and Finance of the House

Committee on Interstate and Foreign Commerce, 92d Cong ,1st and 2d Sess. Parts

1-9 (1971, 1972).

45H. R. Rep. No. 92-1519, 92d Cong., 2d

Sess. (Oct. 4, 1972).

46 In contrast, the Senate version S. 2058,

which was passed by the Senate on July 30,

1973 and referred to the House, would provide for dual regulation of securities depos21
itories, clearing agencies, and transfer

agents. The Commlseron would have general oversight responsibility with respect to

those entities and would coordinate its activities, to the maximum possible extent

possible, with the Federal Reserve Board,

the Comptroller of the Currency and the

Federal Deposit Insurance Corporation.

Those authorities would have the pnmary

responsibility to conduct inspections and

enforce the bill's provisions with respect to

deposrtones, transfer agents and clearing

agencies incorporated as banks. The Commission would have inspection and en- forcement responsibilities with respect to

all such entities not incorporated as banks.

47See 35th Annual Report, p. 21.

48See 38th Annual Report, p. 12; 39th Annual Report, p. 15.

49Securitles Act Release No. 5452 (February 1,1974),3 SEC Docket 449.

50Securities Act Release No. 5463 (February 28,1974); 3 SEC Docket 600.

51Securities Act Release No. 5510 (July 3,

1974); 4 SEC Docket 524.

52Securities Act Release No. 5487 (Apnl

23,1974),4 SEC Docket 154.

53Secu nties Act Release No. 5450

(January 7, 1974), 3 SEC Docket 349.

54Secuntles Exchange Act Release No.

10325 (Au~ust 7,1973),2 SEC Docket 259.

55Securities Act Release No. 5466 (March

8, 1974),3 SEC Docket 647.

56Securities Act Release No. 5466 (March

8,1974),3 SEC Docket 647

57Securities Act Release No. 4936, as

amended.

58Securities Act Release No. 5511 (JUly3,

1974),4 SEC Docket 525. The amendments were effective August 1,1974. The amendment to Guide 28 and the adoption of Guide

2 were proposed in Securities Act Release

No. 5454 (February 7, 1974), 3 SEC Docket

497.

59Secunties Act Release No. 5504 (June

14,1974),4 SEC Docket 417.

60See39th Annual Report, pp. 16-17.

22

61Securities Exchange Act Release No.

10591 (January 10, 1974), 3 SEC Docket 359.

62Secunties Act Release No. 5499 (June 3,

1974),4 SEC Docket 376.

63Securities Act Release No. 5520 (August

14,1974),5 SEC Docket 727. See 39th Annual Report, p. 17.

64 Seeuntres Act Release No. 5411 (July

25, 1973), 2 SEC Docket 189

65Securities Act Release No. 5465 (March

1, 1974), 3 SEC Docket 606.

66Earlier, on January 31, 1973 (Securities

Act Release No. 5360), the Commission had

determined that variable life contracts, is- suers and related persons were sublect to

the Federal securities laws but should be

exempt from the regulatory requirements of

the Investment Company and Advisers Acts.

See 39th Annual Report, p. 19.

671nvestment Company Act Release No.

8000 (September 20, 1973), 2 SEC Docket

481.

681nvestment Company Act Release No.

8216 (January 31,1974),3 SEC Docket 488.

69Wellington Management Co. v. SEC,

CIV. No. 73-1188.

70For specific cases involving rnunlcipal

bond dealers, see pages 84-85 In Part IV.

71Securities Act Release No. 5451

(January 7, 1974),3 SEC Docket 356.

72See pages 81-82 in Part IV for

specific Commission enforcement actions.

73Litigation Release No. 6122 (November

1, 1973), 2 SEC Docket 714.

74Litigation Release No. 6207 (January 18,

1974),3 SEC Docket 419.

75Litigation Release No. 6319 (April 15,

1974),4 SEC Docket 148.

76Litigation Release No. 6258 (February

25, 1974),3 SEC Docket 641.

77Secunties Act Release No. 5459 (February 25, 1974), 3 SEC Docket 594.

78Previously reported in 39th Annual Report, pp. 22-23.

79litigation Release No. 5941 (June 21,

1973), 2 SEC Docket 29.

80litigation Release No. 6142 (November

9, 1973), 3 SEC Docket 30.
....PART 2

THE DISCLOSURE SYSTEM

PART 2

THE DISCLOSURE SYSTEM

A basic purpose of the Federal securities

laws is to provide disclosure of material financial and other information on companies seeking to raise capital through the

public offering of their securities, aswell as

companies whose securities are already

publicly held. This alms at enabling investors to evaluate the securities of these companies on an informed and realistic basis.

The Securities Act of 1933 generally requires that before securities may be offered

to the public a registrationstatementmust be

filed with the Commission disclosing prescribed categories of information. Before

the saleof securities can begin, the registration statement must become "effective." In

the sales, investors must be furnished a

prospectus containing the most significant

information in the registration statement.

The Securities Exchange Act of 1934

deals in large part with secunties already

outstanding and requires the registration of

securities listed on a national securities exchange, as well as over-the-counter securities in which there is a substantial public

interest. Issuers of registered securities

must file annual and other periodic reports

designed to provide a public file of current

material information. The Exchange Act

also requires disclosure of material information to holders of registered securities In

solicitations of proxies for the election of

directors or approval of corporate action at

a stockholders' meeting, or in attempts to

acquire control of a company through a

tender offer or other planned stock acquisition. It provides that insiders of companies

whose equity securities are registered must

report their holdings and transactions in all

equity securities of their companies.

PUBUC OFFERING: THE 1933

SECURITIES ACT

The basic concept underlying the Securities Act's registration requirements is full

disclosure. The Commission has no authorrty to passon the merits of the securities

to be offered or on the fairness of the terms

of distribution. If adequate and accurate

disclosure ISmade. it cannot deny registration. The Act makes it unlawful to represent

to investors that the Commission has approved or otherwise passedon the merits of

registered securities.

Information Provided

While the Securities Act specifies the information to be included In registration

statements, the Commission hasthe authority to prescribe appropriate forms and to

vary the particular items of information required to be disclosed. To facilitate the registration of securities by different types of

issuers, the Commission has adopted specral registration forms which vary In their

disclosure requirements so as to provide

maximum disclosure of the essential facts

pertinent in a given type of offering while at

the same time rrururniztnq the burden and

expense of compliance with the law. In recent years, It has adoped certain short

forms, notably Forms 5-7 and S-16, which

25
do not require disclosure of matters already

covered in reports and proxy material filed

or distributed under provisions of the Securities Exchange Act.

Reviewing Process

Registration statements filed with the

Commission are examined by Its Division of

Corporation Finance for compliance with

the standards of adequate and accurate

disclosure. Various degrees of review procedures are employed by the Division.'

While most deficiencies are corrected

through an informal letter of comment procedure, where the Commission finds that

matenal representations In a registration

statement are misleading, inaccurate, or incomplete, It may, after notice and opportunity for hearmg, issue a "stop-order" suspending the effectiveness of the statement.

Time for Registration

The Commission's staff tries to complete

examination of registration statements as

quickly as possrble. The secunnes Act provides that a registration statement shall become effective on the 20th day after It ISfiled

(or on the 20th day after the filing of any

amendment). Most registration statements

require one or more amendments and do

not become effective until some time after

the statutory 20-day penod. The period between fllmg and effective date ISmtended to

give Investors an opportunity to become

familiar with the proposed offenng through

the drsserrunatron of the preliminary form of

prospectus. The Commission can accelerate the effective date to shorten the 20-day

waiting period-taking Into account,

among other thmgs, the adequacy of the

Information on the Issuer already available

to the public and the ease with which facts

about the offering can be understood.

During the 1974 fiscal year 2,888 registration statements became effective Of these,

198 were amendments filed by mvestment

companies pursuant to Section 24(e) of the

Investment Company Act of 1940, which

provides for the registration of additional

securities through amendment to an effective registration statement rather than the

filmg of a new registration statement For

26

the remaining 2,690 statements, the median

number of calendar days between the date

of the onginal filing and the effective date

was 36.

Financial Analysis and

Examination

During the fiscal year, the Office of the

Chief Financial Analyst of the Division of

Corporation Finance conducted reviews of

real estate mvestment trusts ("REITs") and

the airline industry. The principal objective

of the reviews was to provide a basis for

more Uniform and effective staff examination of disclosure documents filed with the

Commission by companies in the selected

industnes. The review of REITs was signaled by the deterioration in earnings and

liquidity levels occasioned by high cost of

capital on the one hand, and declining

portfolio Yields on the other. The review of

the airlme industry indicated rising fuel

costs, difficulties in securing outside capital

funds, the negative effect of fare increases

on effective utilization of existmq seat capacity, and other problems attributable to

sudden changes in the economic climate at

the end of 1973.

Late in the fiscal year, additional reviews

were initiated for two other industrieselectnc and gas utilities, and bank holding

companies. Generally, priority for review is

given to those industries most directly affected by significant changes in the

economic environment.

The Office of the Chief Financial Analyst

also IS developing a system which Will collect, correlate and interpret data to assist It

In detecting Significant Impairment of

liquidity of registrants In all industries. The

system is intended to identify specific companies which have experienced events

suggestmg a likelihood of future financial

difficulties The system will entail a review of

ratios and tinancral relationships within the

tolerances of industry standards, qualified

accountants' opinions, changes in auditors,

late filings, declines in backlog, reductions

or orrussrons of cash dividends, excessive

amounts of debt maturing In a current or

subsequent penod, proposed recapitalizations, substantial declines In fixed charges

coverage, discontinuance of certain opera-
tions, changes in line of business, writedowns, excessive amounts of non-earning

assets and dividends paid out of capital.

Where appropriate, the staff may ask a particular company about the need for

additional public disclosure.

Investment Company Disclosure

The Division of Corporation Finance has

continued to monitor the procedures instituted in September 19722 to expedite the

processing of investment company posteffective amendments. It has found that the

procedures have benefited both registrants

and the staff by avoiding delays and by

eliminating substantial numbers of "eleventh hour comments". The Division also

continued to work on recommendations for

a simplified prospectus and a new registration form to supplant those presently in

use.3

The past fiscal year has seen a growing

number of investment company mergers

due to declining sales, increasing redemptions, declining assets and increasing

costs, all of which have made the operation

of many smaller funds unprofitable. A novel

merger involved the merger of Surveyor

Fund, a closed-end fund, into the Eberstadt

Fund, Inc., an open-end fund.

A recent development has been the appearance of funds which tie their investment objectives to shifts in the market. The

objectives of these funds are to increase

sharholders' capital during periods of

stock market strength and to preserve it during periods of stock market weakness. The

switch from the growth objective to the

preservation objective is usually made

when appropriate in the judgment of management, although at least one fund (Pilgrim Formula Share's Inc.) revises its investment objective according to formula.

One response to high interest rates has

been a rapid growth in the number of registered money market funds. These funds invest in money market instruments (e.g. certificates of deposit, bankers acceptances,

U.S Treasury bills, and commercial paper)

maturing in one year or less.The growth in

sales of money market fund shares contrasts with an abrupt drop in the registration

of shares of tax exempt municipal bond

funds from $402 million in fiscal 1973 to

$319.4 million in fiscal 1974. A partial response to the increased offerings by money

market funds has been the registration of

funds in which the payment of bond prlncipal and interest on the bonds in the portfolio

of the funds is guaranteed by an independent company.

Office of Oil and Gas

The Division's Office of Oil and Gas has

processing responsibility for all oil and gas

drilling program filings, aswell as filings on

Form 5-10 covering fractional undivided

interests in oil and gas rights. Eighty-four

registration statements were filed during

fiscal 1974for oil and gasdrilling programs,

totaling $819 million. Seventeen registration statements covering fractional undivided interests in oil and gas rights were

filed aggregating $12.7 million.

In addition to the direct processing of

those filings the Office of Oil and Gas IS

responsible for reviewing the disclosure relating to the oil and gas business and properties, including data on production and reserves of oil and gas, contained in other

filings directly processed by the several

branches of the Division of Corporation FInance.ln fiscal 1974,such other filings consisted of 115 registration statements under

the Securities Act of 1933 and 18 offering

circulars pursuant to the Regulation A

exemption thereunder, as well as registration statements and proxy statements under

the Secunties Exchange Act of 1934.

Additional information regarding offerings of fractional undivided interests is contained under Regulation B in this Part.

Tax Shelters

During the year, a significant number of

registration statements relating to real estate limited partnerships and other tax shelter offerings were filed with the Commission. All registration statements relating to

real estate limited partnerships were processed by one branch within the Divisron of

Corporation Finance, while registration

statements relating to other non-oil and gas

types of tax shelters, such as cattle feeding

and breeding, agri-buslness, and leasing, as

27
well as condominium offerings, were processedin a separate branch. Athird branch,

the Office of 011 and Gas, has processing

responsibility for tax shelters relating to 011

and gas.

In all of these types of offerings, the disclosure generally emphasized has Included

the compensation paid to the program

sponsors, the conflicts of Interest Inherent

in many such offerings, the record in prior

offerings of the sponsors of the offering,

and the tax ramifications of the offering.

See the discussion in Part 1 under the

heading "Real Estate Matters" for a descnptlon of developments relating to real

estate tax shelters.

Commercial Paper-Filing Fees

On February 1, 1974, the Commission

amended Rule457underthe Securities Act"

which sets forth the method by which the

registration fee required by Section 6(b) of

the Act is calculated The amendment

provides that the fee for registenng both

commercial paper exempt from registration

under Section 3(a)(3) of the Act, together

with non-exempt commercial paper, ISto be

calculated only on the basis of the total

amount of non-exempt commercial paper.

The Rule before amended required that the

fee be paid upon the aggregate amount of

exempt and non-exempt commercial paper.

Thrs resulted in inordinately high registration costs which tended to discourage the

registration of commercial paper.

Registration Summary Rule

In September 1973, the Oomrnrssron

adopted Rule 458 under the Securities Act,

to require any company filing any registration statement under the Act, with certain

exceptions, to provide In a letter (not part of

the registration statement) a one-paragraph

summary containing specrned information

about the offering. This summary will be

published Inthe SECNewsDigest,asnotice

of the registration staternent," The summaries in the Digest are Intended to promote the dissemination of public information concerning proposed offers of secuntles, By requiring that offerors draft the

summary paragraph, the Commission an28

ticipates more complete descriptions in the

Digest and savings in staff time.

SMALL ISSUE EXEMPTION

The Oomrnlssron is authorized under Section 3(b) of the Securities Act to exempt

securities from registration If it finds that

registration for these securities is not

necessaryto the public Interest because of

the small offering amount or limited character of the public offering. The law imposes a

maximum limitation of $500,000 upon the

size of the issues which may be exempted

by the Commission.

The Oornrnlssron had adopted the following exemptive rules and requlations:"

Regulation A. General exemption for

U.S. and Canadian issues up to

$500,000.

Regulation B. Exemption for fractional undivided interests in oil or gas

rights up to $250,000.

Regulation E' Exemption for securities of a small business investment company up to $500,000.

Regulation F: Exemption for assessments on assessable stock and for

assessable stock offered or sold to

realizethe amount of assessmentup

to $300,000

Rules234-237 Exemptions of first lien

notes,securities of cooperative housIng corporations, shares offered In

connection with certain transactions

and certain securities owned for five

years.

Regulation A

RegulationApermItSa companyto obtain

needed capital not In excess of $500,000

(including underwriting comrrussrons) In

anyone year from a public offering of its

securities Without registration, provided

specified conditions are met. Among other

things, a notification and offering Circular

supplying basic information about the

company andthe securities offered must be

filed With the Oornrrussron and the offering

circular must be used in the offering. In

addition, Regulation A permits selling

shareholders not in a control relationship
with the issuer to offer in the aggregate up

to $300,000 of securities which would not be

included m computing the issuer's $500,000

ceiling.

During the 1974 fiscal year, 438 notifications were filed under Regulation A, covering proposed offerings of $147,779,248

compared with 817 notifications covering

proposed offerings of $298 million in the

prior year. A total of 869 reports of sales

were filed reporting aggregate sales of

$69,664,554. Such reports must be filed

every SIX months while an offering is in

progress and upon its termination Sales

reported during 1973 had totaled $106 million. Various features of Regulation A offerings over the past three years are presented

In the statistical section of this report.

In fiscal 1974, the Commission temporarily suspended 21 exemptions where it had

reason to believe there had been noncompliance With the conditions ofthe Regulation or With disclosure standards, or

where the exemption was not available for

the sscuntres. Added to 18 cases pending at

the beginning of the fiscal year, this resulted

m a total of 39 cases for disposition Of

these the temporary suspension order became permanent in 22 cases: rn 11 by lapse

of time, m 5 cases after hearings, and In 6 by

acceptance of an offer of settlement. No

temporary suspension orders were vacated

Seventeen cases were pend mg at the end of

the fiscal year.

Litigation Involving Regulation A

In Koss v S E C.,7 the United States Distnct

Court for the Southern District of New York

was asked by a secuntres underwriting firm

and ItS president, to review certain letters of

comment sent by the Commission's staff to

companies that proposed to make public

offerings of their securities through the

plaintiff-underwriter In those letters, the

staff had requested the issuers to disclose

In their offering circulars the fact that the

plaintiffs were respondents in an administrative proceedmg pending before the

Cornmlssron, The plaintiffs asked the court

to restrain the Oornrnlssron from directing

issuers to mclude such Information In their

offering circulars.

The court ruled, as the Commission had

argued, that the case was not "ripe" for

Judicial review and accordingly granted

summary Judgment m favor of the Commission The court noted that the staff comment letters contained only informal advice,

were only advisory In nature and did not

represent the views of the Cornrmssron. The

court did in ItS opinion state that the fact of

the pendency of an administrative proceedIng against an underwriter of securities was

material to purchasers of those securities.

In Scientronic Corporeuon v. S.E.C.8 the

issuer of securities sought review In the

United States Court of Appeals for the Third

Crrcurt of a letter to It from the Commission's Washington Regional Office to the

effect that financial statements in its offermg circular relating to a proposed Regulation A offering must comply With generally

accepted accountmg principles. In addition, petitioner sought to overrule the action taken by the Commission's Chief Accountant With regard to ItS "petition" directed to the Cornrrussroners, dealmg With

accounting for research and development

and other matters. Finally, petitioner asked

the court to compel the Commission to take

affirmative action to revise ItS rules to permit certain proposed accountmg methods

to be used in financial statements.

In moving to drsrruss the petition and to

drsrruss as scandalous portions of a document filed by petitioner with the court, the

Comrnlsston urged that petitioner had not

yet exhausted ItS administrative remedies

In effect, petitioner was asking the court to

determine that it should be permitted to

utilize the Regulation A exemption from registration for ItS proposed bond Issue, when

the Oornrnrssron had not yet made a fmal

determination regarding the suspension of

the exemption. The Commission also urged

that even If petitioner had a right at that

pomt to [udlcral review of the actions of

which it complamed, the right of review

would not be in a court of appeals

On February 21, 1974, the court of appeals dismissed the petition and struck as

scandalous portions of the document filed

by petitioner, of which the Commission had

complained.

In Tabby's tnterneuonet Inc. v. S.E.C.,9

the United States Court of Appeals for the

Fifth Circuit affirmed per curtem an order

29
Issued by the Commission which permanently suspended the Regulation A exemption of a 1969 offering by Tabby's International, Inc. The court of appeals stated that

Its affirmance was based upon the Commission's opinion which the court attached as

an appendix to its own oplruon.'?

In the Commission proceeding, the parties stipulated that Tabby's had not been

aware of the manipulative activities of its

underwriter, which were the cause of the

suspension. Tabby's argued that in view of

this factor, the public mterest would not be

served by suspending Tabby's, Regulation A

exemption and possibly exposing Tabby's

to civil and criminal sanctions for violation

of the Securities Act registration provisions

In ItS opinion, the Commission stated that

the Regulation A exemption is available

only where there ISstrict compliance with the

conditions of that exemption and suspension of the exemption ISappropriate where

these conditions are not met, whether or not

the issuer is at fault.

The Commission further stated that suspension of the exemption is not a penalty

but rather serves the remedial purpose of

protecting Investors by making the safeguards of a registration statement a prerequisite for any further public offering of the

securities either by the Issuer or the underwriter where there has been a failure to

adhere to the exemption's conditions. The

Commission noted that the issuer could

seek relief from these consequences under

Rule 252(f) of Regulation A.

Regulation B

Regulation B provides an exemption

from registration under the Securities Act

for public offerings of fractional undivided

interests In 011 and gas rights where the initial amount to be raised does not exceed

$250,000, provided certain conditions are

met. An offering sheet disclosing certain

basic and material information of such offering must be filed with the Commission.

Copies of the final offering sheet must be

furnished to prospective purchasers at least

48 hours in advance of sale of these securities.

Form 5-10 ISavailable for the registration

of fractional undiVided interests In oil and

30

gas rights where the initial amount to be

raised exceeds $250,000 or where the

exemption is unavailable for any other reason.

During the 1974 fiscal year, 625 offering

sheets and 751 amendments thereto were

filed pursuant to Regulation B and were examined by the Office of Oil and Gas of the

Divrsron of Corporation Finance. Sales during 1974 under these offerings aggregated

$29.1 million. During the 1973 fiscal year,

725 offering sheets and 1,020 amendments

were filed covering aggregate sales of $19.9

million. For the fiscal year 1972, 1,124 offerIng sheets were filed with 1,259 amendments thereto, covering aggregate sales of

$21.1 million.

In fiscal 1974, the Oomrnlssron temporarily suspended the Regulation B exemption

for one offeror where It had evidence that

the offeror had failed to meet certain standards and requirements. The suspension became permanent later that year when the

offeror withdrew its request for a hearing. In

the prior fiscal year there were two temporary suspensions of the Regulation B

exemption. one of which was vacated and

the other became permanent.

Litigation Involving RegUlation B

In Olympic Petroleum Corporation v.

S.E.C.11 a corporation which had filed Regulation B papers with the Commission,

brought an action In the United States District Court for the District of Columbia seeking a judgment declaring that it had complied with the requirements of the Commission's Regulation B. The plaintiff argued

that a letter from a member of the Commission's staff stating that the documents filed

with the Cornmissron did not appear to

comply with Regulation B constituted a determination by the Commission and was

therefore reviewable agency action. The

Commission argued, inter alia, that there

had been no determination by the

Commission-as distinguished from. its

staff-and, therefore, there was no reviewable agency action, and that Olymprc had

failed to exhaust ItS administrative remedies.

In an order dated November 8, 1973,

based solely upon the pleadings, the district
court dismissed the complaint for failure to

exhaust administrative remedies. The suit

was also dismissed as moot since Olympic

had completed the offerings which were the

subject matter of the suit. On January 4,

1974, Olympic appealed to the Court of Appeals for the District of Columbia Circuit.12

The appeal had not been decided at the

close of the fiscal year

Regulation E

Under Section 3(c) of the Securities Act,

the Commission is authorized to adopt rules

and regulations exempting securities issued by a small business Investment company under the Small BUSiness Investment

Act. Pursuant to that section, the Commission has adopted Regulation E, which conditionally exempts such securities issued by

companies registered under the Investment

Company Act of 1940 up to a maximum offering price of $500,000. The regulation IS

substantially similar to Regulation A, described above. No notifications were filed

under Regulation E for the two preceding

fiscal years

Regulation F

Regulation F provides exemptions from

registration for two types of transactions

concerning assessable stock. First, an assessment levied upon an existing security

holder may be exempted under the regulation, provided the assessable stock is issued by a corporation Incorporated under

the laws of and having its principal business

operations in any State, Territory or the District of Columbia. Regulation F provides an

exemption also when assessable stock of

any such corporation is sold publicly to

realize the amount of an assessment levied

thereon, orwhen such stock is publicly reoffered by an underwriter or dealer. The

exemption is available for amounts not exceeding $300,000 per year. The Regulation

requires the filing of a notification and other

materials describing the offering.

During the 1974 fiscal year, 12 notifications were filed under Regulation F, covering assessments of stock of $408,652, compared with 15 notifications covering assessments of $408,374 in 1973.

Proposed Rule 239: Residential

First Lien Mortgages

On September 6, 1973, the Cornmissron

published for comment proposed Securities Act Rule 239,13 which under certain

conditions would have provided an exemption pursuant to Section 3(b) of the Act from

registration under the Act, for certain promISSOry notes directly secured by first lien

mortgages on residential real estate. The

Federal Home Loan Mortgage Corporation

had requested adoption of the Rule as appropriate to help it to implement ItS Congressional mandate to create a liquid secondary market In residentlal mortgages. On

May 23, 1974,14 the comrntssron Withdrew

the Rule from further consideration

CONTINUING DISCLOSURE: THE

1934 SECURITIES EXCHANGE

ACT

The Securities Exchange Act of 1934 contains significant disclosure provlsrons deSigned to provide a fund of current material

information on companies in whose securities there ISa substantial public Interest.

The Act also seeks to assure that security

holders who are sohcrted to exercise their

voting rights, or to sell their securities In

response to a tender offer, are furnished

pertinent information

Registration on Exchanges

Generally speaking, a security cannot be

traded on a national secunties exchange

until it is registered under Section 12(b) of

the Exchange Act. If it meets the listing requirernents of the particular exchange, an

issuer may register a class of securities on

the exchange by filing with the Commission

and the exchange an application which discloses pertinent Information concerning

the issuer and its affairs. DUring fiscal year

1974, a total of 225 issuers listed and registered secuntres on a national secuntles exchange for the first time and a total of 434

registration applications were filed. The

registrations of all securities of 218 issuers

were terminated. Detailed statistics regarding secuntles traded on exchanges may be

found in the statistical section.

31
Over-the-Counter Registration

Section 12(g) of the Exchange Act requires a company with total assets exceeding $1 million and a class of equity securities held of record by 500 or more persons to register those secunties with the

Commission. unless one of the exemptions

set forth In that section IS available or the

Commission Issues an exemptive order

under Section 12(h). Upon registration. the

reporting and other disclosure requirements and the insider trading provisions of

the Act apply to these companies to the

same extent as to those with securities registered on exchanges.

Dunng the fiscal year. 527 registration

statements were filed under Section 12(g).

Of these. 342 were filed by Issuers already

subject to the reporting requirements.

either because they had another security

registered on an exchange or they had registered securmes under the Securities Act.

Included are companies which succeeded

to the businesses of reporting companies.

and thereby became subject to the reportIng requirements

Exemptions

Section 12(h) of the Act authorizes the

Commission to grant a complete or partial

exemption from the registration provisions

of Section 12(g) or from other disclosure

and insider trading provrsions of the Act

where It is not contrary to the public interest

or the protection of investors.

At the beginning of the year. 18 exemption applications were pending. and 9 applications were filed dunng the year Of

these 27 applications. 6 were withdrawn. 11

were granted. and 0 denied. The remaining

10 applications were pending at the end of

the fiscal year.

Periodic Reports

Section 13 of the Securities Exchange Act

requires issuers of secunties registered

pursuant to Sections 12(b) and 12(g) to file

periodic reports. keeping current the information contained in the registration application or statement. Similar reports are required pursuant to Section 15(d) of certain

issuers which have filed registration state32

ments under the Securrtres Act which have

become effective. From time to time. the

Commission has Issued statements calling

attention to registrants' obligation to report

current events and explaining procedures

to be followed in certain unusual types of

situations. For example. see the discussion

In Part I concerning Fuel Shortages. Extractive Reserves and Natural Gas Supplies.

In 1974. 53.298 reports-annual. quarterly

and current-were filed.

One of the reports which certain Issuers

must file ISa quarterly report on Form 10-0.

On December 12. 1973. the Commission

published a release15 consisting generally

of a compilation of the views and comments

of the DIvision of Corporation Finance as to

questions frequently raised by public companies and as to problems and deficiencies

frequently encountered by the staff, during

the three years since Form 10-0 was

adopted. It was pornted out in the Release

that generally speaking, the majority of the

denciencres in Form 10-0 were the result of

failures to examine closely and comply with

the general Instructions to the form and the

speciftc Instructions to the items contained

therein.

Proxy Solicitations

Where proxies are soncrted from holders

of secuntres registered under Section 12 or

from secunty holders of registered pubhcutility holding companies. subsidiaries of

holding companies, or registered investment companies. the COmmISSIOn'S proxy

regulation requires that disclosure be made

of all matenal facts concerning the matters

on which the security holders were asked to

vote, and that they be afforded an opportunity to vote "yes" or "no" on any matter

other than the election of directors. Where

management ISsoliciting proxies, a security

holder desinng to communicate with the

other security holders may require management to furnish him with a list of all security holders or to mail his communication

for him. A secunty holder may also. subject

to certain limitations, require the management to include In proxy material an appropnate proposal which he wants to submit to

a vote of security holders, or he may make

an Independent proxy solicitation.
Copies of proposed proxy material must

be filed with the Commission in preliminary

form prior to the date of the proposed solicitation. Where preliminary material fails to

meet the prescribed disclosure standards,

the management or other group responsible for Its preparation is notified Informally

and given an opportunity to correct the deficiencies in the preparation of the definitive

proxy material to be furnished to security

holders.

Issuers of securities registered under

Section 12 must transmit an information

statement comparable to proxy material to

security holders from whom proxies are not

solrcrted with respect to a stockholders'

meeting.

DUring the 1974 fiscal year, 6,757 proxy

statements In definitive form were filed,

6,741 by management and 16 by nonmanagement groups or Individual stockholders.

In addition, 126 mtormatron statements

were filed. The proxy and Information

statements related to 6,645 companies, and

pertained to 6,615 meetings for the election

of directors, 222 special meetings not involvmq the election of directors, and 30 assents and authorizations.

ASide from the election of directors, the

votes of security holders were solicited with

respect to a variety of matters, including

mergers, consoucanons, acqutsrtrons.

sales of assets and dissolution of companies (235); authorizations of new or

additional secuntles, modifications of existing securities, and recapitalization plans

(603); employee pension and retirement

plans (44); bonus or profit-sharing plans

and deferred compensation arrangements

(245); stock option plans (781); approval of

the selection by management of independent auditors (3,195) and miscellaneous

amendments to charters and by-laws, and

other matters (1,839).

DUring the 1974 fiscal year, 434 proposals

submitted by 69 stockholders for action at

stockholders' meetings were included in

the proxy statements of 227 companies.

Typical of such proposals submitted to a

vote of security holders were resolutions on

amendments to charters or by-laws to

provide for cumulative voting for the election of directors, preemptive rights, limitations on the grant of stock options to and

their exercise by key employees and management groups, the sending of a post

meeting report to all stockholders, and limitations on charitable contributions.

A total of 161 proposals submitted by 78

stockholders were omitted from the proxy

statements of 71 companies in accordance

with the provisions of the rule governing

such proposals. The most common

grounds for omission were that proposals

were not submitted on time or were not

proper subjects for stockholders' action

under the applicable state law.

In fiscal 1974, 15 companies were involved In proxy contests for the election of

directors which bring speciat requirements

into play. In these contests, 398 persons,

Including both management and non management, filed detailed statements required

of participants under the applicable rule.

Control of the board of directors was involved in 14 instances In 5 of these, management retained control. Of the remainder,

three were settled by negotiation, four were

won by non management persons, and two

were pending at year end. Management retained all places on the board In the one

contest involving representation on the

board of directors

Litigation on Proxy Rules

In Kixmitter v. S E.C. ,16 the United States

Court of Appeals for the District of Columbia Circuit dismissed a petition to review a

no-action determination informally given to

a corporation by the staff of the Commission as well as the Oornrrussron's purported

affirmance of that determination, in declining to review the staff's position. The court

held that where the Commission has refused to review informal staff advice or to

express ItS own informal views on the matterthere does not exist any "order issued by

the Commission" 17 that a court of appeals

has [unsdlctton to review. The court distinguished the situation involved in Kixmiller

from that in Medical Committee for Human

Rights v. S.E.C.,18 noting that "Medical

Committee Involved a no-action ruling by

the staff which was sanctioned by the

Commission ....

The court did not decrde whether the

Commission erred in refusing to deal with

33

"
petitioner's claim since, in any event, it was

"not at liberty to override" the Commislion's decision. An agency's decision to refrain from an investigation or an enforcement action was thought to be "generally

unreviewable." As to the Commission, the

specifications of the Securities Exchange Act "leave no doubt on that score."

The court found nothing arbitrary about the

Commission's policy (as described in 17

CFR 202.1d) not to involve itself in staff activity, as applied in the instant case. "It is for

the Commission to initially draw the line on

administrative review of staff decisions in

this area, and we cannot say that its regulation has done so unreasonably." [footnotes

omitted].

Takeover Bids, Large

Acquisitions

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

(f) of the Securities Exchange Act, enacted

in 1968 and amended in 1970, provide for

full disclosure in cash tender offers and

other stock acquisitions involving changes

in ownership or control. These provisions

were designed to close gaps in the full disclosure provisions of the securities laws

and to safeguard the interest of persons

who tender their securities in response to a

tender offer.

During the 1974 fiscal year, 953 Schedule

130 reports were filed by persons or groups

which had made acquisitions resulting in

their ownership of more than five percent of

a class of securities. One hundred five

Schedule 130 reports were filed by persons

or groups making tender offers, which, if

successful, would result in more than five

percent ownership. In addition, 45 Schedule 140 reports were filed on solicitations or

recommendations in atender offer by a person other than the maker of the offer. Five

statements were filed for the replacement of

a majority of the board of directors otherwise than by stockholder vote. Four statements were filed under a rule on corporate

reacquisitions of securities while an issuer

is the target of a cash tender offer.

Insider Reporting

Section 16ofthe Securities Exchange Act

and corresponding proVisions in the Public

34

Utility Holding Company Act of 1935 and the

Investment Company Act of 1940 are designed to provide other stockholders and

investors generally with information on insider securities transactions and holdings,

and to prevent unfair use of confidential

information by insiders to profit from shortterm trading in a company's securities.

Section 16(a) of the Exchange Act requires every person who beneficially owns,

directly or indirectly, more than 10 percent

of any class of eq uity security which is registered under Section 12, or who is a director

or an officer ofthe issuer of any such security, to file statements with the Commission

disclosing the amount of all equity securities ofthe issuer of which he is the beneficial owner and changes in such ownership. Copies of such statements must be

filed with exchanges on which the securities are listed. Similar provisions applicable to insiders of registered public-utility

holding companies and registered closedend investment companies are contained in

the Holding Company and Investment

Company Acts.

In fiscal 1974, 116,110 ownership reports

were filed. These included 17,646 initial

statements of ownership on Form 3, 93,338

statements of changes in ownership on

Form 4, and 5,126 amendments to previously filed reports.

All ownership reports are made available

for public inspection when filed at the

Commission's office in Washington and at

the exchanges where copies are filed. In

addition, the information contained in reports filed with the Commission is summarized and published in the monthly "Official Summary of security Transactions

and Holdings," which is distributed by the

Government Printing Office to about 11,500

subscribers.

Short-Swing Trading Utigation

In Gold v.Sloan ,19 the CommiSSion filed a

brief, amicus curiae, in which it urged that

the defendants' acquisitions of securities

pursuant to a corporate merger were "purchases" of those securities for purposes of

Section 16(b) of the securities Exchange

Act. That section generally provides that an

issuer whose securities are registered pursuant to Section 12 of the Securities Ex-
change Act or Itsshareholders suing derivatively, may recoverthe profits realized by an

officer, director or beneficial owner of more

than 10 percent of any class of the corporation's equity securities upon his "purchase

and sale" (or "sale and purchase") of such

securities of the issuer if the two transactions occur within a six-month period. The

defendants who had been shareholders of

the corporation acquired in the merger as a

result of the merger became shareholders

of the acquiring corporation. In addition,

they assumed positions as either officers or

directors of the acquiring corporation.

Within the six months of the merger they

sold some of the shares they had acquired

in the merger.

The Commission urged that the defendants' acquisition of stock in the merger

provided them the opportunity to engage in

the kind of speculative abuse that Section

16(b) was designed to prevent and, therefore, should be held to be within the scope

of that section. The Commission argued

that, contrary to defendant's contention,

their acquisitions could not be viewed as

involuntary. The Commission pointed out

that, even if defendants could not havepossessed inside information prior to the

merger, the defendants might have timed

their sales on the basis of post merger, inside information.

In a 2-1 decision, the Court of Appealsfor

the Fourth Circuit held that, on the particular facts of the case, the acquisitions in

question were to bedeemed purchasesonly

with respect to one of the defendants. The

court stated that, in determining whether

the "possibility of abuse" test was met, only

those circumstances and events connected

with the merger were relevant. The court

concluded that the test was satisfied only as

to the one defendant who had knowledge

of certain inside information concerning

the merger.

The dissenting judge was of the view that

the majority should have considered the

situation that existed in the post-merger

period, when the defendants were officers

and directors ofthe acquiring company and

presumptively in possession of inside information that would have enabled them to

time their sales. It was precisely this sort of

abuse. the judge argued, that Section 16(b)

was designed to prevent.

ACCOUNTING

The securities acts reflect a recognition

by Congress that dependable financial

statements of a company are indispensable

to informed investment decisions regarding

its securities. A major objective of the

Commission has been to improve accounting, reporting and auditing standards applicable to the financial statements and to assure that high standards of professional

conduct are maintained by the public accountants who examine the statements.

The primary responsibility for this program

rests with the Chief Accountant of the

Commission.

Under the Commission's broad rulemaking power, it has adopted a basic accounting regulation (Regulation 5-X) which, together with opinions on accounting principles published as "Accounting Series Releases," governs the form and content of

financial statements filed under the securities laws. The Commission has also

formulated rules on accounting and auditing of broker-dealers and prescribed uniform systems of accounts for companies

subject to the Public Utility Holding CompanyAct of 1935.The accounting rules and

opinions of the Commission, and its decisions in particular cases, have contributed

to clarification and wider acceptance of the

accounting principles and practices and

auditing standards developed by the profession and generally followed in the preparation of financial statements.

However, the specific accounting rules

and regulations-except for the uniform

systems of accounts which are regulatory

reports-prescribe accounting principles

to be followed only in certain limited areas.

In the large area of financial reporting not

covered by its rules, the Commission's principal meansof protecting investors from inadequate or improper financial reporting is

by requiring a report of an independent public accountant, based on an audit performed in accordance with generally accepted auditing standards. which expresses an opinion whether the financial

statements are presented fairly in conformity with accounting principles and practices that are recognized assound and have

attained general acceptance. The requirement that the opinion be rendered by an

35
independent accountant, which was initially established underthe Securities Act of

1933,isdesigned to secure for the benefit of

public investors the detached objectivity

and the skill of a knowledgeable professional person not connected with management.

The accounting staff reviewsthe financial

statements filed with the Commission to insure that the required standards are observedand that the accounting and auditing

procedures do not remain static in the face

of changes and new developments in financial and economic conditions. New

methods of doing business, new types of

business, the combining of old businesses,

the use of more sophisticated securities,

and other innovations create accounting

problems which require a constant reappraisal of the procedures. In fiscal 1974,

work was commenced on a new publication

series to provide information to the public

regarding informal administrative practices

and guidelines developed by the accounting staff with respect to specific accounting

and auditing problems considered in the

review of the financial data filed. The first

issueisexpected to bepublished in the near

future

Relations With the Accounting

Profession

In order to keep abreast of changing conditions, and in recognition of the need for a

continuous exchange of views and information between the Comrnlssron's accounting

staff and outside accountants regarding

approprrate accounting and auditing

pollcies, procedures and practices, the staff

maintains continuing contact with individual accountants and various professional

organizations. The latter include the American Institute of Certified Public Accountants (AICPA)and the Financial Accounting

Standards Board (FASB),the principal professional organizations concerned with the

development and improvement of accounting and auditing standards and practices.

The Chief Accountant also meets regUlarly

with his counterparts In other regulatory

agencies to improve coordination on

policies and actions among the agencies.

Because of its many foreign registrants

36

and the vast and increasing foreign operations of American companies, the Commission has an interest in the improvement of

accounting and auditing principles and

procedures on an international basis. To

promote such improvement, the Chief Accountant corresponds with foreign accountants, interviews many who visit this

country and, on occasion, participates in

foreign and International accounting conferences. In August 1973,he addressed the

annual convention of the American Accounting Association in Quebec City,

Canada. In September and December 1973,

he participated in discussions with representatives of the Canadian Institute of Chartered Accountants in Toronto, Canada.

Professional efforts are being made to

improve and harmonize accounting standards among countries through various international accounting conferences and

committees. One committee, comprised of

representatives of accountancy groups

from eighteen countries, was established to

promulgate international accounting

standards. This committee has issued a

number of proposed standards and is developing additional proposals. The Commission will cooperate closely with these

committees and groups which haveas their

long-term objective the development of a

coordinated worldWide accounting profession with uniform standards.

Accounting and Auditing

Standards

The FASB supplanted the Accounting

Prlnciples Board (APB)of the AICPA,which

ceased operations on June 30, 1973,as the

organization which establishes standards

offinancial accounting and presentation for

the guidance of issuers and public accountants. The new organizational structure was established on the basis of recommendations by a committee appointed

by the AICPA in early 1971to explore ways

of improving this function. A financial accounting foundation, sponsored by the

AICPA and consisting of representatives of

leading professional organizations, appoints the sevenmembers of the FASBwho

serve on a salaried, full-time basis, and the

members of an advisory council to the
Board who serve on a voluntary basis. The

Commission originally endorsed the recommendations for the new structure, which

it believed would provide operational efficiencies and insure an Impartial viewpoint

in the development of accounting standards on a timely basis. Subsequently,20 the

Commission endorsed the FASB and stated

that the FASB's statements and interpretations would be considered as being substantial authoritative support for an accounting practice or procedure.

The Chief Accountant and the FASB have

developed liaison procedures for consultation on projects of either the Board or the

SEC which are of mutual Interest. The

Board has adopted a heavy agenda of tOPiCS

which urgently require consrderatron. They

Include accounting for foreign currency

translation, accrual of future losses, reportIng by diversified companies, accounting

for leases by lessee and lessor, accounting

for such costs as research and development, materiality criteria, busmess combinations and related Intangibles, reporting

the effects of general price-level changes In

fmancral statements, and the conceptual

framework for tmancial accounting and reporting. The Board has issued discussion

memoranda and held hearings on several of

the projects, and It has issued two proposed

standards and has adopted a standard on

disclosure of foreign currency translation

Information.

Another committee was appointed In

early 1971 by the AICPA to study and refine

the objectives of financial statements. It

studied the baSIC questions of who needs

nnancrat statements, what information

should be provided, how it should be communicated, and how much of it can be

provided through the accounting process.

The committee's report on the objectives of

financial statements, which was published

in October 1973, IS being utilized by the

FASB as the basis of ItS study of the conceptual framework for fmanctal accounting and

reporting.

The Chief Accountant also rnalntarns

liaison with other senior committees of the

AICPA on projects of mutual Interest, principally proposed audit guides and standards of the Auditing Standards Executive

Committee and proposed statements of

POSition of the Accounting Standards

Executive Committee. Regular meetings

are held with the Committee on SEC matters

to provide information and guidance to the

profession concerning the Interpretation of

and compliance with the Commission's accounting and auditing requirements applicable to registrants and their independent

accountants.

Other Developments

Dunng the fiscal year the Cornmissron ISsued 13 Accounting Series Releases to

provrde Interpretations or guidelines on

matters of accounting principles and auditIng standards, to require Improved disclosure of financial information by amendment

of reporting forms or Regulation S-X. or to

announce decrsrons In disciplinary proceedings under Rule 2(e) of the Commission's Rules of Practice concerning accountants appearing before it.

One release21 contained a statement of

policy on the establishment and Improvement of accounting prlncrples and standards and the Commission's endorsement of

the FASB. Two interpretative releases22

dealt with the effect of treasury stock transactions on accounting for busrness combinations The subjects of other interpretative

releases were catastrophe reserves by

property and casualty Insurance companles23 and disclosure of Inventory profit

reflected in income in periods of rising

prlces.24 In conjunction with the DIVISion of

Market Regulation, a release25 was issued

providrnq gUidelines forthe maintenance of

current books and records by brokerdealers In accordance With Rules 17a-3(a)

and 17a-11 under the Securities Exchange

Act of 1934.

A number of amendments to Regulation

SoX were adopted to effect Improved disclosures In specitrc areas of nnancrat statements: one release26 dealt With the disclosure of lease commitments by lessees,

another27 With disclosure pertaining to

compensating balances and short-term

borrowing arrangements; and a third release28 With disclosure of income tax expense.

A general revlsion of Article 7A of Regulation S-X. pertaining to the requirements for

37
the form and content of financial statements of life insurance companies, was

adopted29 to reflect developments m accounting practice in recent years and the

effect of the publication m 1972 of an AICPA

audit guide for life insurance companies

which provides for the presentation of the

financial statements in accordance with

generally accepted accountmg principles.

Registration Form 10 and annual report

Form 1o-K were also amended to remove

the exemption from the requirement of audited financial statements which had previously been available to life insurance

companies. Another release30 announced

an amendment in Article 4 of Regulation S-X

relating to the requirements for consolidated and combmed financial statements

m filmgs with the Commission.

Finally numerous amendments to the instructions pertaining to the financial statements, the summaries of operations and the

exhibits in various registration and reporting forms were adopted31 to update and

conform the instructions to current termmologyand practice and to provide other

clarifications and modifications.

Proposals for amendments to Regulation

S-X were issued for public comment which

would requrre improved disclosures regarding accounting policies followed by registrants,32 the components of accounts receivable and inventories arising out of defense and other long-term contract activities of registrants,33 and the capitalization of interest by non-utility comparnes.ss

In the frnal release, a moratorium was proposed on the adoption of a policy of

capitalizing interest by non-utility companies who had not followed such a policy

prior to the date of the release. Shortly after

the end of the fiscal year, a general revision

of Article 7 of Regulation S-X, pertaining to

the form and content of financial statements of title insurance and mortgage

guaranty insurance companies, was proposed 35to reflect developments in accountmg practice, mcluding the requirement that

the financial statements be prepared in accordance with generally accepted accounting principles.

The Commission issued opinions in two

proceedmgs under Rule 2(e) of the Commission's Rules of Practice involving large

38

accounting firms. In one proceeding,36 the

Commission censured and imposed remedial sanctions on a firm. The Commission

concluded that the firm had not performed

the audit of financial statements filed with

the Commission which were found to be

false and misleading in accordance with

professional auditing standards. The sanctions in summary provide for the firm to

adopt and rnamtain certain qualitative audit

and office review procedures, for an investigation by the Commission regarding the

review procedures and the professional

practices subject thereto, and for certain

restrictions on undertaking new professional engagements.

In the second proceeding,37 concluded

shortly after the close of the fiscal year, the

Commission censured an accountmg firm

for failing fully to disclose to the Commission and the public the facts relating to a

settlement negotiated between the firm and

a client regarding an audit of certain inventories that were misstated m the trnancral

statements of the client filed With the Commission.

In another proceeding,38 the Commission accepted the sworn undertaking of a

public accountant not to engage in practice

before the Commission. The accountant

had been permanently enjoined by a Federal court in a Commission injunctive action

from violating antifraud provisions of the

Federal securities laws.

EXEMPTIONS FOR

INTERNATIONAL BANKS

Section 15 of the Bretton Woods Agreement Act, as amended, exempts from registration securities issued, or guaranteed as

to both principal and interest, by the International Bank for Reconstruction and Development. The Bank IS req uired to file with

the Commission such annual and other reports on securities as the Commission determines to be appropriate. The Commission has adopted rules requiring the Bank

to file quarterly reports and copies of annual

reports of the Bank to its Board of Governors. The Bank is also required to file advance reports of any distribution in the

United States of ItS primary obligations. The

Commission, acting in consultation with the
National Advisory Council on International

Monetary and Financial Problems, is authorized to suspend the exemption for

securities issued or guaranteed by the

Bank. The following summary of the Bank's

activities reflects Information obtained from

the Bank. Except where otherwise indicated, all amounts are expressed In U S.

dollar equivalents as of June 30,1974.

Net income for the year was $216 million,

compared with $186 million the previous

year. Of the $216 million net income the

Executive Directors allocated $116 million

to the Supplemental Reserve Against

Losses on Loans and from Currency Devaluations and recommended to the Board

of Governors that an amount of $1 00 million

be transferred by way of grant to an affiliate

of the Bank, the International Development

ASSOCiation.

Repayments of pnncipal on loans received by the Bank during the year

amounted to $487 million, and a further

$112 million was repaid to purchasers of

portions of loans. Total pnncipal repayments by borrowers through June 30,1974,

aggregated $5.9 billion, including $3.8 billion repaid to the Bank and $2.1 billion repaid to purchasers of borrowers' obligations sold by the Bank

Outstanding borrowings ofthe Bank were

$9.7 billion at June 30, 1974. During the

year, the bank borrowed $428 million

through the issuance of 2-year U S. dollar

bonds to central banks and other governmental agencies In some 70 countries;

OM 578 million (U.S. $2203 million) in Germany; 122.2 billion yen (U.S. $460.6 million)

In Japan; SwF 550 million (U.S $177 5 million) in Switzerland; KD 25 million (U.S.

$84.4 million) in Kuwait; U.S. $200 million

in Iran; LD 30 million (U.S. $101.3 million) in

Libya; UAED 300 million (U.S. $76 million) In

United Arab Emirates; and the equivalent of

U.S. $105 million In other countries outside

the United States The above U.S. dollar

equivalents are based on official exchange

rates at the times of the respective borrowings. The Bank also Issued the equivalent of

$43.5 million in bonds that had been sold in

previous years under delayed delivery contracts.

These borrowings, in part, refunded

maturing issues amounting to the equivalent of $616 million. After retirement of $60

million equivalent of obligations through

Sinking fund and purchase fund operations,

the Bank's outstanding borrowings showed

a net Increase of $768 million from the previous year after deducting $277 million representing adjustment of borrowings as a result of currency devaluations and revaluations in terms of U.S. dollars of the value of

the non-dollar currencies in which the debt

was denominated.

The Inter-American Development Bank

Act, which authorizes the United States to

participate in the Inter-American Development Bank, provides an exemption for certain securities which may be Issued or

guaranteed by the Bank Similar to that

provided for securities of the International

Bank for Reconstruction and Development.

Acting pursuant to thrs authorrty, the Commission adopted Regulation lA, which requires the Bank to file with the Commission

substantially the same type of Information,

documents and reports as are required from

the International Bank for Reconstruction

and Development The following data reflects Information submitted by the Bank to

the Commission.

On June 30,1974 the outstanding funded

debt of the Ordinary Capital resources of

the Bank was the equivalent of $1.316 billion, reflecting a net increase in the past

year of the equivalent of $30 million. During

the year, the funded debt was Increased

through public bond Issues totaling the

equivalent of $49.9 million as well as private

placements for the eq uivalent of $58.1 m illion including $13.3 million of drawlnqs

under arrangements entered into dUring the

previous year with Japan and Spain.

Additionally, $40.2 million of two-year and

five-year bonds were sold in Latin America

and Israel, essentially representing a rollover of a maturing borrowinq of $32.5 rnrlnon. The funded debt decreased byapproxImately $473 million due to downward adjustrnent ofthe U.S. dollar equivalent of borrowings denominated In non-member currencies. The funded debt was decreased

through the retirement of approximately

$38.4 million from sinking fund purchases

and scheduled debt retirement

The Asian Development Bank Act,

adopted In March 1966, authorized United

39
States participation In the ASian Development Bank and provides an exemption for

certain securities which may be issued or

guaranteed by the Bank, Similar to the

exemptions accorded the International

Bank for Reconstruction and Development

and the Inter-American Development Bank.

Acting pursuant to this authority, the Commission has adopted Regulation AD which

requires the Bank to file with the Commission substantially the same type of information, documents and reports as are required

from those banks. The Bank has 40 members with subscriptions totaling $1 billion.

As of June 30,1973, 12countries had contributed or pledged a total of $242 million to

the Bank's Special Funds. In addition to the

$26.6 million set aside from Ordinary Capital in 1969 and 1971 by the Board of Governors for Special Funds purposes, another

$51.6 million was set asrde in April 1973,

making a total of $78.2 million set aside. In

addition, Congress has authorized a $100

million U.S. contribution to the Bank's Speoral Funds, and is consrdannq the appropriation of these funds In fiscal 1974. There

have been indications from other countries

of additional contributions.

Through June 30, 1973, the Bank's borrowings totaled the equivalent of $229 million. In 1972, the Bank issued obligations of

the equrvalent of $58.6 million In Japan

($32 5 million), Luxembourg ($8.9 million)

and Italy ($17.2 million). The last U.S. borrowing, In 1971, was $50 million, half In

5-year notes at 6Y2 percent and half In 25-

year bonds at 7% percent. Before selling

securrties in a country, the Bank must obtain the country's approval.

TRUST INDENTURE ACT OF 1939

This Act requires that bonds, debentures,

notes and similar debt secuntles offered for

public sale, except as specifically exempted, be Issued under an Indenture which

meets the requirements of the Act and has

been duly qualified with the Oommtssrcn.

The provisrcns of the Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the

Securities Act of securities to be issued

under a trust indenture subject to the Trust

Indenture Act is not permitted to become

40

effective unless the indenture conforms to

the requirements of the latter Act designed

to safeguard the rights and interests of the

purchasers. Moreover, specified information about the trustee and the Indenture

must be included In the registration statement.

The Act was passed after studies by the

Commission had revealed the frequency

With which trust Indentures failed to provide

minimum protections for security holders

and absolved so-called trustees from minimum obligations in the discharge of the

trusts. It requires, among other things, that

the Indenture trustee be a corporation With

a minimum combined capital and surplus

and be free of conflrcnnq mterests which

might interfere With the faithful exercise of

its duties on behalf of the purchasers of the

securities, and it imposes high standards of

conduct and responsibility on the trustee.

DUring fiscal year 1974,370 trust Indentures

relating to securities In the aggregate

amount of $23.3 billion were filed.

INFORMATION FOR PUBLIC

INSPECTION; FREEDOM OF

INFORMATION ACT

Registration statements, applications,

declarations, and annual and penodrc reports filed with the Commission each year,

aswell as many other public documents, are

available for public inspection and copying

at the Commission's public reference room

in its pnncrpal offices In Washington, D.C.

and, In part, at its regional and branch offices.

The categories of available materials and

those categories of records that are generally considered nonpublic are specified in

the cornmrssron's rules concerning records

and information which Include the rule (17

CFR 200.80) adopted by the Commission to

Implement the provrslons of the Freedom of

Information Act (5 U.S.C. 552). That rule establishes the procedure to be followed in

requesting records or copies and provides

for a method of administrative appeal from

the denial of access to any record. It also

provides for the imposition of fees when

more than one-half man-hour of work is performed by the Commission's staff to locate

and make records available. In addition to
the records described, the Commission

makes available for inspection and copying

all requests for no-action and interpretative

letters received after December 31, 1970,

and responses thereto (17 CFR 200.81) Also

made available since November 1, 1972 are

materials filed under Proxy Rule 14a-8(d),

which deals with proposals offered by

shareholders for inclusion in management

proxy-soliciting materials, and related materials prepared by the staff (17 CFR200.82).

The Commission has special public reference facilities in the New York, Chicago

and Los Angeles Regional Offices and some

facilities for public use in other regional and

branch offices. Each regional office has

available for public examination copies of

prospectuses used in recent offerings of

securities registered under the Securities

Act; registration statements and recent annual reports filed under the Securities Exchange Act by companies having their principal office in the region; recent annual reports and quarterly reports filed under the

Investment Company Act by management

investment companies having their pnncipal office in the region; broker-dealer and

Investment adviser applications originating

in the region; letters of notification under

Regulation A filed In the region, and indices

of Commission decisions.

During the 1974 fiscal year, 18,970 persons examined material on file in Washington; several thousand others examined files

in New York, Chicago, Los Angeles, and

other regional offices. More than 52,948

searches were made for information requested by individuals, and approximately

5,163 letters were written on information

requested.

The public may make arrangements

through the Public Reference Section of the

Commission in Washington, D.C. to purchase copies of material in the Commission's public files. The copies are produced

by a commercial copying company which

supplies them to the public at prices established under a contract with the Commission. Current prices begin at 15 cents per

page for pages not exceeding 8h" x 14" in

size, with a $2 minimum charge. Under the

same contract, the company also makes

microfiche and microfilm copies of Commission public documents available on a

subscription or individual order baSIS to

persons or firms who have or can obtain

viewing facilities In microfiche services, up

to 60 Images of document pages are contained on 4" x 6" pieces of film, referred to as

"fiche."

Annual microfiche subscriptions are offered in a variety of packages covering all

public reports filed on Forms 10-K, 10-0,

8-K, N-l0 and N-1R under the Securities

Exchange Act or the Investment Company

Act; annual reports to stockholders; proxy

statements; new issue registration statements; and final prospectuses for new ISsues. The packages offered Include various

categories of these reports, including those

of companies listed on the New York Stock

Exchange, the American Stock Exchange,

regional stock exchanges, or traded overthe-counter. Reports are also available by

standard industry classifications. Arrangements also may be made to subscribe to

reports of companies of one's own selection. Over one hundred million pages (microimagery frames) are being distributed

annually. The subscnption services may be

extended to further groups of filings In the

future if demand warrants. The copying

company will also supply copies In microfiche or microfilm form of other public

records of the Commission desired by a

member of the public.

Microfiche readers and reader-printers

have been installed In the public reference

areas in Washington, D.C. and the New

York, Chicago, and Los Angeles regional

offices, and sets of microfiche are available

for inspection there. Visitors to the public

reference room in Washington, D.C. may

also make immediate reproduction of material on photostatic-type copying machines.

The cost to the public of copies made by use

of all customer-operated equipment is 12

cents per page. The charge for an attestation with the Commission seal is $2. Detailed Information concerning copying services available and prices for the various

types of services and copies may be obtained from the Public Reference Section of

the Commission.

41
FREEDOM OF INFORMATION

ACT LITIGATION

In Preferred Land Corporation v. S.E.C.39

plaintiffs attempted to gain access, under

the Freedom of Information Act, to a report

of investigation prepared by the Commission's Atlanta Regional Office following an

investigation by that Office into the activities of the plaintiffs. After oral argument.

the district court concluded that "the

Commission's staff report is one of the

types of documents that Congress intended

to protect when it enacted the Freedom of

Information Act, exempt from disclosure

under that Act as a part of an 'investigatory

file compiled for law enforcement purposes,' in the words of the seventh exemption to that Act.nolO The district court also

ruled that Securities Act ReleaseNo. 5310,

"Procedures Relating to the Commencement of Enforcement Proceedings and

Termination of Staff Investigation" (September 27. 1972). does not constitute a

waiver of the investigatory files exemption

under the Act, with respect to recommendations made by the staff to the Commission concerning the institution of

enforcement proceedings. An appeal by

plaintiffs of the district court's order is

pending.ol!

PUBUCAnONS

In addition to releases concerning Commission action under the securities laws

and litigation involving securities violations, the Commission issues a number of

other publications, including the following:

Daily:

News Digest; reporting Commission

announcements. decisions, orders. rules and rule proposals, current reports and applications filed,

and litigation developments .•

Weekly:

SEC Docket; a compilation of Commission releases.•

Monthly:

Official Summary of Securities

Transections and Holdings of Officers. Directors and Principal

Stockholders..

Statistical Bulletin .•

Annually:

Annual Report of the ccmmtseton.s

Securities Traded on Exchanges

under the Securities Exchange Act

of 1934.b

List of Companies Registered under

the Investment Company Act of

1940.b

Classification, Assets and Location

of Registered Investment Companies under the Investment Company Act of 1940.b

Directory of Companies Filing Annual Reports with the Commission

under the Securities Exchange

Act of 1934.a

Other Publications:

Decisions and Reports of the Commisslon,"

The Work of the securities and Exchange Commission.

Holding Companies Claiming

Exemption from the Public Utility

Holding Company Act of 1935.b

Index of Active Registered Investment Companies under the Investment Company Act of 1940.b

Report of SEC Special Study of Securities Markets. H. Doc. 95 (88th

Congress).

Institutional Investor Study Report of

the Securities and Exchange

Commission, H. Doc. 64 (92nd

Congress).

Part 8 of the Institutional Investor

Study Report, containing the text

of the Summary and Conclusions

drawn from each of the fifteen

chapters of the reportStatement of the securities and Exchange Commission on the Future

Structure of the Securities Markets. February 2. 1972.

The Financial Collapse of the Penn

Central Company. Staff Report of

the Securities and Exchange

Commission to the Special Subcommittee on Investigations, August 1972••

Report of the Real Estate Advisory

Committee to the securities and

Exchange Commission.•

Report of the Industrial Issuers Advisory Committee to the securities

and Exchange Commission.•
Acts and General Rules and Regulations for all Securities Acts.a

Compilation of Releases Dealing with

Matters Frequently Arising under

the Securities Act of 1933.a

Compilation of Releases Dealing with

Matters Arising under the Securities Exchange Act of 1934 and Investment Advisers Act of 194O.a

Compilation of Releases, Commission Opinions, and Other Material

Dealing with Matters Frequently

Arising under the Investment

Company Act of 194O.a

aMust be ordered from the Superintendent of Documents, Government Printing

Office, Washington, D.C. 20402

bThis document is available in photocopy

form. Purchasers are billed by the printing

company which prepares the photocopies.

NOTES TO PART 2

1Securities Act Release No. 5231 (February 3, 1972).

28ee 39th Annual Report, pp. 31-32.

38ee 39th Annual Report, p. 32.

4Securities Act Release No. 5453 (February 1,1974).3 SEC Docket 453.

5Securities Act Release Nos. 5424 (September 20, 1973), 2 SEC Docket 462,

and 5424A (November 1,1973),2 SEC Docket 653.

8As to proposed rules under section 3(b), see the discussion in Part 1 concerning

proposed Rules 238 and 240. A discussion

of proposed Rule 239 appears hereafter.

7364 F. Supp. 1321 (1973).

8No.73-1889.

9479 F. 2d 1080 (1973).

1°Securities Act Release No. 5283 (July

21.1972). 11Civ. No. 1657-73.

12No.74-1254.

13Securities Act Release No. 5419, 2 SEC

Docket 397.

14Securities Act Release No. 5497. 4 SEC

Docket 322.

15Securities Exchange Act Release No.

10547; 3 SEC Docket 210.

18492F. 2d 641 (1974).

17see Section 25(a) of the Securities Exchange Act, 15 U.S.C. 78y(a).

18previously discussed in 38th Annual

Report, p. 31; 37th Annual Report, pp.

54-55; 36th Annual Report, pp. 49-50.

19486F.2d 340 (C.A. 4,1973), petition for

certiorari pending, No. 73-1638.

20Accounting Series Release No. 150

(December 20,1973),3 SEC Docket 275.

21/bid.

22Accounting Series Release No. 146

(August 24, 1973), 2 SEC Docket 342 and

Accounting Series Release No. 146-A (April

11, 1974), 4 SEC Docket 221.

23Accounting Series Release No. 145

(August 2,1973),2 SEC Docket 254. 24 Accounting Series Release No. 151

(January 3,1974),3 SEC Docket 345.

25Accounting Series Release No. 156

(Ag[i126, 1974),4 SEC Docket 218.

Accounting Series Release No. 147 (OCtober 5, 1973), 2 SEC Docket 593.

27Accounting Series Release No. 148

(November 13,1973),3 SEC Docket 64.

28Accounting Series Release No. 149

(November 28,1973).3 SEC Docket 155. 29Accounting Series Release No. 152

(February 14, 1974), 3 SEC Docket 564. 30Accounting Series Release No. 154 (April19, 1974), 4 SEC Docket 152. 31 Accounting Series Release No. 155(Apri125. 1974), 4 SEC Docket 218.

32Securities Act Release No. 5427 (October 4, 1973), 2 SEC Docket 525. 33 Securities Act Release No. 5492 (May 6,

1974).4 SEC Docket 261.

34Securities Act Release No. 5505 (June

21.1974),4 SEC Docket 468.

35Securities Act Release No. 5513 (July

11, 1974),4 SEC Docket 551. 38 Accounting Series Release No. 153

(February 25.1974),3 SEC Docket 645.

37Accounting Series Release No. 157

(July 8. 1974). 4 SEC Docket 589. 38 Accounting Series Release No. 158

(July 19.1974),4 SEC Docket 621.

39Preferred Land Corporation v. SEC (D.

D.C., Civ. No. 74-559). 405 U.S.C. 552(b) (7). 4174-1701 (CAD.C.).

43

. PART 3

. . REGULATION OF

SECURITIESMARKETS

PART 3

REGULATION OF

SECURITIES MARKETS

In addition to the disclosure provisions

discussed in the preceding chapter, the Exchange Act assigns to the Commission pervasive regulatory responsibilities for securities markets and persons in the secunties business. The Act, among other

things, requires securities exchanges to

register with the Commission and provides

for Commission supervision of the selfregulatory responsibilities of registered exchanges. The Act requires registration and

regulation of brokers and dealers dOing

business in the over-the-counter markets,

and permits registration of associations of

brokers or dealers exercising selfregulatory functions under Commission

supervision. The Act also contains

provisions designed to prevent fraudulent,

deceptive and manipulative acts and practices on the exchanges and in the over-thecounter markets Some recent developments concerning regulation of the securities markets are discussed in Part 1.

REGULATION OF EXCHANGES

Registration

The Exchange Act generally requires an

exchange to register with the Commission

as a national securities exchange unless the

Commission exempts It from registration

because of the limited volume of ItStransactions. As of June 3D, 1974, the following 13

securities exchanges were registered with

the Commission.

American Stock Exchange, Inc.

Board of Trade of the City of Chicago1

Boston Stock Exchange

Chicago Board Options Exchange, Inc.

Cincinnati Stock Exchange

Detroit Stock Exchange

Midwest Stock Exchange, Inc.

National Stock Exchange

New York Stock Exchange, Inc.

Pacific Stock Exchange, Inc

PBW Stock Exchange, Inc.

Intermountain Stock Exchange

Spokane Stock Exchange

Dellsting

Pursuant to Section 12(d) of the Exchange Act, securities may be stricken from

listing and registration upon application to

the Commission by an exchange, or

withdrawn from listing and registration

upon application by an Issuer, In accordance with the rules of the exchange and

upon such terms as the Commission may

impose for the protection of Investors. It IS

the Commission's view that in evaluating

dellsting applications, It ISnot generally the

Commission's function to substitute ItS

judgment for that of an exchange, and that

where there has been full compliance with

the rules of an exchange With respect to

delisting, the Commission IS required to

grant a dellsting application. The authorrty

of the Comrmssron in such cases IS limited

to the Imposition of terms deemed necessary for the protection of investors.

The standards for delistlng vary among

the exchanges, but generally delistlng actions are based on one or more of the following factors: (1) the number of publicly held

47
shares or shareholders is insufficient (often

as a result of an acquisition or merger) to

support a broad-based trading market; (2)

the market value of the outstanding shares

or the trading volume is inadequate; (3) the

company no longer satisfies the exchange's

criteria for earnings or financial condition;

or (4) required reports have not been filed

with the exchange.

During fiscal 1974, the Commission

granted exchange applications for the delisting of 115 stock issues and 29 bond ISsues. The largest number of applications

came from the American Stock Exchange

(40 stocks and 10 bonds). The number of

applications granted other exchanges are:

New York (31 stocks and 18 bonds); National (17 stocks and 1 bond), Pacific (14

stocks); Midwest and Boston (4 stocks

each); Detroit (2 stocks); Cincinnati,

Spokane and the Chicago Board of Trade (1

stock each).

The Commission also granted the applications of two issuers to withdraw their securities from listing and registration on the

Amencan Stock Exchange.

Exchange Disciplinary Actions

Although ttfe Exchange Act does not specifically grant the Commission authority to

monitor disciplinary actions taken by exchanges,2 each registered national secunties exchange reports to the Commission action taken against members and

member firms and their associated persons

for violations of any rule of the exchange or

of the Exchange Act, or of any rule or regulation under the Act.

During the fiscal year. five exchanges reported a total of 83 separate disciplinary

actions including the imposition in 33 cases

of fines ranging from $400 to $20,000; the

expulsion of 19 individuals; the suspension

from membership (for periods of 3 to 18

months) of 9 member organizations and 16

individual members; and the censure of 22

member organizations.

New Commission

Recordkeeping Rules

Dunng the fiscal year the Commission

adopted Securities Exchange Act Rule

48

17a-1 which requires every national secunnes exchange and association to keep

on file for a period of five years (two years in

an accessible place) and make available for

examination and copying by the Commission and its representatives all documents

which it originates or receives respecting its

self-regulatory actlvltles.s

In order to reduce the volume of material

which must be kept, the Commission also

amended Rule 17a-6 to provide that documents retained pursuant to the Exchange

Act or any rule or regulation thereunder may

be destroyed before the end of the retention

period, or retained on microfilm or other

recording medium for the remainder of the

retention penod if so provided by an exchange or association in a record destruction plan filed with and approved by the

Commission.

Exchange Rules

The Commission's staff continually reviews the rules and practices of the nation's

registered securities exchanges to determine the adequacy and effectiveness of the

self-regulatory scheme. To facilitate Commission oversight, each registered national

sscuntres exchange is required to file with

the Commission a report of any proposed

change in rules or practices not less than

three weeks (or such shorter period as the

Commission may authonze) before Implementing a change. These filings are available for public inspection.

During the fiscal year, the Commission

received 127 letters from exchanges proposing changes in several hundred exchange

rules and practices. The following were

among the more significant:

1. The New York Stock Exchange and the

Midwest Stock Exchange adopted rule

changes permitting their members to sell all

types of insurance. Previously their members had been limited to selling life. accident and health insurance.

2 During the fiscal year, most of the registered stock exchanges adopted rule

amendments which provided for competitive brokerage commissions on orders of

$2,000 or less. For further discussron of

these changes, see Part 1.

3. Dunng the year the New York Stock
Exchange's wholly-owned securities depository, the Depository Trust Company,

submitted for Commission review rule

changes designed to accomplish a direct

electronic rnterconnscnon with the National Clearmg Corporation. For further

discussion, see p. 64, tnfra

Litigation on Exchange Rules

In Gordon v. New York Stock Exchange,

Inc.,4 the Court of Appeals for the Second

Circuit unanimously affirmed an order of

the United States District Court for the

Southern District of New York dismissing for

lack of subject matter Jurisdiction, a challenge under the antitrust laws to the fixed

minimum commission rate policies of the

national secuntles exchanges. The plaintiffs had sued the New York and American

Stock Exchanges and two representative

member firms of the exchanges.

The Commission filed a brief, amicus

cunee, in the Court of Appeals arguing that,

In the Securities Exchange Act, Congress

Intended to grant the Commission exclusive

jurisdiction over a broad range of exchange

activities, including the fixing of commission rates, and that a district court has no

Jurisdiction to entertain an antitrust challenge to exchange activities that are within

the Commission's exclusive Jurisdiction.

The Court of Appeals concluded that the

legislative history of the Securrties Exchange Act demonstrates Congress's Intent

that the Commission "assume the central

role in assuring investor protection and exchange fair dealing" with respect to the fixing of commission rates. It held, as the

Commission urged, that where governmental oversight of the exchanges' practices is

vested expressly in the S.E.C. "both the language and the history of the 1934 Act, together with the sound policy behind supervised exchange self-regulation," mandate

the conclusion that Congress intended to

exempt those practices from the application of the antitrust laws. The court reasoned that If district courts, on an ad hoc

basis, applied the antitrust laws to practices

within the jurisdiction of the Cornmrssron,

"duplicative or inconsistent standards announced contemporaneously by courts and

Commission could result."

Moreover, the court noted, denial of antitrust [unsdrctron with respect to the setting

of fixed minimum commission rates was

grounded In sound public policy because

"when something as crucral to the survival

of the securities industry as its very ancient

rate structure is at stake, draqnosrs and

changes must come from an agency with

the Commission's expertise,.. [and] with

respect to the fixing of commission rates,

the process of administrative review In the

first Instance IS far superior to judicial review" The court rejected the decision in

Thill Securtttes Corp. v. New York Stock Exchange 5 to the extent Inconsistent with ItS

own opinion.

Exchange Inspections

An Important element of the Commission's supervrsron of exchange selfregulation is ItS program of regular inspections of various phases of exchange activity.

These Inspections enable the Commission

to recommend, where appropriate, Improvements designed to Increase the utility

and effectiveness of self-regulation Three

inspections made In fiscal 1974 are descnbad below.6

NYSE Spectetrsts Inspection -The

Commission's staff Inspected the NYSE's

procedures for surveillance of the performance of ItS specialists and ItS stock allocation program. In the Inspection, the staff

Interviewed NYSE Floor Department staff

members, and examined, among other

things, the Floor Department's case files regarding specrallat performance, reports of

specrallst Income and expenses and the

minutes both of the Floor Committee and of

the Oornrmttee on Specialist Ratings. The

staff considered the methods and general

adequacy of continuous speciahst surveillance, the method by which new listings of

stocks are allocated among specralists, instances of reallocations of stocks among

specialists and drscrphnary actions against

speciahsts. It also considered the standards

which the NYSE employs In determining

whether a specraltst IS complying with ItS

"affirmative obligation" under NYSE rules

to engage in a course of dealings for ItSown

account to assist In the maintenance of a

fair and orderly market and its "negative

49
obligation" under Exchange Act Rule 111>-1

to restrict its dealings to those reasonably

necessary to permit it to maintain a fair and

orderly market.

The inspection was, however, primarily

concerned with two of the NYSE's methods

of specialist surveillance-the NYSE's

"New Measures of Specialist Performance"

("New Measures") and its one-week spotchecks of specialist trading, which are

made at least eight times each year-and

with the manner in which new listings of

stocks are allocated among specialists. The

Commission's staff expressed the view that

the "New Measures" and the one-week

spot-checks did not adequately develop a

basis upon which to measure the performance of specialists in fulfilling their affirmative and negative obligations. In addition, it

appeared to the Commission's staff that

neither the performance ratings computed

under the "New Measures" nor those resulting from the spot checks are used as a basis

for making stock allocations or reallocations; it was unclear what bases for allocations are actually utilized. The staff suggested, as the Martin Report7 had earlier

recommended, that the NYSE staff assume

a greater role in the allocation and reallocation of stocks. In addition, the Commission's staff noted that a review of the minutes of the NYSE Committee on Floor Affairs

revealed the crucial role currently performed by that Committee and its subcommittees in determining the regulatory approach to specialist compliance with Commission and NYSE rules. Because of the

limited information revealed in exchange

records respecting the basis for Committee

decisions, the staff recommended that the

Committee's minutes or other records be

appropriately expanded.

Following the inspection, the NYSE established a committee to examine and make

recommendations to the exchange regarding the NYSE's specialist system and its

regulation. In addition, NYSEstaff members

met with the Commission's staff to discuss

the inspection; the NYSE has agreed to respond to the matters raised at that meeting.

Amex Compliance Inspectlon.-The staff

also conducted an inspection of the Compliance Department of the Amex. During the

inspection the staff interviewed Amex staff

50

members and examined selected investigatory case files. Among the matters considered in the course ofthe inspection were

the qualifications of the members of and the

size of the compliance staff; the sources of

information available to it; its methods of

investigation; the general adequacy of the

disciplinary actions; and the depth and detail with which the staff conducts its investigations.

The Compliance Department is responsible for the investigation of possible violations by Amex members of exchange rules

and of the Exchange Act. Although these

violations are in some cases discovered by

the Department, most are referred from

sources outside the Compliance Department. When the Department believes, following its investigation, that an Amex member has committed a rule violation, it brmgs

formal charges before Amex's Disciplinary

Panel.

It was noted by the Commission staff that

although the number of personnel on the

Amex Compliance Department staff was not

at its budgeted strength at the time of the

inspection, its members were generally well

qualified, adequately supervised and

seemed to investigate their cases

thoroughly. The Oornmtssron's staff did,

however, note that the Compliance Department reviews only those arbltratron

cases which are referred to it by the Director

of Arbitration. It suggested that, in order to

improve its ability to identify rule violations,

the Compliance Department should

routinely examine all arbitration cases in

which a decision had been rendered against

a member firm respondent.

FollOWing a previous inspection, the

Oomrntssron's staff had suggested to both

the Amex and the NYSE that they adopt

rules to require member firms to report to

the exchanges certain Incidents indicating

possible violative conduct involving a firm's

employees on a current basis, rather than

only at the termination of employment with

the firm, so that the exchanges could make

timely investigations of possible rule violanons, The NYSE adopted such a rule (NYSE

Rule 351)which appears to be accomplishing

its purpose. Accordingly, following the

most recent inspection of the Amex Compliance Department, the Commission's staff
suggested that the Amex adopt such a "current reporting" rule.

After its 1971 inspection of the Amex

Compliance Department, the Commission's

staff had expressed concern regarding the

Amex's elimination, from its compliance

program, of its periodic inspections of

member firms' front offices. It was suggested that such inspections be reinstituted. During the most recent inspection, it

was learned that the Amex was preparing to

resume inspecting member firms' front offices. The next inspection will examine the

impact of those inspections upon the Amex

disciplinary program.

A few specific cases reviewed during the

inspection were discussed at a meeting between Amex and Commission staff members. The Amex representatives assured the

Commission's staff that any deficiencies in

the manner these cases were handled

would be corrected in the future.

PBW Stock Exchange Inspectlon.-In

November 1973, the Commission's staff inspected the self-regulatory program of the

PBW Stock Exchange, Inc. ("PBW"), as part

of its regular oversight inspection program.

It directed particular attention to the PBW's

plans to begin the trading of options on a

pilot basis and to establish a trading floor

with market-making capability in Miami,

Florida. The inspection of the PBW floor

focused on order execution, specialist performance, and on-site, real-time surveillance by PBW staff. The staff also reviewed

the performance of the PBW Department of

the Stock List, Office of Chief Examiner and

Office of General Counsel and examined

the work of the exchange's two principal

exchange-member self-regulatory committees, the Committee on Floor Procedure

and the Committee on Business Conduct.

As a result of that inspection, the staff

recommended to the PBW that it create a

program to evaluate odd-lot dealerspecialist performance and that it consider

adopting the following three performance

standards for its odd-lot dealer-specialists

in primary-listed securities: (i) minimum allowable quotation spreads, (ii) restrictions

on trading with limited price orders on the

specialist's book; and (iii) the prohibition or

restriction of a member firm's promotion of

primary-listed securities in which it is a registered specialist. The staff also recommended that the PBW formalize the procedures to be followed by its own staff when it

makes inquiry into "news-pending" or unusual trading situations. It was further recommended that the exchange require its

floor members to report to the Committee

on Floor Procedure or to a floor official any

dispute between floor brokers and

specialists concerning the execution of an

order, that the responsible floor official be

satisfied that the public customers' interests are adequately represented in the dispute, and that a record be kept by the Committee of all such disputes reported to a

floor official. The Commission's staff also

recommended that the minutes and records

of the exchange-member self-regulatory

committees more completely reflect the

committees' activities and the bases for

their decisions.

Following the inspection, the PBW reviewed Its parameters for quotation

spreads, instituted a procedure whereby the

presiding floor official involved in a dispute

would submit a memorandum regarding the

dispute to the Committee on Floor Procedure, and instituted additional surveillance

of odd-lot dealer-specialist performance. It

is anticipated that there will be further discussions between the PBW and the Commission's staff regarding the implementation of these procedures and the remaining

recommendations.

SUPERV;SION OF NASD

The Exchange Act provides that any association of brokers or dealers may be registered with the Commission as a national

securities association if it meets the standards and requirements for the registration

and operation of such associations contained in the Act. The Act contemplates that

such associations will serve as a medium for

self-regulation by over-the-counter brokers

and dealers. In order to be eligible for registration, an association must have rules designed to protect investors and the public

interest, to promote just and equitable principles of trade and to meet other statutory

requirements. Registered national securities associations operate under the

Commission's general supervisory author51
ity, which includes the power to review disciplinary actions taken by an association, to

disapprove changes In association rules

and to alter or supplement rules relating to

specified matters. The National Association

of Securities Dealers, Inc. (NASD), IS the

only association registered with the Commission under the Act.

In adopting legislation to permit the formation and registration of national securities associations, Congress provided an

incentive to membership by permitting such

assocranons to adopt rules which preclude

members from dealing with a nonmember

broker or dealer except on the same terms

and conditions and at the same price asthe

member deals with the general public. The

NASDhasadopted such rules.Asa practical

matter, therefore, membership is necessary

for profitable participation in many underwritings since members properly may grant

only to other members price concessions,

discounts and similar allowances not

granted to the general public.

At the close of the fiscal year, the NASD

had 3,318 members, reflecting a net loss of

567 members during the year. This loss reflects the net result of 184 admissions to and

751 terminations of membership. The

number of members' branch offices decreased by 643, to 6,148, as a result of the

opening of 1,334 new offices and the closIng of 1,977. During the fiscal year, the

number of registered representatives and

principals (these categories include all

partners, officers, traders, salesmen and

other persons employed by or affiliated with

member firms In capacities which require

registration) increased by 2,158 to 207,095

as of June 30, 1974. This increase reflects

the net result of 27,095 Initial registrations,

25,658 re-reqrstratlons and 50,595 terminanons of registration during the year.

During the fiscal year, the NASDadministered 59,109 qualification examinations of

""hlch 35,105 were for NASD qualification,

2,624 for the Oornmlssron's SECO program8 and the balance for other agencies,

including major exchanges and various

states.

NASD Rules

Under the Exchange Act, the NASDmust

file for Commission review copies of any

52

proposed rules or rule amendments 30 days

prior to their proposed effective date. Any

rule changes or additions may be disapproved bythe Commission if Itfinds them to

be Inconsistent with the requirements of the

Act. Normally, the Commission also reviews, in advance of publication, general

policy statements, directives and interpretations proposed to be issued by the Board of

Governors pursuant to its powers to administer and interpret NASD rules.

During the fiscal year,9 numerous

changes In or additions to NASD rules,

policies and interpretations were submitted

to the Commission for its consideration.

Among the more significant which were not

disapproved by the Oommlsston were:

(1)Amendments to Schedule Dofthe

NASD's By-laws to provide for the Implementation of annual assessments

and entry fees for securities quoted on

NASDAQ,the Association's automated

quotation system.

(2)Amendments to Schedule Eof the

NASD's By-laws ("Self-Underwriting

Rules"). Among other things, the

amendments require NASD members

which have made public offerings of

their own securities to establish "Audit

Committees" and to elect "public directors" to their Boards of Directors.

(3)Amendments to Schedule Dof the

NASD'sBy-lawsto provide for summary

complaint procedures for NASDAQ

Committee disciplinary proceedings.

(4) Amendments to the NASD's Bylaws to provide new procedures for the

selection of candidates for nominating

Committees (which nominate candidates for election to the District Committees and the Board of Governors)

and to revise nomination and election

procedures of membership on District

Committees and the Board of Governors.

(5)Amendments to the NASO'sRules

of Fair Practice to set forth the initial

margin maintenance requirements to

be followed by NASO members In extending credit to customers in securities transactions.

(6)Amendments to the Interpretation

of the NASO Board of Governors regardmg "free-riding and withholding"
in public offerings. Among other

things, the amendments prohibit

entirely any allocation of "hot Issues"

to NASD firms and persons associated

with NASD fl rms.

Tax Shelters

In recognition of existing and potential

abuses with respect to tax shelter programs,

the Commission continued ItS efforts durIng the fiscal year to provide for adequate

regulation of such programs. Specifically,

the Commission directed its staff to continue to collect information concerning

abuses Involving tax shelter programs and

to formulate various proposals, including

new rules or gUIdelines applicable to all

packagers and promoters of such programs, enlarged enforcement programs

and suggestions for possible additional

legIslation

As previously reported, In July 1973, the

Commission requested public comments

on proposed NASD Rules of Fair Practice

designed to establish a system of regulation

for the public distribution of tax shelter programs by NASD members.'? The Commission reviewed the numerous comments

received in response to its release and In a

May 1974 letter to the NASD encouraged It

to pursue its proposals In the traditional

areas of ItS regulation (e.g., underwriters'

compensation, suitability and sales literature)

With respect to the NASD's proposals relating to the operation, structure and management of tax shelter programs, however,

the Oornrnissron indicated that it did not

then believe that the NASD should attempt

to provide a regulatory structure having a

direct impact on issuers, sponsors and

other non-NASD members.

At the end of the fiscal year the staffs of

the Commission and the NASD were discussing further steps to implement the

NASD's tax shelter proposals.

Mandatory Bonding

Toward the end of the fiscal year, the

Commission permitted to become effective

a new NASD rule setting forth mandatory

fidelity bonding requirements for NASD

members. The rule evolved from a study of

the fidelity bonding requirements imposed

by the exchanges on their members. The

study was conducted by the NASD at the

suggestion of SIPC with a view to developIng similar requirements for NASD members so that various special forms of risk

(such as misappropriation of firm assets)

would be covered through appropriate

bonding and, as was the intention of Congress, be excluded from the risks covered

by SIPC The rule requires each NASD

member to maintain the standard "Stock

Broker's Blanket Bond" or an equivalent

bond acceptable to the NASD to Indemnify

the firm (and Indirectly its customers)

against losses attributable to common law

and statutory crimes such as burglary and

theft (Including "mysterious unexplainable

disappearances" of property), losses of

property in transit, "forgery and alteration"

losses, and damages from any "securities

loss." In addition, the rule requires NASD

members to obtain specrfled minimum

amounts of coverage under various msurIng agreements.

Certain NASD members are exempted

from complying with the rule to the extent

that the nature of their business does not

come within the scope of the fidelity bondIng concept Firms In thrs category chiefly

Include dealers engaged exclusively in the

retail distribution of investment company

shares-firms which typically do not hold

customer funds or securities-and sole

proprietorships and partnerships having no

employees.

Both the NASD and the Commission intend to monitor the Impact of the rule to

ensure that no one IS excluded from the

securities business merely because it cannot obtain a bond at a reasonable cost.

Commission Abrogation of NASD

Rule

The Exchange Act permits the Commission by order to abrogate any NASD rule If it

appears that abrogation ISnecessary or appropriate to effectuate the purposes of the

Act. The Commission, as prevrously repcrted!t on June 7,197212 abrogated Rule

25 of the NASD Rules of Fair Practice13 to

the extent that it permitted or had been con53
strued to permit the NASDto bar receipt by

Its members of any allowance from nonmembers. The NASDhad traditionally interpreted Rule 25 as prohibiting its members

from either granting or receiving comrmssions, concessrons, discounts or any other

allowances from nonmember brokerdealers.

The Commission determined that the

NASD,in interpreting Rule25 to prohibit the

receipt of allowances from nonmembers,

had gone beyond the authority granted by

Section 15A(I)(1).The Commission's decision was based upon its conclusion that

Section 15A(i)(1), which authorizes the

adoption of rules such as Rule 25 restncting

the business conduct of members of national securities associations, is an exception to the free and open market concept

expressed in Section 15A(b)(8) and therefore must be narrowly construed.

The NASDfiled a petition for reviewof the

Commission's decision in the United States

Court of Appeals for the District of Columbia CircUlt.14 On November 1, 1973, the

court, per cunem and Without oprruon, affirmed the Cornmlssron's order

NASD Inspections

During the fiscal year, the staff Inspected

the NASD's district offices In Boston,

Chicago, Dallas, Denver,the District of Columbia, KansasCity, LosAngeles, NewYork,

San Francisco and Seattle. These inspections were conducted as a part of the Commission's regulatory oversight responsibllrty to assure that the District committees

and their staffs (which operate sernrautonomously from the NASD'snational office) are properly carrying out the pollcymaking and administrative functions of the

NASDassigned to them, and to assist in the

proper coordination of the Commission's

and the NASD's regulatory and enforcement activities In the over-the-counter markets.

These inspections involved a reviewof (1)

the composition and effectiveness of the

Distnct Committees, the Distnct BUSiness

Conduct Committees, examination subcommittees, nominating committees and

quotation committees; (2) the functioning

of the district staffs, especially their working

54

relationships With the various committees;

(3) the drstnct staffs coordination and

cooperation With the Commission's regional offices, exchanges and other interested regulatory bodies; (4) the effectiveness of disciplinary proceedings and

enforcement procedures; and (5) the need,

If any, for new rules or amendments to existIng rules, policres or interpretations.

In general, the Commission staff reported

relatively few substantive problems in the

operations of the district offices vlsrted.

There were, however, several areas which

the staff felt merited further discussion with

the NASD's home office. Specifically, the

staff noted that some districts were: (1) expenencing problems in processing formal

complaints Within a reasonable period of

time, i.e., there were occasional delays in

writing and serving disciplinary complaints

on respondents, and in holding hearings,

negotiating settlements and reviewing

transcripts and other materials; (2) finding

difficulty in conducting on a regular basis

inspections of pnncrpal offices of firms not

engaged primarily In a general over-thecounter secuntres business; consequently,

exchange, mutual fund and specialty firms,

and branch offices of members were not

being routinely examined, although It was

recognized that exchange firms are generally examined by one or more exchanges of

which they are members." (3) in some disciplinary proceedings reviewed on appeal

to the Commission, not documenting

adequately the evidence presented or sub.

stantiating adequately the findings made;

and (4) not applying disciplinary measures

uniformly.

These matters were discussed at length

on various occasions with representatives

of the NASD; in response, the NASD has

undertaken new programs and refinements

of existing programs to improve its selfregulatory performance. With respect to the

problems In the timely processing of formal

complaints, the NASD has Implemented a

monthly reporting form which is being used

by its district offices to report the status of

all pending items. The report is also used by

the NASD's national office to identify district offices expertencinq delays and to assign to them the appropriate manpower to

correct the problem. The NASD has also
undertaken corrective action in connection

with its broker-dealer examination program, discussed elsewhere in this annual

report.16

In connection with the adequacy of

documenting evidence In NASD disciplinary records received on appeal to the

Commission, the NASD noted that district

staff personnel were being given pertinent

training With respect to local NASD recordkeeping and In the drafting of its decisions

The NASD is also closely monitoring the use

of internal records as early warning devices

in detecting violations and, where necessary, IS developing new procedures to be

followed by ItS drstrrct offices

NASD Disciplinary Actions

The Commission receives from the NASD

copies of its decisions in all cases where

disciplinary action is taken against members and persons associated with members

Generally, such actions are based on allegations that the respondents violated

specified provisions of the NASD's Rules of

Fair Practice. Where violations by a member

are found, the NASD may impose such

penallties as expulsion, suspension, fine or

censure. If the Violator is an individual, his

registration with the NASD may be suspended or revoked, he may be suspended or

barred from being associated with any

member or he may be fined and/or censured.

During the past fiscal year, the NASD reported to the Commission its final disposition of 919 disciplinary complaints (includIng 182 complaints involving NASDAQ) 17 In

which 722 members and 873 individuals

were named as respondents. Complaints

against 40 members and 81 individuals were

dismissed for failure to establish the alleged

violations. Sixty-four members were expelled from membership and 32 members were

suspended for periods ranging from one

day to one year. In many of these cases, a

fine also was imposed. In 576 cases, members were fined amounts ranging from $25

to $50,000 and in 45 cases members were

censured. In dlsctpllnary sanctions imposed on indlvrduals associated with member firms, 173 persons were barred or had

their registrations revoked and 112 had

their registrations suspended for periods

ranging from one day to eight years. In addition, 507 other individuals were censured

and/or fined amounts ranging from $100 to

$50,000.

Review of NASD Disciplinary

Actions

DIsciplinary action taken by the NASD IS

subject to review by the Commission on ItS

own motion or on the timely application of

any aggneved person In those cases reviewed by the Commission, the effectiveness of any penalty Imposed by the NASD is

automatically stayed pending Commission

review, unless the Commission otherwise

orders after notice and opportunity for hearIng If the Commission finds that the disciplined party committed the acts found by

the NASD and that such acts violated the

specified rules, the Commission must sustain the NASD's action-unless It finds that

the penalties imposed are excessive or oppressive, In which case it must reduce them

or set them aside,

At the beginning of the fiscal year, 22 proceedings to review NASD disciplinary decisions were pending before the Oornrnlssron

and, during the year, 17 additional cases

were brought up for review. The Commission disposed of 13 cases. In four cases, the

Commission affirmed the NASD's action. It

remanded one case back to the NASD. In

seven cases, the NASD's findings and/or

penalties were modified and In one case the

NASD's action was set asrde. At the close of

the fiscal year, 26 cases were pending.

In Plaza Securities Corp.,lS the Commission set aside a finding by the NASD that an

NASD member, by merely joining with a

non-member affiliate In a dlstnbutlon of secunties to the public, had violated the NASD

rule forbidding members to deal with nonmembers except on the same terms as they

deal With members of the general public

[Article III, Section 25]. The Commission,

citing its earlier decision in the "Aetna"

case,'" stated that the NASD rule must be

viewed merely as prohibiting a member

from giving a non-member a discount or

commission not accorded to the general

public. Since the Oornrnlssron could I\Ot

find on the basis of the record that Plaza

55
gave such a discount or concession to its

non-member affiliate, it saw no Impropriety

in Plaza's jOining with the affiliate in a distribution of securities.

In another case, Sumner B. Cotzin,20 the

NASD found, as did the Commission on an

application for review, that the respondent

had violated the net capital rule and had

engaged In sham transactions to avoid detection of Its net capital oenciencres, The

principal contention on review related to an

asserted lack of due process in the NASD's

procedures. This was based on applicant's

belief that the NASD permitted ItS district

director to perform investigative and

prosecutory functions in their disciplinary

proceedings while at the same time advrsing and partlcrpatinq with the District Business Conduct Committee In its deliberations preceding its decision. In sustaining

the NASD's findings, the Commission held

that there was no evidence to support applicant's claim. The Commission noted, however, that although It was unpersuaded that

a rigid separation between investigative and

adjudicatlve personnel is an essential element of fairness In NASD proceedings

at the District Business Conduct Committee

level, the NASD's existing procedures may

present some problems. It suggested that

the Association "re-examine its procedures

to avoid even the appearance of" unfairness.

Review of NASD Membership

Action

The Exchange Act and NASD By-laws

provide that no broker or dealer can be an

NASD member If It or any person associated

With It IS subject to specified disabilities.

These disabilities can be waived only With

specific approval of the Commission.

Commission approval or a direction by it to

admit a person to membership In the Association or to continue the membership of

any person generally IS made after Initial

submission to the NASD by the member or

applicant for membership. The NASD In its

discretion may then file an application With

the Commission on behalf of the petitioner.

If the NASD refuses to sponsor an application, the broker or dealer may apply directly

to the Commission for an order directing

56

the NASD to admit him to or to continue him

in membership. At the beginning of the fiscal year, four applications for approval of

adrnissron to or continuance in membership were pending. During the year,

seven applications were filed, four were approved and three were withdrawn, leaving

four applications pending at the end of the

year.

BROKER-DEALER REGULATION

Registration

Brokers and dealers who use the mails or

means of Interstate commerce in the conduct of an over-the-counter securities business are required to register With the Commission

As of June 30, 1974, there were 3,982

broker-dealers registered, compared with

4,407 a year earlier. This represents a decrease of 425, or 9.6 percent, since June 30,

1973. During the year 766 registrations were

terminated, 702 new applications were received, 341 applications were made effective, and 363 applications were returned,

denied or withdrawn. Approximately 689, or

90 percent, of the 766 terminations were

requested by the registrants for a variety of

reasons, while 77, or 10 percent, were the

result of Commission action (cancellation

or revocation).

During the fiscal year, the Commission

clarified certain of ItS rules imposing

record keeping, reporting and financial responsrbrllty obligations on broker-dealers.

It also adopted or proposed for adoption

new rules or amendments to certain of the

existing rules In these areas.

Recordkeeping

During the fiscal year, the Commission for

the first time published a comprehensive

release clarifying the requirement of Rule

17a-3 under the Securities Exchange Act,

that every broker-dealer make and keep

current the books and records specified In

the Rule.21

Financial Responsibility

The basic financial responsibility rules

applicable to broker-dealers are Rules
15c3-1 and 15c3-3 under the Securities

Exchange Act.

Rule 15c3-3, which became effective

January 15, 1973,establishes standards regarding the custody of customers' securities and limits the use of customers'

funds left with a broker-dealer in order to

insure that such funds are not utilized to

support firm activities unrelated to the servicing of customers. On October 12, 1973,

the Commission published a releasesetting

forth standards for the safekeeping of customers' securities held abroad.22Since that

date over 180 applications for foreign control locations have been processed by the

Commission. In addition, during the year

the staff issued over 160 interpretive letters

concerning Rule 15c3-3. Further releases

interpreting this important Rule are anticipated in the next year.

Rule 15c3-1, the "net capital rule," sets

standards of liquidity to be maintained by

broker-dealers. During the fiscal year, the

Commission issued an Interpretive release

to clarify the availability to broker-dealers of

the $2,500 and $5,000 minimum net capital

requirements of the Rule.23In addition, in a

two-part program to raise minimum net capital requirements for broker-dealers who

carry customers' accounts and hold customer funds and securities, the minimum

net capital required by the Rule rose in the

prior fiscal year from $5,000to $15,000,and

as of July 31,1974 became $25,000.24

Most Importantly, during the fiscal year,

the Commission took a significant second

step toward the implementation of a uniform net capital rule for broker-dealers, first

proposed in late 1972.25After releaseof the

proposal, a great number of constructive

comments were received and were carefully

considered by the Commission. During the

1974fiscal year, the Commission published

a revised proposed rule,26 substantially

changed to reflect many of the comments

received. The rule as adopted would

provide Uniform financial regulations, definitions and interpretations throughout the

securities industry including for the first

time exchange members within its scope

and would facilitate simplification of the financial reporting requirements for brokerdealers.

The new proposed rule does not change

the basic liquidity concept of the original

net capital rule under which the securities

industry hasbeen operating for many years,

but does in some ways depart from the

present Rule.The rule would provide for the

flowing of net capital benefits from the subsldlartea held by broker-dealers to their

broker-dealer parents in amounts equivalent to the liquid assetsof such subsidiaries.

In addition, the revised proposal substantially revises the present Rule's securities

"haircut" provisions, In recognition of the

liquidity of U.S. government securities and

certain other securities. The new proposed

rule also deals comprehensively with the

risks associated with the writing and

endorsement of options both by brokerdealers and their customers.

Financial Reporting

The Commission made two major revIsions to Rule 17a-5, the baSICfinancial reporting rule for broker-dealers, and to the

forms thereunder, which serveto determine

compliance by broker-dealers with applicable financial responsibility rules.

First, the Commission amended Rule

17a-5 and Form X-17A-5 under the Secunnes Exchange Act to permit independent public accountants to perform certain

preliminary audit procedures before financial audits of the statements of brokerdealers.27To accomplish these changes,

Part III of Form X-17A-5 was adopted. That

Part requires the Independent accountant

to descnbe the scope of the preliminary

audit examination, indicate that the information is presented fairly and comment on

any material tnadequactes found to exist at

the date of the preliminary work. Part IIIalso

requires certain statistical information regarding the examination and the preliminary audit procedures performed. Under

the amended Rule 17a-5 such a preliminary

audit examination may not take place

more than 190days prior to the date of the

broker-dealers' annual audit required

pursuant to Rule 17a-5(a).

The amendments are designed to accommodate the elimination by most registered national securities exchanges of their

surprise audit requirements. The amendmentswill also eliminate duplicate costs for

57
broker-dealers which are public companies

and will lead to more effective audits and

more uniform reporting of financial data

and provide greater flexibility to the accountant.

The release announcing the amendments

also provides the Commission's interpretive

view of material inadequacies which should

be reported by accountants In connection

with audits performed pursuant to Rule

17a-5

Secondly, Form X-17A-5 was amended28

to reflect the additional information necessary to monitor compliance with Rule

15c3-3 under the Exchange Act and to give

the Commission sufficient Information to

analyze the effectiveness of that Rule. Certain other amendments to the form were

made In recognition of developments In the

securities Industry since 1967 affecting the

auditing and financial regulation of

broker-dealers. The amendments also require Independent accountants to review

and comment upon the procedures followed in complying with Rule 15c3-3 and

Regulation T of the Board of Governors of

the Federal Reserve System.

The amendments enable the Commission

and the self-regulatory organizations to

monitor compliance with both the Reserve

Formula Computation required by Rule

15c3-3 and the aspects of Rule 15c3-3 related to possession or control of customers'

fully paid for and excess margin securities.

In addition, an Advisory Committee on

Reports and Forms, convened by the Comrrussron, recommended that many financial

reports required of broker-dealers by the

Commission and the various self-regulatory

bodies be consolidated Into a single "Key

Regulatory Report" Subsequently, the

Commission announced a broad program

to Implement the recommendations of thrs

Committee, including plans to develop the

recommended "Key Regulatory Report."29

Rule 17a-18, Rule 17a-19 and

Related Form X-17A-19

In order to promote more effective report.

Ing by the brokerage community, the Commission proposed for public comment two

new rules and a related form. Proposed

Rule 17a-18 would require all self.

58

regulatory organizations to submit to the

Commission for ItS advance approval any

new form, report or substantial amendment

which it intends to require its member firms

to subrnlt.s?

Proposed Rule 17a-19 and related Form

X-17A-19 are Intended to assist the Commission and SIPC in maintaining accurate,

current lists of the memberships of the selfregulatory orqaruzatrons, particutarly With

respect to the SIPC designations of prlncipal examining authorities pursuant to Section 9(c) of the SIPC Act of 1970. At the

Comrnlssron staff's request, all the selfregulatory organizations Implemented proposed Rule 17a-19 and began using proposed Form X-17A-19 on a pilot basis in

March 1974. In May 1974, the Commission

prepared a directory of SIPC designees and

broker-dealer memberships. In June, the

draft directory was supplied to all selfregulators and an exception report of those

firms which have not been examined Will be

produced. The Commission will use this report as a baSIS for reviewing the effectiveness of the self-regulatory organizations'

examination programs.

Broker-Dealer Examinations

The comrntssron in January 1972 established the Office of Broker-Dealer Examination Program to deal more effectively WIth

the problems detarled in the Commission's

1971 Study of Unsafe and Unsound Practrees of Brokers and Dealers.31 By creating

thrs Office, the Commission substantially

strengthened its contlnurnq efforts to prevent a recurrence of the cnsis which confronted the secunties Industry In the years

1968 through 1970. During that period,

there occurred widespread failures of

broker-dealer firms, accompanied by substantial customer losses of cash and securities. One major outgrowth of these

cnses was the passage in 1970 of the Secunties Investor Protection Act.

Dunng the past fiscal year, the Office has

primarily devoted its efforts to three areas of

activity: (1) early warning and surveillance:

(2) examination; and (3) training. See also

pages 56-58 supra, for Information on

other Commission action relating to the financial responsibility of brokers and dealers
Early Warning and Surveillance

Programs

The primary responsibility for insuring

the financial and operational soundness of

ItS member firms rests with each selfregulatory organization. The Commission

periodically reviews through on-site inspections and in-house studies the early warning

surveillance tools of the organizations to

ensure that they constitute sound, effective

programs, which will enable each organization to detect at the earliest possible time

member firms which are In or approaching

financial difficulty and to morntor their conditions. DUring the past fiscal year, the

Commission's staff conducted on-site inspections of the early warning and surveillance programs of the American Stock Exchange, the Chicago Board Options Exchange, the New York Stock Exchange, the

PBW Stock Exchange and the Pacific Stock

Exchange. In addition, the Commission's

staff reviewed the programs of the NASD as

Implemented by its district offices located In

Boston, New York, Dallas, Kansas City,

Chicago, Los Angeles, San Francisco, Seattle, Denver and Washington, D.C. The staff

has also preliminarily discussed with the

Boston Stock Exchange and the Midwest

Stock Exchange inspections of their programs scheduled for the early part of fiscal

1975.

In-house efforts to review these programs

have Included continuing communications

and Informal meetings with the organizations regarding revisions in their programs,

the morutorinq of the SIPC 5(a) program32

and the development of a monthly early

warning and surveillance report

The Office IS planning to meet with the

self-regulatory authorities, in Washington,

D.C., at the Commission to review precisely

each organization's early warning and surveillance tools In a round-table, informal

discussron session. Representatives from

SIPC will also attend the meeting to discuss

the SIPC 5(a) program and the organizations' experiences with this program. When

reviewing their early warning and surveillance programs, the Commission ensures that the self-regulatory authorities

are complying with the provisrons of Section 5(a) of the SIPC Act.

Working together with the NASD and the

self-regulatory authorities having SIPCdesrqnated examining responslbrllty.P the

Oornmlssron has developed a monthly,

combined early warning list and a Rule

17a-11 list for each regional office.34 This

combined list sets forth for each regional

office information concerning any brokerdealer firm within ItS region which any selfregulatory authority has reported as In or

approaching tlnancral difficulty. Each

month the self-regulatory organizations

submit forthe combined list data pertaining

to the financial condition of troubled firms

within each Commission region. The list IS

then timely transmitted to each regional office chief examiner for hrs verification

within 24 hours. The list incorporates all of

the features of the Commission's early

warning rule, Rule 17a-11; at the same time

the list provides information concerning

firms which may not be In violation of any

net capital rule to which they are subject,

but are, nevertheless, considered by the

self-regulatory organizations to be financially troubled. Such a complete, timely list

had not existed before this fiscal year. It has

been of great assistance to the regional offices In monitoring such firms.

Other Commission early warning and

surveillance tools Include Rule 17a-11 ,

mentioned above, which requires a

broker-dealer to notify the Commission If it

breaks through certain specrfted financial

or operational parameters; Rule 17a-5(j),

which requires a broker-dealer to notify the

Commission upon the termination of ItS

membership in one of several enumerated

national securities exchanges If the

broker-dealer was exempt from the Comrmssion's net capital rule by reason of its

holding membership In and being subject to

the capital rules of that exchange; and Rule

17a-l0, which requires a broker-dealer to

file Form X-17A-10 annually with the Commission. The Commission continues to

rnorntor these programs, although some or

all of them may eventually be Incorporated

into the FinanCial and Operational Combined Uniform Single Report being developed for the md ustry by the Report

Coordinating Group.35

Examination Program

An effective examination program IS essential to the overall regulatory program of

59
any self-regulatory organization and of the

Commission.

The Commission's program for examinIng the self-regulatory organizations has

two parts. First, the Commission staff reviews and attempts to strengthen, where

necessary, their examination programs,

while at the sametime evaluating and defining the goals, policies, procedures, design,

budget and staffing of those programs. During the past fiscal year, the Commission's

staff conducted on-site examination program inspections of those self-regulatory

organizations mentioned above at page

59, for which it conducted early warning

andsurveillance inspections. Inspections of

the Boston Stock Exchange and the Midwest Stock Exchange were planned for the

early part of fiscal 1975.

While these reviews are Important, the

real test of these programs takes place In

direct examination of the members of the

self-regulatory organizations. The regional

offices are deemed to be in the best position

to conduct these examinations and to ascertain whether the stated policies and procedures of the national offices of the selfregulatory organizations are being implemented. The regional offices' oversight

programs involve (1)examinations of members of self-regulatory organizations to determine if they are in compliance with the

secunties laws, and (2) the examination of

individual members of the self-regulatory

organizations and a concurrent review of

the reports and working papers of the latest

examination of the individual members performed by those organizations to determine

whether their examination programs are

thorough and effective.

The Commission headquarters office

monitors the examination activities of the

regional offices, both in their review of selfregulatory organizations' examinations and

in their direct inspections of member firms,

and have frequent meetings With the field

officers to review the effectiveness of the

examination programs.

In addition to oversight examinations, the

regional offices conduct cause examinations and SECO examinations. Cause

examinations usually result from a complaint received by a customer or another

broker-dealer and are usually limited to the

60

subject matter of the complaint. The exammer may, however, enlarge the scope of the

examination If he believes that the firm's

operations warrant further study. SECO

examinations are usually routine examinations covering all aspects of a brokerdealer's operations. The regional offices

have established a regular examination

cycle in which each SECO broker-dealer36

is examined 30 to 60 days after it becomes

registered with the Commission and on an

annual basis thereafter.

In fiscal 1974,the Commission's regional

offices cond ucted a total of 1176 brokerdealer examinations, representing a 13 percent increase over the previous fiscal year's

total of 1044. Of the 1176 examinations

conducted, 478 were oversight examinations, 551were cause examinations and 478

were routine examinations (mostly of SECO

flrms).37

Of great assistance to the Commission

and to the self-regulatory organizations in

the case of members of more than one such

organization, have been SIPC's designations pursuant to Section 9(c) of the SIPC

Act of one self-regulatory organization to

serve as a firm's principal examining authority.3s Designations were urged by the

Oommlssron because they would eliminate

much of the duplication in the examination

programs of the self-regulatory organizations.

Another step toward eliminating duplication of effort has been the Commission's

development of a monthly compilation of all

examinations of all broker-dealers conducted dunng the previous twelve months

by either a regional office of the Commission or a self-regulatory organization. The

Commission is currently working on two reVisions to the report in order to improve ItS

usefulness. First, the report will be modified

to Incorporate the SIPC designations of

principal examining authorities. Secondly,

the report will, as revised identify, in one

composite print-out for each SEC regional

office and NASDdistrict office, every member firm of every self-regulatory body and

every broker-dealer situated Within that

[unsdictlon, and set forth all relevant information as to examinations conducted during the immediately preceding twelvemonth period.
1.r 

i.t 

?-..? 

. . The Commission has also made several 

revisions in and additions to its examination 

manual and fbrms. The Broker-Dealer 

Examination Manual, used by the SEC examiners for background material and as a 

guide for conducting examinations, was 

updated and reprinted for distribution to the 

regional offices. The Broker-Dealer Examination Checklist - Standard Form, to be 

used in examinations of broker-dealers 

which conduct a general securities business, has been revised and distributed to 

the regional offices. The regional offices 

will use the revised checklist on an experimental basis for several months and then 

comment on the checklist so that final revisions may be made. 

The Commission also developed with its 

regional office chief examiners a new 

Broker-Dealer Examination Checklist - Short Form, to be used in examinations of 

broker-dealers which do not conduct a 

general securities business. A draft of this 

checklist has also been forwarded to all regional offices for use on an experimental 

basis for several months. After written 

comments have been received, a new Short 

Form will be adopted. 

Training Program 

In order to improve the caliber of the 

examination staff of both the Commission 

and the self-regulatory authorities, the 

Commission developed a series of training 

CdUrseS. Some were directed toward Commission examiners only and others toward 

both the Commission examiners and the 

self-regulatory organizations' examiners. 

These training courses included: 

1. A seriesof two-day training seminars 

for all self-regulatory bodies on the subject 

Of Commission oversight examinations in 

regional offices. Each seminar, of which 

there were several during the fiscal year, 

provided a forum for the interchange of ex: 

periences with, and suggestions~for, the 

Commission's oversight examination programs. 

2. A series of regionai two-day office 

seminars for experienced regional office 

examiners. Several of these seminars, 

which focus on actual examination 

techniques, have been held by the regional 

offices. 

3. A five-day training program for new 

broker-dealer examiners. A seminar was 

conducted by the %ommission's Division of 

Market Regulation on June 4-6. 1974, to 

provide basic, updated information reoarding examiqationi of broker-dealers. participants included Commission compliance 

examinerswhh unto threevearsexoerience 

with the regional offices, various state securities commissions and several of the 

self-regulatory organizations. The seminar 

focused on the examination, earlv warnino 

and surveillance programs of the~~ommis~ 

Slon and the various self-regulatory organizations. 

The participants in the seminar were 

Oiven 

- a case omblem which contained a setof a firm's books and records and facts relatino to the case. The use of such a case studv 

method proved to be extremely effective as 

a training tool and will now become a regular part bf the Commission's training Gograms. 

4. Regional Office Continuing Examiner 

Training Program. 

The regionai offices have been holding 

brief bi-weekly training sessions for their 

examiners. Such sessions are oenerailv one 

or two hours long and provide updated or 

new information concerning Specific 

exammation matters, rules or regulations 

and examination experiences. 

5. Outside trainino -. oroorams. - The Commission is encouraging its examiners in the 

regional offices to take correspondence 

and college courses. It is also assisting in 

the development of at least one correspondence course for examiners and has 

been requested to assist several selfregulatoryorganizations in developing their 

training programs. 

Financial and Operational 

Combined Uniform Single 

Report-FOCUS Report 

in November 1973, the Commission staff 

met with representatives of the selfregulatory bodies to discusstheelimination 

of Unnecessary reports now required of 

broker-dealers. Recommendations regarding the format of a uniform "Key Regulatory 

ReporC', since renamed the "FOCUS Re 

port", were later submitted. 
Upon the adoption of a uniform net capital rule, the FOCUS Report will provide a

uniform source of information for evaluatIng the financial and operational soundness

of brokers and dealers. Completion of the

form will require only a reasonable expenditure of effort by the member firm. An outline

for the FOCUS Report has been developed

by the Commission staff and will be considered by the Report Coordinating Group. The

final draft of the FOCUS Report is expected

to be completed shortly

Regulation of Small

Broker-Dealers

The Subcommittee on Government Regulation of the Senate Select Committee on

Small BUSiness held hearings on July 12

and 23, 1973, regarding the reporting burden on small broker-dealers. Testifying before the Senate Committee were representatives from the small broker-dealer

community, various self-regulatory organizations, SIPC and the Cornrnisston.

Two documents came out ofthe hearings,

Senate Resolution No. 173 and a report of

the Senate Select Committee entitled The

Federal Paperwork Burden.39 Both contained recommendations aimed at alleviatIng reporting and other regulatory problems of small broker-dealers brought out

during the hearings, the problems concerned unnecessary or duplicative reportIng requirements and the small firm's lack

of time, capital and qualified personnel to

complete the reports.

The Senate Resolution directed the

Commission to:

1. review and make appropriate amendments to ItS rules to reduce any unnecessary reporting burden on broker-dealers

and help to assure the continued participation of small broker-dealers in the United

States securities markets, consistent with

ItS statutory responsrbtlrtles to protect investors;

2. review and, If necessary, amend ItS

rules to assure that they take cognizance of

the role of small broker-dealers in the

United States securrties market and permit

such broker-dealers to comply effectively

WIth the rules without unnecessary admin istrative burdens,

62

3. continue active consideration and implementation of the recommendations of

the SEC Advisory Committee Study on

broker-dealers reports;

4. continue to review the position of the

small broker-dealer to ensure ItS continued

participation in the secunties markets

within the context of competitive policy and

the protection of Investors,

5. Immediately proceed to examine and

modify its rules to the extent the public

Interest IS not commensurate With the burden Imposed on small broker-dealers; and

6. report ItS progress to the Congress in

its annual report

The Senate Report recommended

additionally that:

1. the Congress consider enactment of

legislation which would direct the Cornmrssion to establish a JOint Committee on

Small Broker-Dealers and to include on the

Committee representatives from both private and public regulatory agencies, major

and regional stock exchanges and from the

small broker-dealer community; this committee would be directed to develop:

(a) a standard, Industry-Wide definition of

the term "small broker-dealer", and

(b) common pohcres regarding the role

and functions of the small broker-dealer in

the secunties Industry;

2. the Cornmrssron direct its Report Coordinating Group to set a definite timetable for

developing a uniform reporting system;

3. the Oornrrusslon ensure that the Report

Coordinating Group include at least one

member of the small broker-dealer community; and

4. the Oornrmssron establish the posrtlon

of Small Broker-Dealer Liaison Officer, to

function both as an advisor and ombudsman for the interests of the small

broker-dealer community.

Commissum Action>« The Commission

recognizes, and has been working toward

alleviating, the reporting and regulatory

burden on all broker-dealers, and in particular small broker-dealers. Its efforts in this

area have Involved a contlnurnq review of

the rules, regulations and related brokerdealer reporting requirements imposed

not only by the Commission but also by

self-regulatory organizations and other

governmental agencies. Such efforts have
also involved the formation of Federal Advisory Committees including the Report 

Coordinating Committee, with industrvwide participation to study these particular 

reporting problems in the industry. 

In particular, the Commission is responding as follows to the directivescontained in 

the Senate Resolution: 

1. The Commission's staff has been reviewina the financial and o~erationai reporting rules and related reporting requirements of the commission and of other 

regulatory bodies in an effort to alleviate the 

reporting burden on smail broker-dealers. 

Thestaff recoanizes thesDecial orobiems of 

small firms inihis area, and is making every 

effort to reevaluate existinu requirements. 

within thecontext of the interest and 

with a view toward ensuring the continued 

participation of such firms hthe securities 

markets; 

2.TheCommissfon is fully complying with 

the Senate Resolution's directive as to the 

recommendations of the SEC Advisory 

Committee Study. 

The first recommendation that a brokerdealer should be required to report to a 

Single regulator in each area of regulation 

has essentially been adopted by virtue of 

SIPC's designations of sole reguiatory 

aoencies. Dursuant to Section 9lcl of the 

~icuritiei'investor Protection AC~bf 1970. 

Such desiunations became effective on 

June 30, 1973. 

Thesecond recommendation caiisforthe 

establishment of the Report Coordinating 

Group, which has been done. See below. 

The third recommendation seeks to have 

uniform registration laws adopted by ail 

regulatory bodies. An industry-widead hoc 

gmup has developed a proposed uniform 

registration form for consideration by the 

reguiatory organizations and the Commission. This area is the subject of activity of a 

working Subcommittee of the Report Coordinating Group. 

The fourth through seventh recommendations concern the formats and filing 

frequencies for the uniform, industry-wide 

Financial and Operational Combined Uniform Single Report ("FOCUS Report") 

which is to be developed. This proposed 

report is one of the main projects of the 

Report Coordinating Group. 

The eighth through tenth recommendations deal with the availability of brokerdealer economic data, the adoption of uniform record retention rules and the securing of trading information from the exchange's own data base. These issues are 

being considered by the Report Coordinating Group and the subcommittees thereof. 

Regarding the Senate Report, the Commission believes the Committee's recommendation that Congress, through legislation, direct the Commission to establish a 

Joint Committee on Small Broker-Dealers is 

a constructive one. But there may be no 

need to form a new committee. It would 

appear appropriate and productive to utilize the already established advisory 

committess, the SEC Advisory Committee 

on the implementation of a Central Market 

System and the Report Coordinating Group 

(Advisory), which are already considering 

the issues, in the course of their designated 

responsibilities, which would be assigned 

to such a committee. 

The establishment of the .Report Coordinating Group under the Federal Advisory 

Committee Act was announced by the 

Commission on January 24,1974. Its members were selected in May 1974, and its first 

meeting was held in July 1974. The four 

subcommitteesoftheGroupaiso have been 

meeting. The Group is tosubmit public recommendations on or before December 31, 

1974. The Senate Report's recommendation that at least one respresentative of the 

smail broker-dealer community be a member of the Report Coordinating Group has 

been implemented. 

AS to the Senate Report's call for the 

establishment of the position of Smail 

Broker-Dealer Liaison Officer, thecommission is presently formulating plans for a 

broad program in this area. 

In sum, the Commission has demonstrated its concern for the reporting burden 

on all broker-dealers and, in particular, the 

Smail broker-dealers in the securities industry by: 

1. a review of the Commission's financial 

and operational responsibility rules, all 

other rules and regulations, and reiated reporting requirements; 

2. the formation of the SEC Advisory 

Committee on Broker-Dealer Reports and 

63 
RegIstration Requirements-Report Coordinating Group;

3. the formation of the SEC Broker-Dealer

Model Compliance Program Advisory

Oomrruttee,

4. the formation of the SEC Advisory

Oomrmttee on the tmplementation of a Central Market System,

5. the development of a nationwide clearance and settlement system, and

6. the consrderatlon of legislative proposals.

Clearance and Settlement

Presently there are In operation a number

of clearing entitles40 and deposttones atfillated wrtn national securities exchanges

or the NASD. During the fiscal year 1974,

numerous changes in or additions to the

rules, practices, and operations of these

cleanng and depository entitles were submitted to the Commission for ItS review and

consideratron under various provisrons of

the secuntres Exchange Act.42 The following are among the most siqnftcant Items on

which the Commission acted favorably:

1. The National Clearing Corporation

("NCC"), a wholly owned subsrdrary of the

NASD, submitted proposed rule changes to

Initiate operation of a Free Account Net System ("FANS") FANS allows NCC members

to leave securities With NCC to satisfy projected future settlements, thereby elrrnmatIng the need for a broker-dealer to take delivery of securttres one day and return them

to NCC in satisfaction of delivery obligations the next day. In reviewing FANS, the

Commission requested NCC to establish an

electronic interface With the Depository

Trust Company ("DTC"), the wholly owned

secunties deposrtory of the New York Stock

Exchange, as expedinously as possible.

Dunng nscat 1974, DTC and NCC accomplished an Interface which allows NCC

members and DTC members to deliver secunties to each other by bookkeeping entry.

2. DTC and the Midwest Secunties Trust

Company ("MSTC"), a wholly owned subsidrary of the Midwest Stock Exchange, Inc

("MSE"), have developed a two-way link

which permits dual members of MSTC and

DTC to transfer stock by bookkeeping entry

64

between their DTC accounts and their

MSTC accounts.

3. MSTC Will transfer all clearing activities

to a new wholly owned subsidlary of the

MSE to be called Midwest Clearing Corporation.

4. The PaCIfiC Secunties Depository, the

wholly owned securities depository of the

Pacific Stock Exchange, Inc., applied for

and received an exemption pursuant to

Rules 8c-1(g) and 15c2-1(g) under the Exchange Act 43

Securities Investor Protection

Corporation (SIPC)

SIPC was established by the Secuntres

Investor Protection Act of 1970 ("SIPC Act")

to provide certain protections to customers

of SIPC members. It IS a non-profit membership corporation, most of its members

are registered brokers and dealers and

members of national secunties exchanges.

WhIle SIPC IS funded primarily through assessments on ItS members, it may borrow

under certain conditions up to $1 billion

from the United States Treasury.

During frscal year 1974, the Chatrrnan of

SIPC formed a Special Task Force to recommend to the SIPC Board of DIrectors

changes In the SIPC Act. The Special Task

Force, which Included a representative of

the Commission, has made ItS report and

recommendatrons to the SIPC Board.

In 1973 SIPC deSignated princrpal examining authorities (in regard to applicable

nnancrat responarbillty rules) for SIPC

members whrch are members of more than

one self-regulatory orqamzatton.w As noted

above, the Commission believes that these

desrqnatrons are Important first steps in

eliminating unnecessary and burdensome

duplication of examtnanons and reporting

requirements in the Industry.

In August 1973. the Comrnlssron set forth

ItS positron that, In the case of those of its

members for which It was not the SIPCdesignated pnncipal examining authority, a

self-regulatory organization would not be In

derogation of ItS responsjblhtres under the

Exchange Act to police the financial responsrbihty rules as to ItS members If It deferred to the designated exarrunq authority.4s

"
Rule Changes Related to SIPC

DUring the fiscal year, the Oomrnleeron

adopted Rule S6d-1 and related forms

under the SIPC Act.46 Section 6(d)(1) of the

SIPC Act provides for the completion by a

SIPC Act trustee of those "open contractual

commitments" effected by another

broker-dealer wrth the debtor In which a

customer had an interest. Rule S6d-1

places certain limitations on the commitments of a debtor which are eligible for

completion.

Basically, the Rule permits the completion of only those fails-to-receive and failsto-deliver (as defined in the Rule) which: (1)

arose from a current transaction In which a

broker was acting as agent for a customer,

or a dealer was acting for a customer In

certain narrowly defined principal transactions; (2) are not stale as of the filing date;

(3) are promptly disposed of in accordance

with the provisions ofthe Rule-normally by

bUyIng In or seiling out; and (4) are promptly

reported to the trustee and supported by

appropriate documentation.

On May 1, 1974, the Commission announced a proposal to adopt securrtres Exchange Act Rule 15b-1 and to amend Rule

15b~ 1 and Form BDW thereunder 47 The

proposed rules and the form provide that in

the case of Commission revocation or cancellation of the registration of a brokerdealer, or a broker-dealer's WIthdrawal of its

registration, the effectiveness of such revocatron, cancellation or withdrawal would be

delayed for one year for purposes of the

SIPC Act only. Thus, the protections of the

SIPC Act would be available to the customers of such a broker-dealer during that

period.

Litigation Relating to SI PC

In SEC v. Guaranty Bond and Securities

Corp.48 the Court of Appeals for the Sixth

Circuit held that the protections of the SIPC

Act were available to customers of a

broker-dealer who, although Insolvent prior

to the effectIve date of the Act, continued to

transact a substantial busmess In securities

after the Act had become effective. The

Court of Appeals also held that a receiver of

the broker-dealer appointed by the district

court had standing to bring an action on

behalf of customers of the broker-dealer to

compel SIPC to initiate llqurdation proceedIngs under the Act. In its brief in the Court of

Appeals, the Commission had argued in

support of the first point but had urged that

the receiver had no standing as to SIPC.

SIPC then filed with the U.S. Supreme

Court a pennon for a wrrt of certiorari seekIng reversal of the decision by the Court of

Appeals. The Commission filed a

memorandum WIth respect to the petition

stating ItS view that the Court of Appeals

erred In concluding that the receiver of a

broker-dealer has an implied right to file an

action to compel SIPC to fulfill its statutory

oblrqatrons. The Commission stated in the

memorandum that a premature action

brought by a customer to compel the institution of tlquidatron proceedings may adversely effect recourse to viable alternatives

that might be in the public interest. The Supreme Court in October 1974 agreed to review the questions whether a customer of a

broker-dealer had standing to sue SIPC for

ttus kind of relief and whether the receiver

could act on behalf of the customers.

SECO Broker-Dealers

Under the Exchange Act, the Commission

IS responsible for establishing and administering rules on qualrtrcatron standards and

business conduct of broker-dealers who are

not members of the NASD in order to provide regulation of these SECO brokerdealers comparable to that provided by the

NASD for its members.

DUring the fiscal year, the number of

nonmember broker-dealers registered With

the Commission Increased from 276 to 300

and the number of associated persons of

such firms (r.e., partners, officers, directors

and employees not engaged in merely clericalor ministerial functions) Increased from

16,303 to 18,606.

On October 19, 1973, the Commission

announced the adoption of Rule 15b1Q-10

under the Exchange Act, which prohibits

certain reciprocal brokerage practices by

SECO broker-dealers 49 A similar rule had

been adopted by the NASD, as described in

the Oornrnlssron's last annual report.50

Rule 15b1Q-10 prohtbrts SECO broker65
dealers from (1) favoring or disfavoring the

distribution of shares of open-end investment companies on the basts of "brokerage

commission" received; (2) soliciting or

making promises of an amount or percentage of brokerage commissions In connection with the distribution of such Investment

company shares; and (3) seeking orders

for the execution of portfolio transactions

on the basis of their sales of fund shares.

Rule 15b9-2 imposes an annual assessment to be paid by nonmember brokerdealers to defray the cost of regulation. During the fiscal year, the Commission increased the base fee from $175 to $250 and

the fee for each associated person from $10

to $12.51 Additionally, Form SECD-S, required pursuant to Rule 15b9-1, was

amended to Increase the initial fee paid by

nonmember broker-dealers from $150 to

$500.

OTHER COMMISSION RULE

CHANGES

Mortgage Market Exemptions

The Commission has been working with

the Federal Home Loan Mortgage Corporation (" FHLMC") to clarify the applicability of

Federal securities laws to Amminet lnc.,

which was established under FHLMC sponsorship to operate an automated trading information system designed to promote a

more hquid secondary market for residential mortgages.52 The system would list offerings to buy and sell (1) governmentguaranteed and non-guaranteed aggregated and individual whole loan mortgages;

(2) certain participation Interests in such

mortgages,53 (3) commitments for such

mortgages;54 (4) FHLMC-guaranteed particrpatron certificates, and (5) Government

National Mortgage Association passthrough SeCUritles.55

During the 1973 fiscal year, the Commission adopted Rule 3a12-1 under the Exchange Act56 to classify as "exempted securities" those mortgages as defined in the

Emergency Home Finance Act of 1970,

which are or have been sold by FHMLC. As

part of its contlnurnq effort in this area the

Commission, during the 1974 fiscal year,

66

adopted Rule 3a12-4 and rescinded Rule

15a-1 under the Exchange Act.57 The princrpal effect of Rule 3a12-4 is to exempt from

the registration and financial requirements

of Section 15 of the Exchange Act brokerdealers who deal, under specified conditions, solely in mortgage securities (as defined In the Rule) or other exempted securities. Rule 15a-1 had provided an exemption

only from the registration requirement.

Transactions in secuntles so exempted are

still subject to antifraud provisions of the

Exchange Act.

Real Estate Investment Contract

Securities

On June 7, 1974, the Comrnlssron released for comment proposed Rule 3a12-5

under the Securities Exchange Act.58 If

adopted, the Rule would exempt from Sections 7 and 11(d)(1) of the Act (both of which

deal with the extension or maintenance of

credit to purchase securities) subject to various conditions, certain investment contract secunties mvolvmq the direct ownership of specified residential real property

offered by broker-dealers. In the release, the

Commission stated its preliminary view that

the unique characteristics of investment

contract secuntles involving the direct

ownership of specified residential real

property (particularly the traditional modes

of financing real property and the lack of

any secondary trading market therefor)

make It unlikely that the concerns addressed by Sections 7 and 11(d)(1) Will be

present.

On the same day the Commission released proposed Rule 3a12-5, the Board of

Governors of the Federal Reserve System

announced that it had deferred, until December21, 1974, an amendment to Regulation T. The amendment would have the effect of treating the extension of credit on

any part of an Investment contract security

as credit on the entire security and would

prohibit broker-dealers from arranging for

such credit unless collateralized In compliance with the req uirements of Regulation

T.

The Commission is presently considering

the comments received on proposed Rule

3a12-5.
Corporate Repurchase Programs

On December 6, 1973, the Commission

released for public comment a revision of

proposed Rule 13e-2 and a related amendment to Rule 10b-6 under the Securities

Exchange Act. Both are designed to prevent

an Issuer from effecting repurchases of ItS

own stock that may have a manipulative or

misleading Impact on the trading market In

the Issuer's secuntles."

Proposed Rule 13e-2 specifies conditions under which an issuer whose equity

securities are registered pursuant to Section 12 of the Exchange Act may repurchase

such securities in the open market or in

negotiated transactions It also provides for

specific regulation in connection with repurchases by broker-dealer Issuers. The

proposed amendment to Rule 10b-6 would

provide an exemption from that Rule for

purchases by an issuer pursuant to the

terms and conditions of Rule 13e-2, Absent

the exemption, the purchases might have

been prohibited by the existence of outstanding convertible securities, warrants or

distributions pursuant to certain employee

plans.

In reproposing Rule 13e-2 the Commission specifically solicited comments regarding whether an Issuer should be requrred to disclose a repurchase program

and, if so, the manner and content of such

disclosure, and whether purchases by certain persons, such as officers, directors, or

insiders of an Issuer, should be exempted,

conditionally or unconditionally, from the

prohibitions of the Rule.

Confirmation Requirements for

Periodic Transactions

On March 15, 1974, the Commission released for public comment a proposed

amendment to Rule 15c1-4.60 The amendment is Intended to reduce the economic

burden of the confirmation requirements of

Section 11 (d)(2) of the Securities Exchange

Act and Rule 15c1-4, with respect to mutual

fund investment plans, particularly those

involving small and periodic purchases,

without significantly lessenrng Investor protections.

The proposed amendment would permit

principal underwriters or their agents to

delay sending confirmations for up to 90

days to Investors purchasing mutual fund

shares under certain employer-sponsored

plans and certain tax-qualified plans, and

for as long as 30 days to Investors purchasIng mutual fund shares under specified

tax-qualified individual retirement plans.

The confirmations would be required to

summarize all transactions within the respective 90- or 30-day periods and could be

sent in bulk to the employer or other designated person for distribution to participants

In group plans In addition, under the rule,

an employer or designated person could

collect and remit participants' payments for

fund shares provided such funds were remitted promptly to the broker-dealer, but

not later than 30 days after receipt.

Short Sale Regulation

On March 4,1974, the Commission proposed amendments to Rules 3b-3, 10a-1

and 10a-2 to establish comprehensive

short sale regulation for securities which

will be traded in the planned pentral market

system for listed securitles.s" The Commission Indicated In ItS Policy Statement on the

Structure of a Central Market System

(March 29, 1973) that the adoption of more

complete and effective short sale regulation

was one of the first of a series of steps the

Commission had under consideration to

Implement the proposals made therein, particularly in view of current plans to Implement a composite last sale reporting system. The proposed amendments reflect the

recommendations which were made to the

Commission by ItS Advisory Committee on a

Central Market System and which are contained in that Committee's Interim Report to

the Commission on Regulation Needed to

Implement a Composite Transaction Reporting System (October 11, 1972).

NOTES TO PART 3

'in March 1971, the Executive Committee

of the Board of Trade of the City of Chicago

adopted a resolution to close the Board's

securities market. The Board has not, however, withdrawn its registration.

2 Under legislation proposed to the Congress (H.R. 5050), the Ocrnrnissron would be

given the authority to review and amend

exchange disciplinary actions.

67
3Securities Exchange Act Release No.

10809 (May 17,1974),4 SEC Docket 322.

4498 F. 2d 1303 (C.A. 2, 1974).

5433 F.2d. 264 (CA 7, 1970),cert. denied,

401 U.S. 994 (1971).

8Other inspections are described in

Broker-Dealer Examinations at pp. 5~1,

infra.

7Martin, William McC., The Securities

Markets,A Report, With Recommendations

(1971), reprinted in Study of the Securities

Industry, Hearings Before the Subcommitteeon Commerce and Finance of the House

Committee on Interstate and Foreign

Commerce, 1st and 2d Sess., Pt. 6, Appendix NN at 3189 ff. (1971-1972).

8Those registered broker-dealers which

are not NASD members are referred to as SECO broker-dealers. See p. 65, infra.

9The NASD as well as others also re- quested the Commission to review the

NASD's anti-reciprocal rule. For further information see Part V, p. . l039th Annual Report, p. 12.

11See 38th Annual Report, p. 54.

12Securities Exchange Act Release No.

9632 (June 7, 1972).

13CCHNASD Manual, Rules of Fair Practice, Article III,Section 25, para. 2175 (1974).

14No. 72-1975 (CA D.C.).

15Since examinations of these exchanges

do not concentrate on, and exchange examiners are not generally famfliar with NASD

rules governing a large number of significant matters which are unique to over-thecounter market regulation, NASD attention

to these firms should be even greater than

IS customary presently.

16See pp. 5~O, infra.

17Themajority of complaints involved the

failure by NASDAQ market-makers to make

timely reports of their trading volume in

NASDAQ-quoted securities.

18Securities Exchange Act Release No.

10643 (February 14, 1974), 3 SEC Docket

545.

19Securities Exchange Act Release No.

9632 (June 7, 1972), see supra, p. 53 and

38th Annual Report, p. 54.

20Secunties Exchange Act Release No.

10850 (June 12, 1974), 4 SEC Docket 420.

21Securities Exchange Act Release No.

10756 (April 26, 1974), 4 SEC Docket 195.

22Securities Exchange Act Release No.

10429(October 12, 1973),2 SEC Docket 567.

23Securities Exchange Act Release No.

10304 (July 30,1973).2 SEC Docket 218.

24Securities EXChange Act Release

No. 9633 (June 14, 1972).

25See39th Annual Report, p. 59.

26Securities Exchange Act Release No.

10525 (November 29, 1973),3 SEC Docket

103.

27Securities Exchange Act Release No.

10398 (September 20,1973),2 SEC Docket

467.

28Securities Exchange Act Release No.

68

10825 (May 24, 1974), 4 SEC Docket 344.

The amendments were first proposed in Securities Exchange Act Release No. 10392

(September 14, 1973), 2 SEC Docket 432.

29Now known as the "FOCUS Report."

See pp. 61-62, infra.

30See Securities Exchange Act Release

No. 10612 (January 24,1974),3 SEC Docket

423.

31Study of Unsafe and Unsound Practices

of Brokers and Dealers, Report of the Secu r- ities and Exchange Commission (Pursuant

to Section 11(h) of the Securities Investor

Protection Act of 1970), H.R. Doc. No. 92-

231, 92d. Cong., 1st Sess. (1971).

32The self-regulatory organizations must

report each month to SIPC those member

firms which are in or approaching financial

difficulty. 33Seep. 64, infra. 34 See p. 60, mtre, 3S See p. 61, infra.

36See p. 65, infra.

37Few routine examinations are now

conducted offirms other than SE.COfirms.

All examinations of member firms of selfregulatory organizations must now be

over-Sight examinations which involve an evaluation of the self-regulatory organizations' reports of their own examinations.

38See p. 64, infra.

39S. Rep. No. 93-880, 93d Cong., 2d Sess.

(1974).

40CIearing entities clear and settle transactions between participating brokerdealers. Offsetting transactions between

broker-dealers are netted out and settlement and delivery are effected only as to the

balance under the traditional balance order

system. Under the more recent net-by-net

system, balances may be carried forward

and netted against future settling trades.

41Depositories hold securities certificates

and effect delivery between participants by

book entry.

42See Section 15AO), and Rules 8c-1(g),

15c2-1 (g), and 178-8.

43 Paragraph (g) of Rules 8c-1 and 15c2-1

requires a determination by the Commission that the agreements, provisions and

safeguards established for the depository are adequate for the protection of investors.

44Section 9(c) of the SIPC Act provides

that where a member of SIPC is a member of more than one self-regulatory organization, SIPC shall designate one of them to exam- ine the members for compliance with applicable financial responsibility rules.

4SSee Securities Exchange Act Release

No. 10612 (January 24,1974),3 SEC Docket

423.

48 Securities Investor Protection Act Release No.5 (July 25, 1973), 2 SEC Docket

173.

47Secunties Exchange Act Release No.

10766 (May 1,1974),4 SEC Docket 230.
48496 F.2d 145 (C.A. 6, 1974), petition for

ceruoreri granted.

49Securities Exchange Act Release No.

10439 (October 19, 1973), 2.SEC Docket 598.

5039th Annual Report, p. 8.

51Securities Exchange Act Release No.

10759 (April 26, 1974), 4 SEC Docket 198.

52The Emergency Home Finance Act of

1970 was enacted following a determination

by Congress that the nation needed more

capital in residential mortgages and that

this could be best accomplished by the establishment of a liquid market for such secunties. FHLMC was established by this Act

with the power "to make and enforce such

by-laws, rules and regulations as may be

necessary or appropriate to carry out the

purposes or provisions," of the Act 12

U.S.C. 1452 (b) (3).

53The only participation Interests which

will be listed on Amminet are those which

amount to at least $50,000 and represent

one of two undivided interests In a whole

loan or an aggregated whole loan, the remaining interest being retained by the

originator.

54The only commitments that will be

listed On Amminet are contracts to purchase whole loan mortgage Interests which

by their terms require that the contracts be

fully executed within 2 years.

55The Government National Mortgage

Association, pursuant to Section 306(g) of

the Federal National Mortgage Association

Charter Act, as amended, 12 USC. 1721 (g),

Issues secuntres (referred to as "passthrough" securities) which are guaranteed

as to timely payment of principal and interest by the full faith and credit of the United

States.

56See 39th Annual Report, pp. 6{}-61.

57Securities Exchange Act Release No

10828 (May 28, 1974),4 SEC Docket 349.

58Securities Exchange Act Release No

10845 (June 7, 1974),4 SEC Docket 384.

59Securities Exchange Act Release No.

10539 (December 6, 1973), 3 SEC Docket

167.

60Securities Exchange Act Release No

10681 (March 15, 1974), 3 SEC Docket 691

61Secunties Exchange Act Release No

10668 (March 6,1974),3 SEC Docket 650.

69

PART 4

ENFORCEMENT

The Ocrnrntsston's enforcement activities, which are designed to combat securities fraud and other illegal activities,

continued at a high level during the past

year. These activities encompass civil and

criminal court actions aswell as administrative proceedings conducted internally.

Where violations of the securities laws are

established, the sanctions which may result

range from censure by the Commission to

prison sentences imposed by a court. The

enforcement program is designed to

achieve as broad a regulatory impact as

possible within the framework of resources

available to the Commission. In light of the

capability of self-regulatory and state and

local agencies to deal effectively with certain securities violations, the Commission

seeks to promote effective coordination

and cooperation between its own enforcement activities and those of other agencies.

DETECTION

Complaints

The Commission receives a large volume

of communications from the public. These

consist mainly of complaints against

broker-dealers and other members of the

securities community aswell as complaints

concerning the market price of particular

securities. During the past year, some 5,300

complaints against broker-dealers were received, analyzed and answered. Most of the

above mentioned complaints dealt with operational problems, such as the failure to

deliver securities or funds promptly, or the

PART 4

ENFORCEMENT

alleged mishandling of accounts. In addrtion, there were some 6,000complaints received concerning Investment advisers, issuers, banks, transfer agents and mutual

funds.

The Commission seeks to assist persons

in resolving complaints and to furnish requested information. Thousands of investor

complaints are resolved through staff inquiries to the firms involved. While the

Oornmissron does not have authority to arbitrate private disputes between brokerage

firms and Investors or directly to assist investors in the legal assertion of their personal rrghts, a complaint may lead to the

institution of an investigation or an.,enforcement proceeding, or it may be referred

to a self-regulatory or local enforcement

agency.

Market Surveillance

To enable the Commission to carry out

surveillance of the securities markets, its

staff has devised procedures to identify

possible violative activities. These Include

surveillance of listed securities, which is

coordinated with the market surveillance

operations of the New York, Amerrcan and

regional stock exchanges.

The Commission's market surveillance

staff maintains a continuous watch of

transactions on the NewYork and Amerrcan

Stock Exchanges and reviews reports of

large block transactions to detect any unusual prrce and volume variations. Also the

financial news tickers, financial publications and statrstloal services are closely fol73
lowed In addition, the staff has supplemented Its regular reviews of dally and

penodrc market surveillance reports of exchanges with a program for review of special surveillance reports, which provide a

more In depth analysis of the information

developed by the exchanges

For those secuntres traded by means of

the NASDAQ system, the Commission has

also developed a surveillance program,

which IS coordinated with the NASD's market surveillance staff, through a review of

weekly and special stock watch reports.

For those over-the-counter secuntrss not

traded through NASDAQ, the Comrrussron

uses automated equipment to provide an

efficient and comprehensive surveillance of

stock quotations drstnbuted by the National

Quotation Bureau This IS programmed to

Identify, among other things, unlisted securities whose price movement or dealer interest vanes beyond specined limits In a preestablished time period When a secunty IS

so Identified, the equipment prints out current and hrstonc market information Other

programs supplement this data with information concerning sales of secunnes pursuant to Rule 144 under the Securities Act,

ownership reports, and penodrc company

filings such as quarterly and annual reports

Trus data, combined with other available information, IS analyzed for possible further

mquiry and enforcement action

In addition, recognizing that the computer provides the most expedrtious

method of reviewing and analyzing the voluminous trading data generated by the secuntres markets, the Comrmssron has developed a program which provides an analysrs of the bid listings for each security by

summarizing specrtred types of activity by

each broker-dealer firm subrmttrnq pnce

quotations for that particular security

The staff also oversees cash tender offers,

exchange offers, proxy contests and other

activities involving efforts to change control

of public corporations. Such oversight involves not only review of trading markets In

the secunnes Involved, but also filings with

the Commission of required schedules,

prospectuses, proxy matenal and other intormation

74

INVESTIGATIONS

Each of the acts administered by the

Commission authonzes investigations by It

to determine If Violations have occurred.

Most of these are conducted by the Comrnrssron's regional offices. Investigations

are carned out on a confidential basis, consistent With effective law enforcement and

the need to protect persons against whom

unfounded charges might be made Thus,

the existence or results of a non public investigation are generally not divulged unless they are made a matter of public record

In proceedings brought before the Comrrussron or In the courts. Dunng fiscal year

1974, a total of 382 investigations were

opened, as against 472 the preceding year.

Litigation Involving Commission

Investigations

Wlchard v. TPO, Incorporated' was an acnon brought by a customer against her

broker-dealer, charging Violations of the antifraud provisrons of the federal secunties

laws The plaintiff moved, pursuant to Rule

34 of the Federal Rules of CIVil Procedure,

to compel the production of transcnpts of

deposrtrons of the broker-dealer's officers

and directors, taken dunng a private investigation conducted by the Commission. The

Commission submitted a memorandum,

amicus cunee, In response to the request of

the court that the Oomrnrssion generally advise the court of ItS POSition With respect to

the proposed discovery

In ItS memorandum, the Commission

reaffirmed the POSItion It earlier had outlined In a memorandum It had filed In ln re

Four Seasons Securtttes Law Litlgatlon.2

When discovery ISsought In CIVil IIgitatlon of

transcripts of testimony given or documents

submitted In a Commission investigation, If

the witness who gave the testimony or produced the documents opposes such discovery, he should have the opportunity to

present to the court any objections he may

have, including those based on lack of relevancy or privilege. In the event the witness'

objections are overruled and he does not

then have the transcripts or documents

sought, the witness should obtain the

transcnpt or documents from the Cornrrus-
sion pursuant to the court's order. Should a

subpoena be Issued to the Commission for

transcripts or documents which, If requested by a witness, would be obtainable

under Rule 6 of its Rules Relating to lnvestigations,a the Commission may resist compliance with the subpoena until the witness

has had an opporturuty to bring to the court's

attention whatever objections he may have

to production, or the Commission may Itself

object to disclosure on Independent

grounds

In ItS memorandum, the court, agreeing

with the procedures outlined by the Comrrussron, ordered the broker-dealer and the

other defendant to obtain copies of the requested transcripts from the Commission

and to submit them to the court for inspection In camera so that the court could determine their relevancy to the issues presented in the case.

ENFORCEMENT PROCEEDINGS

The Commission has available a wide

range of possible enforcement remedies It

may, in appropriate cases, refer ItS files to

the Department of Justice with a recommendation for criminal prosecution. The

penalties upon conviction are specified In

the various statutes and include Imprisonment for substantial terms as well as fines.

The securities laws also authorize the

Commission to file injunctive actions In the

Federal district courts to enjoin continued

or threatened Violations of those laws or

applicable Commlssron rules. In injunctive

actions the Oornrnlssron has frequently

sought to obtain ancillary relief under the

general equity powers ofthe Federal district

courts The power of the Federal courts to

grant such relief has been Judicially recognized. The Commission has often requested

the court to appoint a receiver for a brokerdealer or other business where Investors

were likely to be harmed by continuance of

the existing management. It has also requested, among other things, court orders

restricting future activities of the defendants, requiring that rescrssion be offered to

secunties purchasers, or requiring drsgorgement of the defendants' ,II-gotten

gains.

The SEC's primary function is to protect

the pubhc from fraudulent and other unlawful practices and not to obtain damages for

Injured individuals Thus, a request that

disgorgement be required is predicated on

the need to deprive defendants of profits

derived from their unlawful conduct and to

protect the public by deterring such conduct by others.

If the terms of any injunctive decree are

Violated, the Commlssron may file Criminal

contempt proceedings, as a result of which

the Violator may be fined or Imprisoned.

The Federal securities acts also authorize

the Commission to Impose remedial administrative sanctions Most commonly,

administrative enforcement proceedings

Involve alleged Violations of the secunties

acts or regulations by firms or persons engaged In the securities business, although

the Oomrmssron'sjunadlctton extends to all

persons Generally speaking, if the Commission finds that a respondent Willfully violated a provisron of or rule under the securities acts, failed reasonably to supervise

another person who committed a Violation,

or has been convicted for or enjoined from

certain types of misconduct, and that a

sanction IS In the public interest, It may revoke or suspend the registration of a

broker-dealer or Investment adviser. bar or

suspend any person from the securrtres busmess or from association with an investment company, or censure a firm or lndivrdual. Proceedings may also cover adequacy

of disclosure In a registration statement or

In reports filed With the Commission. Such a

case may lead to an order suspending the

effectiveness of a registration statement or

directing compliance With reporting requirernents The Commission also has the

power to summarily suspend trading In a

security when the public Interest requires.

Proceedings are frequently completed

Without hearings where respondents waive

their right to a hearing and submit settlement offers consenting to remedial action

which the Comrnlssron accepts as an appropriate disposition of the proceedings.

The Commission tries to gear its sanctions

In both contested and settlement cases to fit

the circumstances of the particular case

For example, It may limit the sanction to a

particular branch office of a broker-dealer

ratherthan sanction the entire firm, prohibit

75
only certain kinds of activity by the brokerdealer during a period of suspension or only

prohibit an individual from engaging in

supervisory activities.

A chart listing the various types of enforcement proceedings, as well as statistics

on such proceedings are located In the

statistical section.

ADMINISTRATIVE

PROCEEDINGS

Summarized below are some of the many

administrative proceedings pending or disposed of In fiscal 1974.

First Mid America. Inc. (FMA).4-ln this

administrative proceeding against a New

York Stock Exchange member firm, its president, senior vice-president and whollyowned subsidiary, the Commission found,

pursuant to offers of settlement submitted

by the respondents without admitting or

denying the charges, that the respondents

had violated antifraud and antlrnarupulatrva

provisrons of the Securities and Securities

Exchange Acts. Specifically it was found

that FMA prematurely closed an underwriting of debentures which It was comanaging and retained over $1,500,000

of the securities In ItS own account. FMA

then entered NASDAQ as a market maker In

the debentures, and dominated, controlled

and artificially maintained the market and

price for these securities FMA was also

found to have used Increased compensation and a sales contest for its employees to

distribute its position In the securities

withm a short period to ItS customers

without disclosing its manipulative activities.

FMA and its subsidiary were suspended

for 60 days from underwriting and overthe-counter trading activities subject to certain conditions. FMA's president was suspended from association with a brokerdealer for nine months and thereafter barred from such association in a supervisory

capacity, except that he may apply to the

Commission for removal of the bar after two

years. FMA's senior vice-president was suspended from association with a brokerdealer for 60 days and from association as a

director for an additional 120 days.

A. P. Montgomery & Co., Inc.5

76

Administrative proceedings were instituted

on January 30, 1974, against twenty-seven

respondents, including partnerships and

corporations organized to invest in securities and three broker-dealers and certain

Individuals charging violations of the antifraud, anti manipulative, short sale, margin

and recordkeeping provisions of the Exchange Act. The order for proceedings alleged that respondents, other than the

broker-dealers, made short sales of certain

sscunues to the broker-dealer respondents

after they had given indications of Interest

to purchase the same class of securities

covered by pending registration statements

relating to "secondary offerings" of socalled "cold Issues" The short sales were

effected prior to the effective dates of the

registratIOn statements and were subsequently covered by shares obtained in the

offerings. The broker-dealer respondents in

turn resold the shares prior to the effective

dates of the registration statements. The

short sales were part of a scheme to manipulate the price of the securities. Ten of the

securities were listed for trading on various

exchanges and five were traded over-thecounter. The order also alleged that the short

sales were effected in cash accounts rather

than In margin accounts as a result of which

the respondent customers avoided making

the necessary initial margin deposits.

Eleven respondents thus far have consented to sanctions by the Commission in

this matter. The registration of one brokerdealer has been revoked and other respondents have been suspended or barred

from certain activities for periods up to one

year. As a result of the investigation of this

practice known as "shorting into secondary offerings," the Commission has issued proposed Rules 10b-20 and 10b-21

governing short sales prior to secondary offerings and other practices in connection

with the marketing of secunnes.s

Holland Andrews & Perrier.-This administrative proceedings arose out of the

Accurate Calculator Corp. matter, the subject of a companion civil action. In its respective Findings and Orders, the Commission found that Holland, Andrews & Perrier,

a Canadian broker-dealer, Alan Perrier,7 and

Chartered New England Corp," violated the

- registration provisions of the Securities Act
10 that they offered for sale, sold or delivered after sale shares of the common stock

of Accurate when no registration statement

was on file or 10 effect with respect to said

secuntres. In each case the respondents

consented to the Commission's Findrnqs

and Order without admitting or denyrnq the

allegations contained 10 the Order for Proceedings.

Chartered New England Corp. 10 addition

to consenting to a 10-day suspension of its

over-the-counter retail operations, undertook to continue certam pollcies and procedures rnvotvmq (a) the securing of

specified information pnor to quoting certain securities, (b) restnctions on the secunties in which It can make a market, and (c)

restrictions on the securities it may solicit

retail customers to purchase or sell.

Holland Andrews & Perrier and Alan Perrier were barred from association With a

broker-dealer With the proviso that Alan

Perrier might reapply to the Commission

after a period of two years to become so

associated in a non-supervisory capacity.

TRADING SUSPENSIONS

The Securities Exchange Act authonzas

the Commission summanly to suspend

trading in a security traded on either a national securities exchange or 10 the overthe-counter market for a penod of up to 10

days If, 10 the Commission's opmlon, such

action IS required 10 the public interest.

During fiscal 1974, the Commission suspended trading in the securities of 279

companies, an mcrease of 60 percent over

the 174 secunties suspended 10 fiscal 1973

and almost a 400 percent increase over the

47 securities suspended 10 fiscal 1972. In

most mstances, this action was taken either

because of substantial questions as to the

adequacy, accuracy or availability of public

information concerning the companies' financial condition or business operations or

because of transactions in the companies'

securities suggesting possible manipulation or other violations.

The Commission during fiscal 1974 suspended tradrnq also in the securities of a

substantial number of Issuers who were delinquent in filing required reports with the

Commission. This was done in order to alert

the public to the lack of adequate, accurate

and current information concerning such

Issuers.

On October 18, 1973 the Commission

suspended tradmq in all securities of Seaboard Ccrporatron." The Commission initiated the suspension of trading because of

questions which had been raised concern109. (a) the adequacy and accuracy of disclosures made in Seaboard's registration

statement covering a pnor sale of 500,000

Seaboard Units (consistmq of common

stock and warrants), and in filings made

With the Commission subsequent thereto;

(b) certain activities engaged 10 by Seaboard in connection With ItS management of

four registered investment companies With

current net assets of approximately $90 million (Admiralty Fund, Inc., Competitive Capital Fund, Seaboard Leverage Fund, Inc,

and The Income Fund of Boston); and (c)

the possible terrnmation by the aforementioned Investment companies of their investment contracts With Seaboard which

are Seaboard's pnmary source of mcorne,

In addition, the Commission had been informed that the Investment companies

under Seaboard's management had voluntarily terminated sales of new shares. Seaboard was the underwriter for these mvestment companies

Delinquent Reports Program

Congress, In the Federal secunnes laws,

established the framework for a disclosure

scheme desiqned to provide public investors with financial and other information

necessary to make Informed investment decisrons, One of the fundamental elements to

the success of this disclosure scheme is the

timely filing of required reports In proper

form.10

In the latter part of fiscal 1973 the Commissron became aware of two disturbing

trends in thrs area. First, there appeared to

be a general increase in the number of regrstrants which had failed to comply With

the Exchange Act reporting requirements.

Secondly, there were mdlcattons that registrants in certain industries, which were experiencing detenorating business conditions, failed to comply with the Act's report77
Ing requirements more often than other registrants.

On June 11, 1973 the Commission publicly expressed ItS concern with the many

registrants who failed timely to file Exchange Act reports In proper form." The

staff then went to work to develop and implement a program (1) to monitor compliance by registrants with the reporting requirernents and (2) to take prompt enforcement action where registrants were delinquent

During the 1974 fiscal year, the Commission suspended trading in the secuntres of

nearly 200 registrants solely because of

their failure to file required reports. With few

exceptions, the duration of such suspensions was ten days While the majority of

such registrants could be characterized as

small In terms of net assets and number of

shareholders, many of such registrants had

secuntres listed for trading on a national

secunties exchange and thus enjoyed the

recognition and market appertaining

thereto.

An example of the type of action taken

under thrs program was the suspension of

trading In the securities of 48 registrants for

the ten day paned commencing April 11, 1974

As a result of diligent staff rnqurry, each of

these registrants was found to be deunquent at the least In filing its Annual Report

on Form 1D-K for its fiscal year ending in

1972.12

During this fiscal year the Commission

also brought a civil injunctive action against

registrant First Wisconsin Mortgage Trust

("First Wisconsin"), a Massachusetts real

estate Investment trust, solely on the basis

of its failure to comply with the reporting

requuernents.P Its shares of beneficial

interest are listed for trading on the New

York Stock Exchange At the time the action

was commenced First Wisconsin was alleged to be delinquent In filing its Annual

Report on Form 1D-K for ItS fiscal year

ended December 31, 1973 and ItS quarterly

report on Form 7-0 for the fiscal quarter

ended March 31, 1974. In trus action the

Commission seeks, inter eue, an order compelling First Wisconsin to file forthwith the

delinquent reports with the Commission

and permanently enjoining First Wisconsin

from again violating the reporting require78

ments This matter is pending.

In addition to the First Wisconsin action,

the staff has done substantial work with a

view to fu rther litigation involving other regrstrants delinquent in filing reports.

The program IS expected to result in

prompter Commission responses to delinquent reporting. It is anticrpated that the

program will encompass substantially all

Exchange Act reports. Beyond mducrnq

compliance with Exchange Act reporting

requirements, It IS hoped that this program

will bring about an Increased public awareness of the Importance of the Act's reportIng provisions.

CIVIL PROCEEDINGS

Dunng fiscal 1974, the Commission instituted a total of 148 injunctive actions. Some

of the more noteworthy of these injunctive

proceedings and Significant developments

in actions instituted In earlier years are reported below. Coordination between selfregulatory bodies and the DIvision of Enforcement resulted In several enforcement

actions, in addition to investigations.

In S.E.C. v, Shapiro 14 the Court of Appeals

for the Second Oircurt affirmed a judgment

of the district court15 which permanently enjoined Norman Berman, a merger and acqursitrons broker, from further violations of

the antifraud provlsrons of the Exchange

Act. The order in addition required Berman

to disgorge all profits he denved from trading in the stock of Harvey's Stores, Inc.

("Harvey's") on the basis of material nonpublic Information relating to the existence

and progress of merger negotiations involving Harvey's and Ridge Manor Development

Co ("Ridge Manor"), and the ramifications of a merger. Berman had acquired the

Information In acting as a finder and partieipant In the merger discussions. The court

agreed with the district court that Berman

had violated the antifraud provlsions by his

own trading and by "tipping" others about

the merger negotiations.

Although Berman admitted that he had

acquired inside information, he contended

that, at the time of each of his purchases of

Harvey's stock, the prospects for a merger

between Harvey's and Ridge Manor were so

remote that Information concerning a pos-
sible merger was not material, and therefore

was not required to be disclosed. The court

noted that facts are deemed material if a

reasonable investor might have considered

them Important in the making of an investment decision. Citing S.E.C. v. Texas Gulf

Sulphur CO.16the court stated that whether

facts relating to a future event are material IS

dependent "upon a balancing of both the

Indicated probability that the event will

occur and the anticipated magnitude of the

event In light of the totality of the company

activity" In applying the test, the court

found that even at the time of the first of

seven purchases by Berman of Harvey's

stock two significant events had occurred

which dictated a conclusion that the information concerning a proposed merger was

material. In any event, the court found It

unnecessary to "speculate as to how a reasonable investor might have received this

Information" in view of the substantial

amounts of Harvey's stock purchased by

Berman and other persons in possession

of the information

The court rejected Berman's contention

that he should not be enjoined because It

was not shown that he acted In bad faith,

and determined that a likelihood of future

violations was indicated since Berman engaged in not one but seven purchases of

Harvey's stock In violation of Rule 10b-5,

and that these violations occurred In the

context of his regular business as a "corporate marnage broker." As to this latter factor, the court stated that, "[o]ne who has

displayed such frailty in the past and faces

so many temptations in the future may well

need the admonition of an injunction to

obey the law."

The court further ruled that the district

court's approach-in requiring Berman to

disgorge not the actual profits realized

when he sold shares In Harvey's after public

disclosure of the material information, but

the "paper" profits which had earlier accrued as of the date of public disclosurewas reasonable and did not Involve the imposition of a penalty. In effect, under the

disgorgement order Berman had to surrender more profits than he actually realized

since the price of Harvey's stock dropped

after public disclosure. To hold otherwise,

the court observed, "would emasculate the

.>

deterrent effect of Rule 10b-5."

S.E.C. v. Bausch & Lomb Inc. 17_This

case Involves the drssernmatron and improper disclosure and use of inside information concerning Bausch & Lomb's disappointing sales and earnings from its soft

contact lens Defendant Richard J Clancy,

formerly a partner In the investment advisory firm of another defendant, without admitting or denying the allegations in the

complaint, consented to a permanent injunction enjoining him from future violations Similar to those alleged In the complaint He consented also to a Oornrrussron

suspension of the effective date of the application for registration as an Investment

adviser of Clancy Management Corp of

which he IS the sole stockholder, officer,

and dlrector.18 The action as to the remainIng defendants IS In the discovery phase

SEC v. Geon Industries Inc.19-Qn Apnl2,

1974, the ccrnrmssron, after a [omt investigation with the American Stock Exchange,

filed a complaint against Geon, ItS chairman, chief fmancral officer, a comptroller of

a Geon suosidrary, a registered representative, his broker-dealer employer, Edwards &

Hanly, and two tippees of Geon's chairman,

seeking to enjoin them from further Violations of the antifraud provrsions of the Exchange Act. The complaint charged, among

other things, that the tippees, the registered

representative and the comptroller purchased Geon stock while In possession of,

and without prior disclosure of, material

non-public Information concerning a proposed acqulsinon of Geon by Burmah Oil

Company of England, and that the same

persons later sold Geon stock while In possession of, and without prior disclosure of,

negative rnatenal non-public information

concerning Geon's financial condition and

ItS potential effect on the proposed acqursltion. The two trppees, Geon's comptroller

and the registered representative consented to permanent Injunctions enjoining

them from future Violations of the antifraud

provisions of the Exchange Act and rescmded their transactions in Geon stock. In

addition, the registered representative and

the comptroller consented to injunctions

against future Violations of the margin proVisions of the Exchange Act and the Federal

Reserve Board's margin regulations. The

79
case was tried against the remaining defendants; the matter IS pending.

In S.E.C. v. Koscot Interplanetary, Inc.20

the United States Court of Appeals for the

Fifth Circuit reversing the previously reported decisron of the district court." held

that the interests in the Koscot pyramid

promotion scheme that were sold to the

public are "investment contract[s)" and

therefore securities, as defined In the Federal securities laws In so doing, the court

rejected a restnctrve Interpretation of the

standard enunciated by the Supreme Court

in S.E.C. v. W. J. Howey CO.,22 which found

an Investment contract to exist where "a

person Invests his money In a common enterprise and is led to expect profits solely

from the efforts of the promoter or a thrrd

party." Instead, the court of appeals

adopted a "resilient standard which will

allow for a practical and dynamic scrutiny of

investment schemes.

The court determined that the Koscot

scheme Involved a "common enterprise," although there was no pooling of profits. The

"entreat factor" was "not the similitude or

comcrdence of investor input, but rather the

umtormrty of Impact of the promoter's efforts."

With regard to the element of the Howey

formula that profits come "solely from the

efforts of others" the court of appeals rejacted a "literal" mterprstatron of Howey for

a "functional" approach, which would not

frustrate the remedial purposes of the Federal securities laws It found the "proper

standard" to be that recently explicated by

the Ninth CIrcuit In S.E.C. v. Glenn W

Turner Enterprises,lnc.23-"whether the efforts made by those other than the Investor

are the undeniably significant ones, those

essential managerial efforts which affect

the failure or success of the enterprise."

Thus, a scheme is no less an investment

contract merely because an Investor contributes "some effort as well as money to get

into it."

The court concluded by noting that ItS

holding was confined to "those schemes in

wrnch promoters retain lmrnedrate control

over the essential managerial conduct of an

enterprise and where the investor's realization of prouts is inextricably tied to the success of the promotional scheme." Thus the

80

holding does not extend to "conventional

trancmse arrangements" in whrch the investor contributes truly siqruficant efforts

which are "unfettered by promoter mandates." Such a "conventional" franchise

would not be subject to the regulatory

scheme of the Federal securities laws.

In S.E.C. v. Continental Commodities

Corp.24 the Court of Appeals for the Fifth

Circuit held that commodity options are

investment contracts and that notes are secunties when issued In an "Investment"

context.

In its complaint the Oornrnlssron had alleged vlolatrons of the regIstration and antrfraud provisions of the Securities Act and

the Exchange Act in connection with the

offer and sale of purported options on

commodity futures and in the subsequent

offer of promissory notes in partial payment

of clarrns owed to persons who had invested

in the scheme. The district court dismissed

the Commission's complaint holding that

the court lacked subject matter jurisdrctlon

because the so-called optrons and the

promissory notes were not securities.25

In ItS brief In the court of appeals, the

Cornrmssron disputed only so much of the

district court's decisron as held that the

notes issued to investors were not secunties. Nevertheless, the court of appeals consrdered whether the commodity options

being sold were securltres.

In holding these options, which it descnbed as dlscretronary accounts, to be investment contracts, the court focused on

whether the requisite "common enterprise" was present. Oonsistent wrth ItS recent declsron in S.E.C. v Koscot Interplanetary, Inc., the court again adopted

the view of the Court of Appeals for the

Ninth Circuit, as expressed in S.E.C. v.

Glenn W. Turner Enterprises, Inc., that "[a)

common enterprise is one in which the fortunes of the investor are Interwoven with

and dependent upon the efforts and success of those seeking the Investment or of

thrrd parties." The court specrtlcally rejected the proposition that the pro rata sharIng of prouts is critical to a finding of commonality. It also rejected the district court's

view that no common enterprise was involved because Continental Commodities

invested in different options on com-
modities futures for different Investors. The

court stated that "the critical inquiry ISconfined to whether the fortuity of Investments

collectively IS essentially dependent upon

promoter expertise."

On the question whether notes issued by

Continental Commodities to its customers

in payment of their claims were securities,

the court of appeals considered It "not dispositive" that the notes possessed a maturIty date of less than nine months. According

to the court, "It IS the character of the note,

not its maturity date, which determines coverage" under the securities laws. Consistent with the position urged by the Commission, the court concluded that shortterm notes are exempt under Section 3(a)(3)

of the Securities Act and excluded from the

definition of a security under Section

3(a)(10) of the Exchange Act, only if they are

the type of prime quality commercial paper

not generally offered to the public, and

which qualifies for discount at a federal reserve bank.

In S.E.C. v. Glen-Arden Commodities.

Inc.26 and S.E.C. v. Heitenden-Rttner International, Inc. 27 the Courts of Appeals for the

Second and Fourth Circuits, respectively,

held that the offer and sale of Interests In

casks of unblended scotch whisky aging in

warehouses In Scotland, to Investors In the

United States involved the offer and sale of

Investment contracts in violation of the registratlon and antifraud provlsions of the

Federal securities laws. In both decisions,

the courts noted that investors. who were

sold relatively small quantities of scotch

never Intended to take actual possession of

the purchased casks, bought with the intention of reselling at a profit, and relied upon

their sellers to select the types of whisky for

them. and to assist in the contemplated resale to blenders since there was no organized scotch whisky market, were dependent upon the defendants to realize

profits promised by the promoters of the

Investments As the district court in

Hettenden-Rimer stated In its decisron,

which was adopted by the Court of Appeals

for the Fourth Circuit, "[t]heir participation

in the enterprise was limited to providing

capital with the hope of a favorable return."

S.E.C. v. Marasol Properties. 28_ Thrs was

a case brought by the Commission seeking

to enjorn the sale of condominium Units on

the grounds that the promoters were offerIng sacuntres in violation of the registration

and antifraud provlsions of the Federal securities laws. It IS one of the first of ItS kind.

The Commission sought to enjoin

Marasol Properties, Iberia lnmobluana Internacronal Inc., Inter-Fed Travel Services

ASSOCiation, Inc., De Ritchie and Galarents,

S.A from violating Sections 5(a) and (c) and

17 of the Securities Act, and Sections 10(b)

and 15(b) of the Securities Exchange Act

and Rule 10b-5. The promoters were allegedly offering and seiling condorrunurn

units in Costa del Sol, Spain, forthe primary

purpose of Investment rather than occupancy by the purchasers. The sale of a unit

IS coupled with an undertaking to arrange

continuing rental of the units for the benefit

of the purchaser.

In connection With their activities It was

also alleged that the defendants made false

and misleading statements of material facts

regarding, among other things, the parties

and risks involved in such an investment.

A consolidated hearing on the merits was

held on the Commission's application for a

temporary restraining order and motion for

a preliminary injunction on September 24,

1973. The court found that the defendant's

offers and sales constituted offers and sales

of secuntres in the form of "investment contracts" as well as certificates of Interest or

partrcipatron in a profit-sharing agreement

The action was dismissed as to Galarents,

S A for lack of proper service of process.

The court permanently enjorned the remainIng defendants from Violating registration

and antifraud provlsions of the Securities

Act and of the Exchange Act.29

S.E C. v. Strathmore Distillery Co.

Ltd.3D-ln January 1974, the Cornmisston

filed an injunctive action in the United

States District Court for the District of Columbia against Strathmore and John B R.

Turner, a director of Strathmore, alleging

Violations of the registration and antifraud

provlsions of the Federal securittes laws

The complaint alleged that the defendants,

without registration, were offering to sell

and seiling interests In scotch grain whisky

which constituted investment contracts and

thus securities. It was further alleged that

Strathmore had made false and misleading

a1
statements as to matenal facts about,

among other things' the safety, profrtabrhty

and marketability of the Interests, the marKet pnce for scotch grain wrusky, the varranee between Strathmore's prices and the

market price and the difficulty of resale

In S.E.C. v Memme & Co 31the Commission brought an action to enjoin Memme &

Co., a broker-dealer, from further violating

the net capital and recordkeeping provisions of the Securities Exchange Act and

the rules promulgated thereunder and to

enjoin several of Memme's registered pnncipals from further aiding and abetting

those violations. With the exception of John

Charles Fina, a registered principal of

Memme, injunctions were entered against

all of the defendants either by default or by

consent. After a evidennary heanng the distnct court prehrrunanly enjoined Frna,

On appeal to the United States Court of

Appeals for the Second ClrcUlt,32 Frna argued that he should not have been enjoined

because, as he stated, he had not been responsible for the investment decisions

whrch precipitated the net capital vrolanons, had not had the authority to prevent

Memme from dornq business while It was

out of compliance witn the Commission's

net capital rules, and had resigned from the

firm before the violations were discovered

by the Commission The Cornrmssron argued that had Mr Fma computed Memme's

net caprtal position-which computations

were his responsibility-he would have drscovered that Memme was not In compliance

and he could have Informed Memme's pnncrpals ofthat fact. HIs resignation before the

violations were discovered by the Oornrnrssion, although after they had occurred, dId

not relieve him of his responsibility.

On January 8, 1974, the court of appeals

affirmed the district court's order from the

bench. Frna subsequently consented to the

entry of a permanent injunction.

On June 11, 1974, the United States Distnct Court for the Southern Distnct of New

York, In S.E.C. v Eznne,33 entered a Final

Judgment of Permanent Injunction and Ancillary Relief against an attorney (who consented to the final decree) upon a finding by

the court that he intentionally appeared and

practiced before the Commission In contravsnnon of Rule 2(e) of the Commission's

82

Rules of Practice. The attorney stipulated

that he appeared as counsel at a Commission administrative proceeding after his

privilege to appear and practice before the

Commission had been permanently suspended The district court earlier had preIiminanly enjoined the attorney from appearing or practicing before the Commission In contravention of Rule 2(e).34 Under

the terms of the final decree, the attorney is

enjoined from representing any person before the Commission, from preparing or filIng any documents wrth the Commission,

and from representing or advising, in connection with the Federal securities laws, any

broker-dealer or other entity registered or

required to be registered with the Cornrrussion.

The attorney is also enjoined from rendering advice with respect to the Federal securrtles laws, except where such advice is a

necessary Incident to any attorney-client

consultatron, the princrpal aspects of which

do not relate to the securities laws, and certain other conditrons are met. Under the

terms of the decree, he is further prohibited

from accepting any legal fees In connection

with matters he ISenjoined from performing.

The order also directs him to disgorge any

legal fees or compensation he received in

connection with such matters during the

penod of his suspension from practice before the Commission.

As previously reported,35 S.E.C. v. Nationa/ Student Marketing Corporation

("NSMC") was originally brought by the

Commission against NSMC and 19 others,

including two law firms and NSMC'soutslde

auditors NSMC and ItS comptroller have

thus far consented to injunctions. At the

close of the fiscal year, documentary discovery was being conducted in both the

Commission's CIVil enforcement action and

private acnons wruch had been consolidated with It for pretrial purposes

In January 1974, an Indictment charging,

among other things, conspiracy to violate

the mail and securities fraud laws was returned In the United States Distnct Court for

the Southern District of New York against

fIve officers and employes of NSMC, mcludIng the former president. In addition, two

members of the firm that audited NSMC's

financial statements, a partner and a former
aud it-manager, were charged with participating In the preparation for NSMC of a

materially false and misleading proxy

statement. See Part 1, pages 18-19 for

further information on the cnmrnal aspects

of the NSMC matter.

In S.E.C. v. Crofters, /nc.,36 the Commission brought an action against various corporate and individual defendants charging

violations of antifraud provrstons of the

Federal secunties laws in the sale of secunties to the State of Ohio, and seeking an

Injunction against further violations Most

of the defendants consented to the entry of

permanent injunctions; the complaint was

dismissed as to one defendant. After a trial,

the drstnct court permantly enjoined the

two remaining defendants, William V. Coffey and John M King.

On appeal, (the case was captioned as

S.E.C. v. Coffey,37 in ordenng the case remanded as to Coffey and dismissed as to

King, the United States Court of Appeals for

the Sixth Circuit applied standards for liability that had previously been applied only In

private actions for damages. The court, In

determining that the conduct of the defendants was not fraudulent, focused not on the

nature of the conduct Itself, but on the

characteristics of the target of the alleged

fraud and Implied that for the Commission

to establish a violation there must be actual

injury. The court held that in an injunctive

SUIt charging fraud the Commission must

show that a defendant acted In "Willful or

reckless disregard for the truth." The Commission filed a petition for certroran With the

Supreme Court in the last half of the calendar year, arguing that the standard appeared to be In conflict With Supreme Court

and other appellate authority.

InSEC. v. DO/nick 38the Courtof Appeals

for the Seventh Circuit rejected the language In Coffey requiring the Commission

to show a violation of Rule 10b-5 that a

defendant acted With "Wilful or reckless disregard for the truth," as "lnconsistent With

the law" of the Seventh CirCUIt. The court In

DO/nick also held, inter alia, that pledges of

stock at banks were sales Within the meaning of the Securities Act of 1933, and that

defendant had Violated the registration provisions ofthat Act when he pledged unregistered shares of stock with banks as collateral for loans where the loans could be repaid only through the unregistered drstnbutron of the pledged shares to the public.

Some of the pledged shares were subsequently sold In the over-the-counter market as they were released by the banks to

defendant, in order to reduce the balance of

the loans With the proceeds of the sales

In S E.C v. Spectrum Ltd.,39 the Court of

Appeals forthe Second Circuit reversed the

denial by the drstnct court of a preliminary

injunction requested by the Cornrrussron

against an attorney who authored an Opinion letter which was used to effect a drstnbunon of unregistered secunties. The drstnct court had held that the attorney's conduct did not nse to a Violation of the secunties laws since the record did not show that

the attorney had actual knowledge that he

was aiding and abetting an Illegal drstnbunon of securrtres

In remanding forfurther proceedings, the

court of appeals stated that, In a Commission injunctive action, the proper standard

to be applied In determining whether a defendant aided and abetted Violations of the

Federal securities laws IS whether that defendant acted negligently. The court emphasrzed, among others things, that the

negligence standard was not overly stnct In

the case of attorneys, In light of the unique

and pivotal role the legal protessron plays In

the effective Implementation of the Federal

securities laws.

S.E.C. v Seaboard Corp.4o-The Comrrussron filed a complaint In the Federal

Court for the Central Drstnct of California

against Seaboard and twenty-eight other

Individuals and entities. The SUit essentially

deals With the alleged mismanagement and

outright looting of a complex of mutual

funds ("Funds").

The complaint alleges that a portfolio

manager of the Funds engaged In a practice

of first purcnasmq thinly traded secunties

through nominees, then causing the Funds

to purchase the same securmes in large

volume, thereby causing a pnce rise. He

then allegedly sold rns personal holdings

either to the Funds or Into the market when

the Funds were buymq As a result, the

Funds were alleged to have lost as much as

$4,000,000.

83
The complaint also alleges that finders'

fees in excess of $200,000 were illegally

paid to affiliates of the mutual funds and

that securities were purchased, investment

advisers selected and other decisions relating to the Investment funds made m order to

benefit Seaboard and ItSaffiliates to the detriment of the Funds.

S.E.C. v. RepublIc Neuonet Life Insurance

Company. On March 8, 1974 the Commission instituted an injunctive action against

Republic National Life Insurance Company

("Republic"), Realty Equities Corporation of

New York ("Realty"), Peat, Marwick, Mitchell

& Company, Westheimer, Fine, Berger &

Co., and eleven individuals who were employees of Republic or Realty.41The Commission charged extensive violations of antifraud and reporting provisions of the Exchange Act. In essence, the complaint alleged that Republic, in trying to conceal its

failing mvestment m Realty, put millions of

dollars into Realty through certain transactions. The proceeds were usually channeled

back to Republic to repay earlier Realty

debt. Realty was thus enabled to retain suftlcient funds through the transactions to

continue in operation. Republic and Realty

and each of their independent auditors

were alleged to have made and issued false

and rrusleadmq frnancral statements.

Realty, its president and treasurer consented to permanent Injunctions enjoining

them from future violations of antifraud

provisions of the Exchange Act. In addition,

the management of Realty has been restructured in an attempt to insure that violations

of the law do not reoccur. Special counsel is

to be appointed by the court, to prosecute,

on behalf of Realty, civil actions which Realty may have. The litigation IScontinuing

agamst the remaining defendants.

S.E.C. v Talley Industries, Inc.42-0n October 30, 1973 the Commission filed a complaint seekmg injunctive and ancillary relief

against Talley Industries, Peat, Marwlck,

Mitchell & Co. and two officers ofTalley. The

complaint alleged violations of the anti.

fraud, reporting, and proxy provrsrons of the

Federal securities laws, arising out of a

merger in May 1970 of Talley with General

Time Corporation.

The complaint alleged that Talley's financial statements, which were included in a

84

joint proxy mailed in April 1970 to shareholders of Talley and General Time, were false

and misleading in greatly overstating earnings. Projections of future sales and future

production costs were alleged to have been

made without reasonable bases. The complaint also alleged that at least $8.9 million

classmed as inventory should have been

treated as an expense, which If done would

have reduced Talley's earnings for the year

ended March 31, 1969 from $1.71 per share

shown in the proxy to 62t per share.

The complaint alleged that the false earnings statements in the proxy statements

served to mislead former General Time

shareholders by misrepresenting that the

exchange ratio offered to them by Talley was

fair and reasonable.

Among other things, the complaint

sought an order directing Peat, Marwick to

implement procedures designed to prevent

the recurrence of the violative conduct alleged in the complaint, and such other relief

as necessary and appropriate to redress the

wrongs suffered by the former shareholders

of General Time.

In April 1974, Talley and the 2 officers

consented to an injunction without admitting or denying the allegations in the complaint.43 The Oornmlssron's suit was settled

by the defendants in conjunction with the

settlement of related private litigation.

S.E.C. v. Allegheny Beverage Corporation.-As previously reported,44 the Commission instituted an injunctive action

against Allegheny and 24 other defendants

alleging violations of reporting, antifraud,

and registration provisions of the securities

acts. In addition to Allegheny, the defendants include an Allegheny subsidiary, four

Allegheny officers, the company's auditors,

the underwriter of the subsidiary's public

offering, counsel for the underwriter, counsel for the subsidiary, and the escrow agent

for the public offering, Suburban Trust

Company.

On August 31, 1973, Judge George Hart

denied a Motion to Dismiss filed by certain

of the defendants. On May 14,1974, JUdge

Har.t denied cross motions for summary

judgment by the plaintiff Commission and

certain of the defendants.

In S.E.C. v. First U.S. Corporatlon,45 a

Tennessee broker-dealer and 5 of its offi-
cers and employees were named as defendants In an Injunctive action filed by the

Commission In the Western District of Tennessee. The complaint charged violations

of the antifraud provisions of the Federal

securities laws The complaint alleges that

the defendants purchased from, and sold

to, customers rnurucrpal bonds at prices not

reasonably related to current market pnces

and churned certain accounts. In one instance, the complaint alleges that the defendants induced a 70 year old widow to

engage In over 200 secuntres transactions

in a one year period involving nearly $1 million which adversely affected the customer's Interests.

S.E.C. v Investors Associates of Amenca,

Inc. 46_ The Commission filed a complaint

In October 1972 In the United States District

Court for the Western District ofTennessee,

alleging that the defendants, including 4

firms and 5 Individuals, had violated the antifraud provrsrons of the Securities Act and

the Exchange Act by having engaged In a

fraudulent scheme to sell municipal bonds.

The defendants were alleged to have used

high pressure, "boiler room" techniques

and employed a scheme in which two of the

firms traded certain secunties between

themselves In order to create an artificial

market for the securities.

In addition, the complaint alleged that the

defendants engaged in "reverse trading," a

practice whereby customers were Induced

to purchase municipal bonds at prices the

customers believed to be less than the current market prices while at the same time

the defendants purchased other municipal

bonds from the same customers at prices

unreasonably below the then current market price, thereby denving a substantial undisclosed profit from the transactions In this

action, as well as in each of the previous

SUItS filed by the Commission involving

these practices, the Commission sought

certain ancillary relief, Including disgorgement of the alleged Illegal monetary gains of

the defendants.

The defendants, all of whom had previously consented to preliminary injunctions,47 without admitting or denying the

Commission's allegations consented to

orders of permanent injunction. The orders

required also that, under certain conditions,

the defendants disgorge sums totaling

$202,990.58.48

S.E.C. v. Paragon Seounttes Co.49-0n

August 2, 1973, the Commission filed an

Injunctive action In the District Court forthe

District of New Jersey charging Paragon, 4

associated firms, and 11 individuals with

violations of the antifraud, broker-dealer

registration and other provrsrons of the

Federal securities laws

In essence, the Commission's complaint

alleges that Paragon while purportedly dealIng only In municipal bonds was in fact

dealing In other securities and failed to register as a broker-dealer with the Commission Additionally, the complaint charged

Paragon with filing false and misleading

statements with the Commission with respect to ItS financial condition and with respect to its line of business In other matters.

Moreover, the complaint charged the defendants with violations of the antifraud and

prophylactic provisions of the secuntres

acts and also alleged that they abused their

discretionary authority with respect to various accounts; that they purchased and sold

securities at prices unreasonably related to

the current market price of such securities;

and employed high pressure sales

techniques to accomplish such fraudulent

ends Additionally, the complaint charges

that the defendants made numerous fraudulent misstatements of material facts and

omitted to state material facts concerning

Paragon's relationship with ItS customers;

the pnce of the secuntres being sold; Paragon's underwriting; its Interest in the distribution of certain bonds It was seiling; and

the safety of an investment in bonds being

sold.

During fiscal year 1974, the defendants In

S.E.C. v. Charles A. Morris & ASSOCiates,

Inc., consented to permanent Injunctions,

without admitting or denying the Commission's allegations that they had engaged In

high pressure sales campaigns to induce

customers to purchase murucipal bonds at

prices as high as 75 percent In excess of

their current market value. Among other

things, the defendants consented to the

drsqorqernent of alleged Illegal profltS.50

S.E.C. v Accurate Calculator Corp. 51_

The United States District Court for the

Southern District of New York entered de85
crees of permanent injunction by consent

against Accurate, its promoter and five

other defendants enjoining them from violating the registration and antifraud provrsions of the Federal securities laws in connection with a dlstnbutron of Accurate's secunties in the United States and Canada. As

part of Its complaint the Commission alleged, among other things, that Accurate's

promoter had diverted for his own use and

benefit and other non-corporate purposes a

substantial portion of an offenng of Accurate's secunties In Canada and participated

In the preparation of a false and misleading

offenng circular relating to Accurate

The Court ordered the appointment of a

receiver for Accurate with directions,

among other things, to take custody of all

assets of Accurate and to obtain funds and

secunties diverted from Accurate by ItS

promoter and others. The Commission also

accepted offers of settlement from three respondents In an administrative proceeding

ansrnq out of the Accurate matter who had

been charged With Violating the registration

provrsions of the Securities Act. See In the

Matter of Holland Andrews & Perrier 52

S.E.C. v. WhIttaker Corporetron,53_On

February 8, 1974, the Commission filed a

complaint In the United States Drstnct Court

for the Central District of California against

Whittaker alleging Violations of the proxy

rules. The complaint alleged that Whittaker

had failed to adequately and accurately descnbe ItS relationship with ItS Independent

certified public accountants In the proxy

matenal which solicited shareholder approval for retention of the accountants for

the coming year. The defendant allegedly

had failed to disclose matenal facts concerning the settlement of a claim asserted

against the auditors In connection with

pnor audits and failed to disclose that In

Whittaker's opinion such auditors had done

Inadequate auditing for the fiscal years

ended October 31, 1970 and 1971. Contemporaneously With the filing ofthe complaint,

Whittaker, without admitting or denying the

allegations, voluntanly consented to the

entry of an order enjOining it from future

Violations of the proxy rules and requirlnq It

to set forth In its next proxy statement a full

and accurate descnption of its relationship

With ItS accountants.

86

S.E.C. v.J. Hugh Ltedtke.54---{)n July 1, 1974

the Commission filed a complaint seeking

to enjoin J. Hugh Liedtke, chairman of the

board of Pennzorl Co., William C. Liedtke,

Jr., Pennzoil's President, and Choctaw

Corp., a pnvate investment company, from

further violations of the antifraud provrsions

of the Exchange Act. The Oornrrussion's

complaint alleged that both Lredtke s,

through Choctaw Corp., purchased substantial amounts of Pennzorl stock during a

two-month period when both Liedtkes were

In possession of matenal non-public information regarding the fact that Pennzoil was

planning to spin-off ItS wholly-owned gas

pipe line substdrary, United Gas Pipe Line

Co. All three defendants consented to a

permanent Injunction against further such

Violations, and agreed to disgorge some

$108,000 to persons who sold Pennzorl

stock to Choctaw during the two month

penod.

This case IS an example of sxpedltrous

investigation and enforcement action

where the factual Situation is relatively uncomplicated and uncontested. In this case

the investigation was begun on May 28,

1974 and the complaint was filed on July 1,

1974.

SEC. v. Prudent Real Estate Trust.55-ln

May 1973, the Commission filed a complaint

seeking an injunction and other relief

against Prudent and ItS trustees, named

only in their representative capacities. The

complaint alleged that Prudent Violated

Sections 5(a) and 17(a) of the Securities Act

and Section 10(b) of the Exchange Act and

Rule 10b-5 thereunder in connection With

Prudent's offenng In March 1972, of $2.5

million principal amount of 7 percent convertible subordinated debentures and warrants.

The Oommlssron alleged that Prudent

had prearranged the sale of 50 percent of

the offering to two private investors, pnor to

the effective date of the registration statement. The registration statement discloses

neither this fact nor that Prudent had, as an

inducement to purchase, entered into a

consulting agreement with the Investors

which had the effect of providing them with

a greater return on their investment than

was to be realized by public investors Prudent failed also to disclose that these two
investors would become the largest stockholders In the Trust and that various trustees of Prudent were purchasing shares of

beneficial interest in Prudent on the American Stock Exchange throughout the offering period.

On November 9, 1973 the Court permanently enjoined Prudent from violating Sections 5(a) and 17(a)(2) of the Securities Act

with respect to securities issued by Prudent.56 The complaint was dismissed as to

the trustees. The court also ordered Prudent to redeem all its then outstanding 7

percent convertible subordinated debentures no later than February 28, 1974. Prudent consented to the entry of the order

Without admitting or denying the allegations in the Commission's complaint.

S.E.C. v. Techni-Culture, Inc. 57-The

Commission in a complaint, filed in August

1973, alleged a massive fraudulent distribution of unregistered common stock of

Techni-Culture, Inc. during the promotion

of this shell corporation as a firm involved in

an advanced form of hydroponic farming.

On April 2, 1974, after a hearing on the

Commission's Motion for Preliminary Injunction, Judge William P. Copple, United

States District Judge for the District of

Arizona, preliminary enjoined five of the

defendants from violations of the antltraudand registration provisions of the Federal

securities laws.58 In addition, he directed

these defendants to deposit any shares of

Techni-Culture, Inc. which they owned or

controlled With the court for the benefit of

public shareholders. He further ordered the

alleged principal promoter of the scheme to

file with the court a quarterly report of all his

securities holdings and prohibited him from

acting as an officer or director of any public

company, except upon a showing to the

court that measures have been taken to prevent repetition of the conduct of the nature

alleged by the Commission.

S.E.C. v. Marvin Bernstein.59-ln June

1973, the Oommrsston filed a complaint for

injunction in the United States District

Court In New Jersey against Marvin S.

Bernstein and eight others alleging violations of registration and antifraud provisions of the Federal securities laws. The

Commission's complaint alleged that the

promoters of Computron Corp., a Utah shell

corporation, had made false and misleading

statements in Computron's offering circular

and had misappropriated funds received

during its Regulation A offering.

Additionally the promoters, working with

M. Bernstein Securities Inc., a New Jersey

broker-dealer, arranged a merger With a

group of privately held New Jersey manufacturing concerns called Star-Glo Inc

The merged company, defendant Star-Glo

Industries, Inc., was unable to make the filings required by the Securities Exchange

Act because of inadequate financial and

shareholder records kept by the promoters

of Computron. Seven of the nine defendants have thus far consented to Injunctions.

The Court has also approved a plan which

enabled Star-Glo to clarify its records concerning ownership of its stock, about which

there was some question

S.E.C. v. Protesstone! Service Association, Inc.6°-Qn April 29, 1974 the Commission filed a complaint seeking injunctive

and other relief in the Western District of

Missouri against Professional Service Association, Inc. ("P.S.A."), John E. Robinson

and Hilton Patterson. The complaint alleges

that the defendants Violated antifraud proVisions of the Federal securities laws In

connection With the promotion ofthe securrties of P.S.A.

The Oommlssion alleged that the defendants were circulating false, misleading and

fraudulent promotional materials and financial statements which materially overstated the value of the company's "training

and reference" manuals. In addition, the

Oornmtsston alleged that the defendants

had forged a letter from a corporation

domiciled in Missouri which purported to

state its intention to make a substantial investment in P.S.A. Finally, the Commission

alleged that the fraudulent promotional mao

terlals, financial statements and forged letter were part of the defendants' efforts to

sollcit stock subscnptrons In P.S.A. from the

Investing public.

On the same day that the complaint was

filed the defendants consented to the entry

of a permanent Injunction without admitting

or denying the allegations in the complaint.

Robinson and Patterson agreed to offer to

rescind all agreements to purchase or sell

87
P.S.A. securities from November 1, 1973 to

the date of the consent.

The Institution of this enforcement action

represents an additional phase of the

Commission's program to deal effectively

and expeditiously with on-going current

abuses In the securities market. Within 24

hours after it had received information

concerning the illegal activity, the Commission was prepared to file a complaint

against the defendants. The defendants

thereupon promptly agreed to consent to

the injunction. It can be expected that future

Commission enforcement efforts will continue to utilize this approach to attempt to

enjoin violative conduct soon after it is discovered

S.E.C. v. Occidental Petroleum

corporeuon.v'<-sr: December 1973, the

Commission filed a complaint seeking to

enjoin Occidental and its board chairman, Dr.

Armand Hammer, from further violations of

antifraud provisrons of the Federal securities laws The Cornrntssron's complaint

charged that Occidental and Hammer had

failed to disclose in prospectuses relevant

to two public offerings of securities In 1971,

that Occidental faced potential massive

writedowns on its tanker fleet The complaint further charged that there were various other material misrepresentations in

the prospectuses With regard to its tanker

fleet which had the effect of concealing Occidental's actual financial situation. Occidental and Hammer both consented to a

permanent order enjoining them from future Violations of the antifraud provrsrons

S.E C. v. Florida East Coast RaIlway Co.

("FEC").62-The United States District

Court for the District of Columbia entered a

decree of permanent Injunction by consent

enjoining FEC from Violating the antifraud

and proxy provisions of the Federal securities laws The court additionally entered a

consent order declaring null and void proxres solicited by FEC In 1971 and 1972 in

connection with an exchange offer proposal of common stock for its outstanding

First Mortgage Bonds

The Alfred I duPont Testamentary Trust,

another defendant In the action, undertook

to offer rescission to sellers of $476,000 face

amount First Mortgage Bonds purchased

by the Trust while allegedly In possession of

88

material Inside information relating to the

railroad. The Trust and Florida East Coast's

Chairman and It President (who were both

also defendants) undertook not to engage

in any transactions in FEC securities

Without prior notification to the court and

the Commission. In view of these undertakIngs the Oornmissron determined to discontinue the proceedings against the Trust and

the two officers of the rallroad.63

S.E.C. v.snomer, Sltomer& Porges.64-ln

October 1973, the Commission filed an injunctive action In the District Court for the

Southern District of New York against the

New York law firm of Sitomer, Sitomer &

Porges, three of its partners and the Empire

Fire and Marine Insurance Company and

certain of its officers and directors, charging violations of the registration and antifraud provisions of the Federal securities

laws in connection with the registered public offering of certain securities.

The complaint alleged the lawyer defendants had received a $200,000 undisclosed

contingent fee upon the successful completion of a registered public offering by Empire

Fire, In addition to legal fees of $95,000

(which were disclosed) and paper profits of

approximately $167,000 on stock they purchased With a loan guaranteed by the issuer. Although the stock pu rchase itself was

disclosed, that the stock was subject to a

buy-back agreement and that the purchase

loan was guaranteed by the issuer was not

disclosed. The complaint alleged the compensation was received pursuant to a written compensation agreement with the issuer, which was hidden from the auditors of

the issuer.

The law firm and its partners were also

charged with attempting to employ a similar scheme in connection With an aborted

registered public offering of the securities

of another Issuer The defendants were alleged to have induced the Issuer to enter

Into a written compensation agreement

pursuant to which the defendants were to

receive an undisclosed contingent fee of

$400,000 In addition to legal fees of

$200,000 and paper profits of $900,000 on

stock of the Issuer. The stock was subject to

a buy-back agreement in the event the public offering was not successful.

Empire Fire and Marine Insurance Com-
pany and its officers and directors consented to the entry of permanent injunctions in March 1974, without admitting or

denying the allegations in the complaint.65

Empire consented also to an order directing

it to file an amended registration statement

disclosing the matters discussed above and

amendments to other filings concerning the

matter. The president and chairman of the

board of Empire consented also to an order

directing him to indemnify Empire for expenses Incurred in connection with the alleged violations, up to $100,000.The case is

pending as to the law firm and Its partners.

MULTIDISTRICT LITIGATION

Amendments to Multldistflct Litigation

Procedures-S. 2904 which was introduced

Inthe Congress In the last fiscal year,would

exempt enforcement actions brought by the

Commission from 28 U.S.C.1407.That section provides for the transfer to aSingledistrict court, for coordinated or consolidated

pretrial proceedings, of civil actions that

haveone or more common questions of fact

pending In different judicial districts. Presently, only Injunctive actions brought by the

United States under the Federal antitrust

laws are exempt from Section 1407.

Section 1407was enacted by Congress in

1968.The legislation was prompted by the

institution of more than 2,000 private antitrust damage suits filed in 35 federal district

courts following the successful criminal

prosecution under the antitrust lawsof electrical equipment manufacturers in 1961.for

this reason, the primary focus during the

hearings which led to the enactment of Section 1407was upon the problems presented

by the institution of numerous private damage actions having common parties and

common Issuesof fact. Congress did, however, recognize the need to place certain

Government ciVilactions on adifferent footing from private civil litigation. It excluded

antitrust injunctive actions brought by the

Govemment from the operation of the bill.

There were no other express exclusions

however from the bill.

Hearings on S. 2904 were held on February 20,1974 before the Subcommittee on

Improvements in Judicial Machmery of the

Senate Committee on the Judiciary. At

those hearings the Commission related

that, in its experience, the resulting uncertainty of the outcome of a motion under

Section 1407 has often caused district

courts in which the Oomnusston's enforcement action is pending, to await disposition

of the motion by the JudiCial Panel on Multidistrict litigation before proceeding With

the disposition of the Commission's action.

Even where a motion has been ultimately

denied by the Panel, 66 the Commission

often has experienced substantial delay in

its actions. When the motion is granted, the

delay in resolution of the Commission's action ISeven more substantial. For example,

in the Oornmlssron's injunctive action

against National Student Marketing Corporation.67 a motion was made to the Judicial

Panel in April 1972to transfer the Commission's case for pretrial consolidation with

private damage actions pending In other

districts. Almost eight months later, the

Panel on December 1,1972, ordered seven

related private actions transferred to the

district where the Oornrmssron's suit was

pending. These cases were consolidated

With the Commission's case for pretrial

purposes.68 The effect of that motion was to

delay the Oornmtssron's Injunctive case

substantially, and that case at the close of

the fiscal year was still only In the early

stages of discovery.

In view of the Multidistrict Panel's decision in National Student Marketmg and the

adverseeffect of that decision on the Commission's ability to obtain prompt dispositions of ItSinjunctive actions, the Commission strongly urged passage of S. 2904.

In In re Harmony Loan Co.•Inc. Securities

Litigatlon69 the Judicial Panel on Multldistrict litigation refused under 28 U.S.C.1407

to transfer to one district for consolidation

or coordinated pretrial proceedings a

Oornrnissron enforcement actlon-8.E.C. v.

Fisher7o-and to private actions all of

which contained some common questions

of fact. The Oomrrussion case and one private action were pending In one district and

the other private action was pending in

another distnct. The Panel noted that the

pending actions sought different relief and

were at different stages of development.

The minimal discovery needed in the Commission's enforcement action had been

89
completed and it appeared to the Panel that

that action was ripe for decision on the

Commission's request for injunctive relief.

Without reaching the Commission's basic

argument that the nature and purpose of a

Commission enforcement action requires

its exclusion from consolidated pretrial

proceedings with private damage SUitS, the

Panel determined that inclusion of the

Commission's case in Section 1407 proceedings could needlessly complicate and

delay final disposition of all the actions involved.

Participation as Amicus Curiae

The Commission frequently participates

as amicus cunee in litigation between private parties under the securities laws where

it considers It important to present its views

regarding the interpretation of the provisions involved. For the most part, such participation is in the appellate courts.

Manor Drug Stores v. Blue Chip

Stamps,71-Thls is an action brought to recover damages for violations of Rule 10b-5

under the Securities Exchange Act. Plaintiffs, among the alleged beneficiaries of a

government anti-trust consent Judgment

against certain ofthe defendants, were entitled to purchase shares in a newly formed

corporation allegedly at a "bargain" price.

The complaint alleges that defendants devised a scheme to dissuade the offerees, by

means of misleading statements, from purchasing the securities. The district court

dismissed the complaint on the basis of the

so-called "BIrnbaum rule," announced in

Birnbaum v. Newport Steel Corp., 193 F. 2d

461 (CA 2), cert. denied, 343 U.S. 956,

which holds that a person who is neither a

purchaser nor a seller of securities has no

cause of action under Rule 10b-5.

The Commission as amicus curiae argued

in the court of appeals that Rule 10b-5

should not be limited to actual purchasers

and sellers of securities but should extend

to all Investors and potential investors. In

the alternative the Commission contended

that the consent decree was the functional

equivalent of a contract to sell. The court of

appeals adopted this alternative argument

and reversed the drstnct court.

Defendants petitioned for a writ of cer90

tloran. The Commission, in a memorandum

amicus cunee filed In support of this petition, urged the Supreme Court to review the

matter, among other reasons, to resolve the

conflict among the courts of appeals as to

the Birnbaum rule by rejecting the rule. On

November 1, 1974, the Court granted the

petition.

In tntemettonst Controls Corp. v. Vesco,72

the Court of Appeals for the Second Circuit

held that the pro rata distribution of a

portfolio securrty by a corporation to its

shareholders was a sale Within Section

10(b) of the Securities Exchange Act and

Rule 10b-5 The court of appeals further

held that a district court could freeze assets

of defendants "to assure compensation to

those who are victims of a securities fraud."

The Special Counsel, who had been appointed for International Controls Corporation ("ICC") pursuant to a consent order of

permanent injunction entered against ICC

In S.E C. v. Vesco,73 filed a suit on behalf of

ICC against 32 indlvidual and corporate defendants alleging varrous violations of the

Federal securities laws. Among the defendants were Fairfield General Corporation and

two of its wholly-owned subsidiaries (the

"Fairfield group"), Vesco and Co., Inc. and

Robert L Vesco. Among other things, ICC

alleged that Vesco had fraudulently misled

other directors of ICC into spinning off the

company's stock holdings in the parent of

the Fairfield group to ICC shareholders.

The district court had entered several orders to prevent dlssipatron of certain assets

to which ICC would be entitled if its suit

were successful. Specifically, the district

court's orders prohibited the Fairfield

group from selling its principal asset (an

airplane) and enjoined Vesco and Co. from

selling or otherwise disposing of ItS principal asset (approximately 850,000 shares of

ICC). The district court also enjoined the

continued prosecution of a number of actions by the defendants In state courts.

The Fairfield group argued primarily that

the district court lacked jurisdiction over

the subject matter. They argued that the

spin-off of Fairfield General to ICC

shareholders was not a sale under Section

10(b) of the Secunties Exchange Act and

Rule 10b-5 thereunder because the

shareholders of ICC were in the same posl-
non after the spin-off as they had been before It. The court of appeals rejected this

argument and held that In light of the "umbrella protection placed over securities

transactions by Section 10(b) .. ICC must

be deemed a seller .... The court viewed

a recent line of cases74 which hold that Spin

offs are sales for purposes of the registration provisions of the Securities Act of 1933

as Inapposite because those cases all involved consideration flowing to the parent

corporation's principal shareholders (e.g.,

in the form of the enhanced value of the

retained shares because of the creation of

a public market for the shares). In this connection, the court rejected the Commission's argument, as amicus cunee, that

there had been consideration to ICC and/or

Vesco In the transaction.

The court stated that, "although in other

contexts the term 'sale' might appropriately

be construed more narrowly, we find emphasis on consrderation inconsistent with

the broad scope of protection under Section 10(b) for those who engage in transactions eventuating In the acquisition or disposition of securities." The court also reasoned that It should look beyond the question of whether or not there is harm to the

recipient shareholders in the stock distribution because Section 10(b) is designed for

the protection of creditors as well In the

court's view, the spin-off was a "transaction

Involving . . . the disposition of securities

and, therefore, one for which the corporation IS well deserving and entitled to the

protection of Section 10(b)."

The court of appeals affirmed the orders

of the district court freezing the assets of

the defendants, but vacated the district

court's orders enjoining the continued

prosecution of actions by the defendants in

state courts, with one exception. The court

of appeals reversed those orders which it

deemed beyond the purview of the narrow

exceptions to the Antr-lnjunction Act, 28

U.S.C. 2283.

In Safeway Portland Employees' Federal

Credit Union v. C. H. Wagner & CO.,75 the

Court of Appeals for the Ninth Circuit held,

In accordance with the views expressed by

the Commission as amicus curiae, that certain brokered bank certificates of deposit

were required to be registered under the

Securities Act. Each brokered certificate

consisted of a certificate of deposit Issued

by a bank, together with a broker's promise

to pay, upon the maturity of the certificate,

bonus Interest over and above the interest

payable by the bank. The money used by the

broker to pay the bon us interest came from

a person who was seeking a loan from the

bank and was Willing to pay a premium to

Induce an Investor to purchase a certificate

of deposit Issued by the bank so that the

bank would be willing to make a loan. The

court held that the combination of the bank

certificate With the bonus Interest "created

an integrated investment package which

must be Viewed In ItS entirety In determining

whether It ISwithin or without the Act." Noting that this package differed "fundamentally" from the underlying certificate of deposit issued by the bank since there was a

greater rate of return to the Investor, and

porntlnq out that the economic Inducement

for the purchase of the brokered certificate

was the total combined rate of Interest, the

court concluded that the package, the elements of which were "Inseparable," constituted an Investment contract and therefore

a security. The court further held that since

the package, unlike the underlying bank

certificates, was not Issued by a bank, the

exemption from registration accorded to

bank-issued secuntres was unavailable.

Reserve Life Insurance Co. v. Provuient

Life Insurance CO.76 Involved the solicitation by the trustees of an expiring voting

trust of certificate holders In the trust for

their consents to a continuation of the trust

for an additional term of ten years. The votIng trust held the controlling voting stock of

the Provident Life Insurance Co., an Issuer

that was exempt from registration under

Section 12(g)(2)(G) of the Securities Exchange Act.

In its brief, amicus curiae, the Commission argued primarily that the sohcrtatlon of

the voting trust certificate holders by the

trustees involved the offer of a security required to be registered under the Securities

Act of 1933, and that the exemption from

registration contained In Section 3(a)(9) of

the Securities Act for "[a]ny security exchanged by the issuer with its existing security holders, exclusively ... ," was not

available to the voting trust, since, In the

91

"
Commission's view, the original trust by the

terms of the trust agreement would and did

expire at the end of its original 15-year term

and the requirement of a single issuer under

Section 3(a)(9) was not met. In rejecting the

Commission's view, the court of appeals

considered the trust and its renewal to be a

single, continuing legal entity.

The court of appeals agreed with the

Commission, however, that the voting trust

was an issuer required to register its certificates under Section 12(g) of the Securities

Exchange Act. In this connection the court

upheld the validity of Rule 12g5-2 under the

Securities Exchange Act, pursuant to which

the assets of a corporation whose stock IS

held by a voting trust are attributed to the

trust in order to determine if the trust has

sutncient assets to require registration. The

court also agreed with the Commlssron that

the solicrtatlon by the voting trustees to extend the term of the trust was a sollcrtatlon

"in respect of" the voting trust certificates

as well as the underlying Insurance company stock and therefore subject to the

proxy rules. The court stated that the solicitation by the trustees constituted "a sellertation for the trustees' right to exercise indirect control over the corporation for many

years."

Finally, In response to a collateral issue

concerning what weight, if any, is to be

given to views expressed by members of the

Commiasron's staff that conflicted expressly or by implication With the Commission's position as amicus curiae, the court

of appeals held that the views expressed by

the staff do not constitute an oftlcral expression of Commission opinion and do not

bind or estop the Commission from espressinq contrary views.

In Meyerhofer v. Empire Fire & Marine

Insurance CO.77The United States Court of

Appeals for the Second Circuit held that an

attorney under the peculiar circumstances

of the case did not Violate provisions of the

American Bar Association's Code of

Protessional ResponSibility by drsclosmq

certain information relating to one of tus law

firm's clients to attorneys who represented

plaintiffs in a lawsurt against that client.

Upon learning that a registration statement and prospectus prepared by hrs law

firm relating to the public offering of the

92

client's securities did not contain certain

required material information, the attorney

reported that fact to the commlssron and

resigned from the law firm. Shortly thereafter, this material information was disclosed

in a 1D-K report filed with the Oommlssron.

As a result of that disclosure, certain

shareholders of the client filed SUItagainst it

based on its failure to Include the information in ItS registration statement and prospectus. The attorney also was named a defendant in the lawsuit. In order to demonstrate to plaintiffs' counsel that he was not

culpable and have himself dropped as a defendant, the attorney gave plaintiffs' counsel a copy of the affidavit he earlier had provided to the Commission.

On motion by the client corporation, the

district court ruled that the delivery by the

attorney of his affidavrt to the plaintiffs' attorneys, and their receipt of that affrdavrt,

Violated Canons 4 and 9 of the ABA's Code

of Professional Responsibility In that It involved the revealing of confidential information by an attorney and had the appearance of Impropriety. Accordingly, the district court dismissed the case without prejudice and enjoined the attorney who had

revealed the information and plaintiffs'

counsel from further association With the

case.

In the court of appeals the Commission

filed a brief, amicus curiae, argUing that the

delivery of the affidavit by the attorney to

counsel forthe plaintiffs did not constitute a

breach of the Code: (1) the information In

the affidavit was not confidential because it

Involved a fraud perpetrated by the client;

and (2) even if the information were confidential, the attorney had a right, under ABA

Disciplinary Rule 4-101(c)(4), to reveal the

information in the course of defending himself against an accusation.

Without reaching the issue of whether the

attorney had, in fact, revealed confidential

information, the court of appeals reversed

the dismissal of the case on the ground that

the delivery of the affidavit by the attorney to

counsel for the plaintiffs was authorized

under Disciplinary Rule 4-101 (c)(4). The

court concluded that In light of his urgent

situation, the attorney had the right to make

an appropriate disclosure of his role in the

public offering; since the affidavit was the
best evidence of his Innocence, It was also

appropriate for the attorney to turn the affidavit over to counsel for plaintiffs.

The court of appeals also reversed the

Injunction agaihst plaintiffs' counsel barring them from further association With the

case, but sustained so much of the iruunction against the attorney as would bar him

from representing the plaintiffs In their case

against the client corporation.

Merrill Lynch, Pierce, Fenner & Smith v.

Ware78 Involved a wage dispute between a

member of the New York Stock Exchange

and a former employee. Pursuant to an Exchange rule, the employee had Signed an

agreement to arbitrate all disputes arising

out of his employment. After the employee

had brought SUit in California state court,

the member firm attempted to Institute arbitration, arguing that since the Exchange

rule was adopted pursuant to the Exchange's self-regulatory power under the

Securities Exchange Act of 1934, it preempted a California statute which gave employees the right to a judrcial forum In wage

disputes regardless of any arbitration

agreement.

Commission counsel participated in the

filing of a brief for the United States as

amicus curtee in the Supreme Court. Consistent with the views expressed in that

brief, the Court held that since the Exchange rule requirlnq arbitration was, only

peripherally, if at all, related to fair dealing

and investor protection, It would not preempt inconsistent state law. The Court also

rejected the member firm's contentions that

national uniformity In regulation of exchanges required application of the Exchange rule, that the Securities Exchange

Act required the law of New York (where the

arbitration rule would be valid) to be applied

because that is where the New York Stock

Exchange ISlocated, and that application of

the California statute would unduly burden

interstate commerce.

CRIMINAL PROCEEDINGS

As a result of Investigations conducted by

ItS staff, the Commission during the past

fiscal year referred 65 cases to the Department of Justice for criminal prosecution.

This represents more than a 35 percent Increase overthe 49 cases referred during the

preceding fiscal year As a result of these

references, 40 indictments naming 169 defendants were returned, as compared to the

same number of indictments against a total

of 178 defendants during the previous year

In addition, dUring the past fiscal year, the

Commission authonzed ItS staff to file 2

Criminal contempt actions and convicnons

were obtained against 6 defendants. DUring

the past fiscal year, 81 defendants were

convicted in the 28 Criminal cases that were

tried Convictions were affirmed in 7 cases

that had been appealed, and appeals were

still pending In 7 other cases at the close of

the period.

Members of the staff of the Commission

who have Investigated a case and are familrar with the facts involved and the applicable statutory provisrons and legal pnnciples, are usually requested by the Department of Justice to participate and assist In

the trial of a criminal case referred to the

Department, and to partlcrpate and assist In

any subsequent appeal from a convrctlon,

The Criminal cases that were handled durIng the fiscal year demonstrated the great

variety of fraudulent practices that have

been devised and employed against members of the investing public.

As a result of the Oommlssron's reference

of the files in the Everest Management Corporation case,79 an indictment was filed In

the Southern District of New York which

named Morton Kaplan, Philip Zane, Jerome

Silverman, Charles Fischer, Robert Persky,

and others. Among other things, they were

alleged to have concealed the fact that approxrrnately $500,000 which had been

raised by Microthermal Applications, Inc

("Microthermal"), in a public offering of its

stock, was dissipated by, two coconspirators not named as defendants.

They thereafter caused the company to file

tmancral reports with the Commission

which indicated that the money had been

invested in certificates of deposit. Zane, Silverman and Persky were convicted after a

non-Jury trial of filing a false and misleading

Form 1D-K annual report With the Oornrnrssion and were sentenced to two years imprisonment with all but four months suspended. The judgment was affirmed on

appeal.80 A petition for certiorari is now

93
pending before the Supreme Court.

Kaplan, the former president of MIcrothermal, pleaded guilty to conspirmg

with Zane, Silverman and Persky to file the

report. He was sentenced to two years of

which four months was to be served in a

Federal institution

By virtue of their convictions in ttus case,

Zane and Silverman, both accountants, and

Perksy, a lawyer, were automatically suspended from appearing or practicing before

the Commission pursuant to Rule 2(e) of the

Commission's Rules of Practice.

In December 1973 in the case of U.S. V.

AloI,81 Vmcent T. Aloi, John Dioguardi,

Ralph Lombardo and John Savmo were

convicted of conspiracy to violate the securities laws and securrtres fraud in connection

with the securities of At-Your-Service Leasing Corp. The defendants had engaged 10 a

fraudulent scheme to acquire control of

At-Your-Service Leasing Corp. 10 order to

misappropriate corporate funds. The

scheme also mvolved the distribution of

fraudulent offering circulars. Dioguardi and

Aloi were sentenced to prison terms of ten

and nine years, respectively This case IS

particularly significant in that these repeated secunties violators received substantial terms of imprisonment.

U.S. v. Arthur J. Levine82 was a case involvmg Weis Securities, Inc. ("Weis"), a

broker-dealer firm registered with the

Commission and a New York Stock Exchange member firm. Wels collapsed financially and is currently being liquidated pursuant to the Secunties Investor Protection

Act of 1970. Arthur J. Levine, the former

chairman of the board of Wels; Sol t.eit,

former president; Alan Solomon, former

vtca-president and treasurer, Joel Kubie,

former comptroller; and Robert Lynn,

former assistant comptroller, were indicted

in this case for falslfymg the books and records of the firm in order to conceal its true

financial condition Wels, which had approximately 40,000 customer accounts IS

the largest brokerage firm ever to be hquidated under the provisions of the Act.

Lert, Kubie, Levine and Lynn each pled

guilty to one count of the indictment alleging conspiracy to violate the Federal securities laws. In addition, Leit and Levine both

pled guilty to an mformation charging each

94

of them with violations of the bookkeeping

provisions of the Exchange Act. Solomon,

the only defendant to go to tnal, was found

guilty of one count of violatmg the bookkeeping provisions of the Exchange Act.

U.S. v. Joel Kline83 and U.S. v. Max

Zerkm.84-These two cases arose out ot a

Commission rnvesnqatlon into the possible

manipulation of certain over-the-counter

stocks. Joel Klme, Enc Adolph Baer and

Donald Harrison Abrams were indicted in

connection with their efforts to obstruct the

Commission's rnvesnqatlon. They were

charged with mfluencing witnesses to testify falsely before the Commission, conceal109, altering and destroying evidence relevant to the mvestigation and committing

perjury before the Commission. Each defendant pled guilty to one count of the indictment charging conspiracy to obstruct

justice. Kline was fmed $10,000, and given a

prison term of 20 months to five years, Baer

was fined $10,000, given a suspended sentence and placed on probation for three

years; and Abrams was fmed $7,500, given a

suspended sentence and placed on probation for two years.

After Kline, Baer and Abrams were sentenced, Max Zerkm waived indictment and

pled gUilty to a one count information

charging him with manipulation of the

over-the-counter market prices for the securities of Penn Metal Fabrications, Inc.,

U.S Vinyl Corp. and Montgomery Land Investment and Development Corporation.

Zerkin was fined $10,000 and placed on

probation for three years.

United States v. Bernard Deutsch.85

After a six week trial Bernard Deutsch and

Stanley DUBoff, two New York registered

representatives and Milton Cohen, a St.

Paul, Mmnesota businessman and presrdent of Richard Packmg Company, were

found guilty on all four counts of an information filed by the U.S. Attorney's Office in

the Southern District of New York.

The information charged that the defendants conspired to manipulate and did manipulate the market price of Richard's common stock from 1968 to 1970. Deutsch and

DuBoff were alleged to have secretly directed transactions in the common stock of

the company at Kelly, Andrews & Bradley, a

brokerage firm, pursuant to a "kickback"

-
arrangement. As part of the scheme

Deutsch and DuBoff also Induced three

mutual funds to purchase 129,000 shares of

the stock at an eventual loss to the funds of

over $5 million.

The information also charged that

Deutsch, DuBoff and Cohen caused a false

and misleading offering circular to be

mailed in connection with a public offering

of 10,000 shares of Richard stock, pursuant

to a Regulation A exemption from registration.

Deutsch and DuBoff are currently under

Indictment in four other cases involving violations of the conspiracy, mail fraud and

Federal securities laws in connection with

trading In the securities of Acrite Industries

Inc., Frigitemp Corp. and Integrated Medical Services, Ltd.86

In U.S. v. The Technical Fund, Inc 87 a

twenty-count Indictment was returned

against an investment company and certain

of its officers, directors and related individuals and entities In the Federal court In

Boston. Several defendants were charged

with violations of provisions of the Investment Advisers Act and affiliated transaction

provrslons of the Investment Company Act.

This case IS one of the small number of

criminal cases charging violations of sections of the Investment Company Act.

In another Significant case, U.S. v. Manning88 a federal JUry in the Central District of

California convicted Daniel E. Manning and

David A. Wooldridge of securities fraud,

mail fraud, the sale of unregistered securities, and conspiracy in connection with

transactions in the securities of Capitol

Holding Corp. Three other defendants,

Irwin "Steve" Schwartz, Robert Eisenberg,

and Bernard Klavir failed to appear at trial

and are ctasstfled as fugitives The trial,

which lasted more than SIX weeks, disclosed that millions of unregistered Capitol

Holding shares were fraudulently sold to

shareholders throughout the United States

and Canada, that Schwartz was responsible

for a market manlputatron through Canadian brokerage firms; that Manning and a

Schwartz associate met secretly in a Los

Angeles motel and exchanged thousands of

stock certificates for large sums of cash;

that Manning and Wooldridge unlawfully

received large profits from the sale of

Capitol Holding stock through nominees;

and that Eisenberg, a former Commission

attorney, was the mastermind behind the

scheme. On September 5, 1973, Judge Irving Hill sentenced Manning and Wooldridge

each to SIX years imprisonment and fined

each $10,000.

In U.S. v Seymour Pol/ack89 a conviction

was obtained against Seymour Pollack, a

chrome secuntles Violator, on 13 counts of

an indictment charging mall fraud, wire

fraud and the sale of unregistered securities.

of Control Metals Corporation. Also convicted were Paul Sachs, an attorney practrcIng law in the District of Columbia, and William Cudd. Prior to the trial, another defendant in the case, Harold Rothman, pled

guilty to one count of the indictment charging him with the sale of unregistered securities. Stanley Kaiser, an attorney also practrcIng law in the District of Columbia, pled

gUilty to an Information charging him with

violating antifraud provtsions of the Federal

securities laws.

In U.S. v. A.J White & CO.90 Allen J. White

pled guilty to one count of an indictment

which charged Violations of the brokerdealer bookkeeping requirements of the

Exchange Act. Although bookkeeping proVISions of the Act are frequently the subjects

of Commission administrative and civil enforcement proceedings, they are infrequently the subjects of Criminal indictments.

White was fined $8,500, given a one year

suspended sentence and placed on probation for one year.

Organized Crime Program

The prosecution of securities cases IS

often based pnrnanly on circumstantial eVIdence requrrlnq extensive investigation by

highly trained personnel. The difficulties in

such investigations and prosecutions are

compounded when elements of organized

cnme are Involved. Witnesses are usually

reluctant to cooperate because of threats or

fear of physical harm Books, records, and

other documentary evidence essential to

the investigation and to a successful

prosecution may be destroyed or nonexrstent The organized cnme element is adept

at diSgUISing ItS participation in transac95
tions, through the use of aliases and

nominee accounts, by operating across international boundaries, and by taking advantage of foreign bank and other secrecy

laws. It frequently operates through "fronts"

and infiltrates legitimate business concerns Organized crime has an extensive

network of affiliates throughout this country In all walks of life, and In many foreign

nations. Despite these difficulties, the

Commission, working in cooperation with

other enforcement agencies, has been able

to make major contributions to the fight

against organized crime.

DUring fiscal year 1974, the organized

crime program focused principally on two

ends (1) increasing the Oomrrussron's effectiveness In obtaining current reliable information relating to organized criminal actrvIty In the securities Industry; and (2) aggressively pu rsuing to completion investigations of situations brought to the Commission's attention as potentially Involving the

Inftltratron of elements of organized crime

Into the ind ustry

In order to Increase the flow of reliable

data, an intelligence unit has been established In the DIVIsion of Enforcement. Its

prmcrpal function ISto maintain channels of

cornmurucanon with state, local and other

Federal agencies, as well as comparable

agencies of foreign governments, which

might have information on organized Criminal actrvitly In the securities Industry. Information received by ttus unit IS correlated

with other available information and evaluated In light of the Commission's responsrbihtles under the Federal securities laws.

Information indicating possrble securities

law violations by organized Criminal elements is relayed by the intelligence unit to

those other members of the staff whose

principal duties are to investigate actrvity by

organized crime.

Members of the staff have participated in

seminars and lectures sponsored by state

and local governments and state and local

representanves have been Included in the

Cornrmssion's training programs. This has

alerted local authortties to the role of the

Commlssron In curtarlinq organized Criminal activity In the secunties industry. Members of the Cornmlssron staff are also as96

Signed on a full time basis to certain of the

Justice Department's Organized Crime

Strike Forces. Both the Strike Forces and

the Oomrnlssron staff have thereby benefited in learning more about criminal activIty In the securities industry.

As a result of the organized crime unit's

enforcement efforts dUring the past nscat

year, there has been a dramatic Increase in

the number and Importance of actions In this

area In the past year, In cases where members of organized crime were involved, the

Commission filed mjunctive actions naming

51 persons and contributed to the return of

indictments relating to 39 indrviduals and

the convicnon of 54 individuals. Seven persons considered to be Important members

of organized crime were enjoined, two such

members were Indicted and eleven such

members were convicted on indictments returned In prior years. The cornrntssron

presently has 48 matters under investigation Involving organized crime.

Cooperation with Other

Enforcement Agencies

In recent years the Comrnlssron has given

Increased emphasis to cooperation and

coordination WIth other enforcement agencies, including the self-regulatory organizations, enforcement agencies at the State

and local level, and certain foreIgn agencies. Its programs in trus area cover a broad

range. For example, the Commission believes that certain cases are more appropriately enforced at the local rather than the

Federal level where the activities, while VIOlatmg the Federal secunnes laws, are essentially of a local nature. In these instances,

the Commission authorizes the referral of

the case to the appropriate State or local

agency, and members of the staff familiar

with It are made available for assistance to

that agency in its enforcement action.

The Commission has also fostered programs designed to provide a comprehensive exchange in information concerning

mutual enforcement problems and possible

securities violations. DUring the fiscal year,

It continued its program of annual regional

enforcement conferences. These conferences are attended by personnel from State
securities agencies, the U.S. Postal Service,

Federal, State and local prosecutors' offices and local offices of self-regulatory associations such as the NASD. They provide

a forum for the exchange of information on

current enforcement problems and new

methods of enforcement cooperation. One

result of these conferences has been the

establishment of programs for joint investigations. Although the conferences were initially hosted by the Commission's regional

offices, many State agencies are now serv1n9 as sponsors or co-sponsors. During the

past year, the Commission's Divlsron of Enforcement conducted an Enforcement

Training Seminar to which were invited representatives of all the State securities agencies and their counterparts in the Canadian

provinces. Invitations were also extended to

other Federal agencies having Investigative

or enforcement responsibilities Involving

laws relating to the issuance of or transactions in securities.

The Commission's Proceedings and litigation Records Branch continues to provide one means for cooperation on a continuing basis with other agencies having

securities enforcement responsibilities.

The Branch acts as a clearinghouse for information regarding enforcement actions in

securities matters that have been taken by

State and Canadian authorities, other governmental and self-regulatory agencies,

and the Commission itself. It answers requests for specific information and in addition publishes a periodic bulletin which IS

sent to contributing agencies and to other

enforcement and regulatory bodies. During

fiscal 1974, the branch received 3,964 letters either providlnq or requesting information, and sent out 3,023 communications to

cooperating agencies. Records maintained

by the Branch reflect a steady increase in

recent years in the number of enforcement

actions taken by State and Canadian authorities. The data in the SV (Securities Violations) Files, which IScomputerized, is useful in screening Issuers and applicants for

registration as securities or commodities

brokers or dealers or investment advisers,

as well as applicants for loans from such

agencies as the Small Business Administration.

FOREIGN RESTRICTED UST

The Commission rnalntams and publishes a Foreign Restricted List desiqned to

alert broker-dealers, financial institutions,

Investors and others to possible unlawful

distributions of foreign securities in the

United States. The list consists of names of

foreign companies whose securities the

Commission has reason to believe have recently been or are currently being, offered

for public sale in the United States In violation of registration requirements. While

most broker-dealers refuse to effect transactions in securities Issued by companies

on the list, this does not necessarily prevent

promoters from Illegally offering such secunties directly to United States investors.

DUring the past fiscal year, 7 corporations

were added to the Foreign Restricted List,

bringing the total number of corporations

on the list to 82. The follOWing companies

were added during the year:

City Bank AS.91-This is a company incorporated under the laws of Denmark,

Which, In United States publications, offered to pay 9 percent interest to United

States Investors who would open savings

accounts in Danish kroner In the City Bank

AS in Copenhagen.

Los Dos Hermanos, S.A. 92_Thrs Spanish

corporation publicly offered In the United

States bonds in 42,000 peseta (about

$735.00) denominations for the stated purpose of financing a specialized hotel In

Spain for rheumatic patients. Prospective

investors were offered bonds at a substantial discount and were promised that each

year they would receive a return of 18 percent, free round-trip air travel to Malaga,

Spain, and one week's accommodation.

Also offered were investment contracts involVing a condominium in Spain, With similar promises of an 18 percent return and

fully-paid travel and accommodations.

Global Insurance Company, Limited 93 offered In the United States "guaranteed income debentures" In face amounts of

$1,000 or multiples thereof, maturing In one

to four years and paying between 10 to 12

percent Interest per annum. In addition, the

firm represented that these investments

would be "cloaked In Swiss-like secrecy"

97
and "tax free," implying that the Investor

might avoid payment of United States income taxes on the income received.

Globus Anlage-Vermittlungsgesellschaft

NBH. 94_This German corporation advertised In newspapers In the United States

promising investors a return of 10 percent

each month on funds in amounts not less

than $1,000, or the eq urvalent of 120 percent

interest per annum The firm also represented to investors that the return on the

securities would be "tax free" through the

use of secret bank accounts in Luxembourg

and also represented that the investments

would be Insured by Lloyd's of London.

Prestige Finance Corporation Limited of

Nassau in the Bahamas solicited brokers

and dealers in the United States with a proposal to rebate secretly 15 percent of all

funds which the brokers and dealers might

persuade their customers to Invest In shares

of the stock of corporations recommended

for investment by Prestige. The initial

shares recommended were those of International Oommunlcettons Corporatlon,95 a

company said to be Incorporated in the

Cayman Islands, British West Indies. In an

accompanying prospectus, it was stated

that the company, which apparently Intended to publish a directory of telex subscnbers, would pay dividends of $1,900 for

each $100 invested.

Atlantic and Pacific Bank & Trust Co., Ltd.

of Nassau in the Bahamas 96 issued certificates of deposrt in $50,000 denominations

to United States nationals who in turn

futilely endeavored to exchange these certificates for valuable assets, including, in

one instance, eleven luxury automobiles.

On September 7, 1973, the minister of finance of the government of the Bahamas

revoked the license of the company.

James G. Allan and sons;" of Edinburgh,

Scotland engaged in an extensive newspaper and mail campaign to solicrt United

States investors to purchase Investment

contracts covering cases of newly distilled

scotch whiskey, to be held in storage in

warehouses In Scotland until the whiskey

aged and became more valuable. One letter

distributed by the firm promised a 30-34

percent return per annum. The investment

opportunities were Similar to those recently

characterized as secuntles by the courts

98

NOTES TO PART 4

1E.D. N.Y., No. 70 Civ. 1063.

254 F.R.D. 527 (W.O. Okla .. 1972).

3Rule 6 provides: ". . . A person who has

submitted documentary evidence or testimony in a formal investigative proceeding

shall be entitled, upon written request, to

procure a copy of his documentary eVIdence or a transcript of his testimony on

payment of the appropriate fees: Provuied,

however, That in a nonpubhc formal investigative proceeding the Oornmrssron may

for good cause deny such request. In any

event, any witness, upon proper identification, shall have the right to Inspect the official transcript of the witness' own testimony."

4Securities Exchange Act Release No.

10846 (June 10, 1974),4 SEC Docket 418.

5securlues Exchange Act Release No.

10637 (February 11, 1974),3 SEC Docket

542.

6Securlties Exchange Act Release No.

10636 (February 11, 1974),3 SEC Docket

540.

7Securitles Exchange Act Release No.

10590 (January 9, 1974),3 SEC Docket 359.

8SecUrities Exchange Act Release No.

10853 (June 13, 1974),3 SEC Docket 425.

9Secuflties Exchange Act Release No.

10445 (October 18, 1973),2 SEC Docket 602.

10See generally Part 2, supra.

11Secuntles Exchange Act Release No.

10214(June11,1973),1 SECDocket,No.20,

p.3.

12S~cuflties Exchange Act Release No.

10732 (April 11, 1974), 4 SEC Docket 82.

13Litlgation Release No. 6404 (June 19,

1974), 4 SEC Docket 498.

14494 F.2d 1301 (1974).

1539th Annual Report, p. 74.

16401 F. 2d 833 (CA 2,1968), cert. denied,

394 U.S. 976 (1969).

17 Previously reported In 39th Annual Report, pp. 74-75.

181nvestment Advisers Act Release No.

410 (April 30, 1974),4 SEC Docket 253.

1974 Civ. 1496 (S.D.N.Y.), Litigation Release No. 6304 (April 2, 1974),4 SEC Docket

66.

20497 F. 2d 473 (1974). 21365 F. Supp. 588 (N.D. Ga., 1973), discussed in 39th Annual Report at D. 78.

22328 U.S. 293, 29~299 (1946). 23474 F. 2d 476. cert. denied. 414 U.S. 821

(1973). 24497 F. 2d 516 (1974).

25See 39th Annual Report, p. 79.

26493 F. 2d 1027 (C.A. 2,1974). Review of

the preliminary injunction granted by the

district court at the behest of the Commission was consolidated with an appeal from a

temporary restraining order and a petition for mandamus.

27496 F. 2d 1192 (C.A. 4,1974), affirming

per curiam, 362 F. Supp. 323 (E.D. Va.,

1973).
28litigation Release Nos. 6018 and 6024

(August 13 and 16, 1973), 2 SEC Docket 308,

311.

29 Litigation Release No. 6081 (October 2,

1973), 2 SEC Docket 542.

30litigation Release No. 6217 (January 24,

1974),3 SEC Docket 447.

3173 Civil 3438 (S D.N.Y.)

32No. 73-2402.

33No. 72 CIV. 3161 (CBM).

34See 39th Annual Report, pp 83-84.

35See 39th Annual Report, pp. 84-85. 36351 F. Supp. 236 (S.D. Ohro, 1972). 37493 F. 2d 1304 (1974).

38C.A. 7, No 73-1752 (August 16, 1974).

The distnct court's oprnion may be found in

359 F. Supp. 219 (N.D. III., 1973). The case

was captioned as S.E.C. v. Pig 'N Whistle,

and was previously reported in 38th Annual

Report at pp. 77-78.

39489535 (C A. 2, 1973).

40litigation Release No. 6269 (March 5,

1974),3 SEC Docket 681.

41Litigation Release No. 6273 (March 8,

1974),3 SEC Docket 684.

42litigation Release No. 6114 (October

30, 1973), 2 SEC Docket 711.

43litigation Release No. 6330 (April 19,

1974),4 SEC Docket 151.

4439th Annual Report, p. 76.

45 Litigation Release No. 6032 (August 22,

1973), 2 SEC Docket 340.

46Litigation Release No. 5583 (October

26, 1972); previously reported 10 39th Annual Report, p. 80.

47Two defendants had also consented

during fiscal year 1973 to permanent injunctions. litigation Release No. 5763 (February

28. 1973), 1 SEC Docket No.5, p. 24.

48Litigation Release No. 6164 (December

4, 1973), 3 SEC Docket 195.

49Litigation Release No. 6005 (August 2,

1973), 2 SEC Docket 252.

50Previously reported 10 39th Annual Report, p. 80.

51Previously reported in 39th Annual Report, pp 81-82.

52See p. 76, supra.

53Litigation Release No. 6245 (February

12,1974),3 SEC Docket 563.

54Litigation Release No. 6414 (July 1,

1974),4 SEC Docket 544.

55litigation Release No. 5880 (May 9,

1973), 1 SEC Docket, No. 15, p 23.

56litigation Release No. 6143 (November

9, 1973), 3 SEC Docket 63.

57Litigation Release No. 6010 (August 2,

1973), 2 SEC Docket 254.

58Litigation Release No. 6308 (April 5,

1974),4 SEC Docket 68

59litigation Release No. 5949 (June 27,

1973),2 SEC Docket 63.

60Litigation Release No. 6347 (May 1,

1974),4 SEC Docket 257.

61Litigation Release No. 6186 (December

27, 1973),3 SEC Docket 326.

62Previously reported in 39th Annual Report, pp. 79-80.

63Litigatlon Release No. 6259 (February

25, 1974),3 SEC Docket 642.

64 Litigation Release No. 6107 (October

23, 1973),2 SEC Docket 648.

65 Litigation Release No. 6298 (March 28,

1974),3 SEC Docket 781.

66See e.g., In re Harmony Loan Co., Inc.

Secunttes Litigation, CCh Fed. Sec. L. Rep.

Para. 94,472 (J.P.M.L., No. 154, 1974); In re

King Resources Securities Litigation, 342 F.

Supp. 1179 (J.P.M L, 1972); In re Glen W.

Turner Enterprtses Litigation. 355 F. Supp.

1402 (J.P.M.L., 1972).

67S.E.C. v. National Student Marketing

Corporation, D. D.C., Oivrl Action No 225-

72.

681n re National Student Marketing Corporatlon,368F.Supp.1311 (J.P.M.L., 1973).

69J P M.L., Docket No. 154 (April 1, 1974).

7°S.D. orno, CIVil Action No 8876.

71492 F. 2d 136 (C.A. 9, 1974), cert,

granted. Docket No. 74-124.

72490 F. 2d 1334 (C A. 2, 1974).

73See discussion of this action 10 39th

Annual Report at pp. 22-23.

74See, e.g., S.E.G. v. Datronics Engineers,

Inc., 490 F. 2d 250 (G.A. 4,1973), certioren

derued, 416 U.S. 937 (1974). 75501 F.2d 1120 (1974).

76G.A. 8, No. 73-1241, June 21,1974.

77497 F. 2d 1190 (G.A. 2, 1974).

78414 U.S. 117 (1973).

7938th Annual Report. p. 81 and 39th Annual Report, pages 84, 89. litigation

Release Nos. 5768 (March 5, 1973), 1 SEC

Docket No.6, p. 27; 5971 (July 13, 1973),2

SEC Docket 155 and 6085 (October 4. 1973).

2 SEC Docket 543.

80495 F. 2d 683 (C.A 2, 1974).

81litigation Release No. 6209 (January 21.

1974),3 SEG Docket 444.

82Litigatlon Release No. 5988 (July 23,

1973),2 SEC Docket 209.

83Lltlgatlon Release No. 5889 (May 14,

1973), 1 SEC Docket No. 16, p 26.

84 Litigation Release No. 6215 (January 22.

1974).3 SEC Docket 446.

85Litigation Release No. 6394 (June 12,

1974), 4 SEG Docket 464.

86Litigation Release No. 6199 (January 11,

1974),3 SEC Docket 384.

87Litigation Release No. 6282 (March 18,

1974).3 Sec Docket 744.

88Litigation Release No. 6078 (September

27.1973),2 SEC Docket 519.

89Litlgatlon Release No. 5951 (June 28,

1973), 2 SEC Docket 64.

90litigation Release No. 5926 (June 11,

1973), 1 SEC Docket No. 20, p. 29.

91Securities Act Release No. 5409 (July

24, 1973), 2 SEC Docket 187.

92Securities Act Release No. 5507 (June

26, 1974), 4 SEC Docket 500.

93Securities Act Release No. 5478 (Apnl8,

1974),4 SEC Docket 76.

99
94Securities Aet Release No. 5417 (August

28, 1973), 2 SEC Docket 345.

95Securities Act Release No. 5415 (August

20, 1973),2 SEC Docket 313.

100

96Securities Act Release No. 5425 (September 27, 1973),2 SEC Docket 493.

97Securities Act Release No. 5458 (February 20, 1974),3 SEC Docket 566.
PART 5

INVESTMENT COMPANIES

AND ADVISERS

PART 5

INVESTMENT COMPANIES

AND ADVISERS

Under the Investment Company Act of

1940 and the Investment Advisers Act of

1940,the Commission IS charged with extensive regulatory and supervisory responsibilities over investment companies and

investment advisers.The primary responsrbility for discharging these duties lies with

the Division of Investment Management

Regulation.

Unlike other Federal securities laws

which emphasize disclosure, the Investment Company Act provides a regulatory

framework within which investment companies must operate. Among other things

the Act: (1) prohibits changes in the nature

of an investment company's businessor its

investment policies without shareholder

approval; (2) protects against management

self-dealing, embezzlement or abuse of

trust; (3) provides specific controls to eliminate or mitigate inequitable capital structures; (4) requires that an investment companydisclose its financial condition and investment policies; (5) provides that management contracts be submitted to

shareholders for approval, and that provision be madefor the safekeeping of assets;

and (6) sets controls to protect against unfair transactions between an investment

company and its affiliates.

Persons advising others on their securities transactions for compensation must

register with the Commission under the Investment Advisers Act. This requirement

was extended by the Investment Company

Amendments Act of 1970to include advisers to registered investment companies.

The Advisers Act. among other things, prohibits performance fee contracts which do

not meet certain requirements; fraudulent,

deceptive or manipulative practices; and

advertising which doesnot comply with certain restrictions.

Investment companies and assets under

the management of investment advisers

constitute Important resources for investment in the nation's capital markets. In

order to continue their role of channeling

individual savings into capital needed for

Industrial development, investment companies and investment advisers must have

the confidence of investors, and the safeguards provided by the Investment Companyand InvestmentAdvisersActs contribute to sustaining such confidence.

PROPOSED LEGISLATION

From time to time the Oomrmssron develops and proposes further legislation

which It deems necessary in the public

interest and for the protection of investors.

A number of such proposals have recently

been submitted to Congress and are currently awaiting action.

Proposed Oil and Gas Investment

Act

In June 1972.the Commission submitted

to the Congress a proposed Oil and Gas

Investment Act. The proposed legislation

would requrre registration of 011 programs

and subject them to comprehensive regula103
tion. Oil programs are generally unincorporated associations which are primarily engaged In the business of holding or investing in 011 or gas interests. They are designed

to enable their investors to obtain directly

the tax advantages provided in the Internal

Revenue Code for the oil and gas busmess,

Many of the problems with the programs

with which this proposed legislation is concerned stem from the fact that generally

ownership is separated from control. As a

result, the arrangements for the management of oil programs virtually always involve self-dealing and other transactions

and practices which may be unfair to investors.

The legislation would provide controls

desrqned to prevent conflicts of Interest and

unfair transactions between the programs

and their managers and to insure fmancial

responsibility of program managers. It

would further prohibit changes In fundamental policies of an oil program without

approval of the participants, and require

that a person acting as a program manager

do so under a written contract which contams certain provrsrons. Some provisions of

the proposed statute would be administered primarily by the National Association

of Securities Dealers With Commission

oversight These relate to sales charges,

sales literature, suitability of an investment

and a classification system for the various

forms of management compensation.

The legislation was Introduced in both

houses of the 92d Congress, but was not

acted upon. It was reintroduced In the 93d

Congress In 1973 1

Sale of Investment Adviser

In 1972, the Commission proposed legislation2 to clarify the arnbiqurty created by

the declsion of the Court of Appeals for the

Second Circurt in Rosenfeld v. Black.3 In

that case, the court held that the general

prmciple In equity that a fidUCiary cannot

sell his office for personal gain is Impliedly

Incorporated Into Section 15(a) of the Act

which requires shareholder approval of any

new Investment advisory contract Consequently, a retiring Investment adviser of

an Investment company violates the Act by

receivmg compensation which reflects

104

either (1) a payment contingent upon the

use of influence to secure approval of a new

adviser or (2) an assurance of profits for the

successor adviser under a new advisory

contract and renewals.

In submitting the proposed legislation,

the Commission expressed its view that the

prlncrples of equity were appropriately

applied to the facts of the Rosenfeld case,

which involved an outright sale by an investment adviser of its advisory contract

With a registered investment company. The

sweep of the court's language cast doubt

however on whether an Investment adviser

without Incurring liability to the company or

its shareholders, could profit when it sold its

business by selling its assets

In ItS statement accompanying the legislation, the Oornrnlssion suggested that it

would be in the public interest to remove the

uncertainty generated by the Rosenfeld decision. The amendments are intended to

permit an investment adviser, or an affiliated person of an adviser, to obtain a

profit In connection With a transaction

which results in an assignment of the adVISory contract If certain conditions are met

These conditions are designed to prevent

an Investment adviser or an affiliate from

receiving any payment or other benefit In

connectron With the sale of its business

which Includes any amount reflecting its

assurance that the investment advisory contract Will be continued.

The proposed bill was not enacted in the

92d Congress. In 1973 it was reintroduced in

modified form and passed by the senate.s m

September 1973, similar legislation was introduced In the House of Representatives.s

Institutional Disclosure

In the Letter of Transmittal of the Institutional Study Report the Oommlssion stated

that "gaps [exist] In the information about

the purchase, sale and holdings of securities by major classes of institutional investcrs," and recommended that such gaps be

eliminated by amending the securities laws

"to provide the Commission with general

authority to require reports and disclosures

of such holdings and transactions from all

types of institutional Investors."6

On April 25,1973, It was announced that
the Commission would draft and sponsor

institutional disclosure legislation requiring

all institutional investors to report all oftheir

securities holdings and their Institutionsized trades? Such institutional disclosure

would permit Commission study of the effects of institutional trading and holdings

on the securities markets, and the characteristics of institutional Investors, for the

purpose of developing possible further disclosure requirements and, If needed, further regulatory controls on Institutional investors. On July 23, 1973,Senator Hamson

A. Williams, Jr., Chairman of the Senate

Subcommittee on Securities, introduced

legislation In the Senate along these conceptual lines" with the Commission's support as to the objectives of the bill. Later, on

November 1, 1973, the Commission's own

version of Institutional disclosure legislation was introduced in the Senate.9On April

4, 1974, Representative John E. Moss,

Chairman of the Interstate and Foreign

Commerce Subcommittee on Commerce

and Finance, introduced Similar legislation

in the House of Representatlves.t?

RULES

The normal continuing review of rules in

light of changing conditions and administrative experience resulted in the revlsion or

proposed revision of several rules relating

to investment company and Investment adviser activities.

Amendment of Rule 17g-1

Rule 17g-1, before amended, required a

registered management investment company to provide and maintain a fidelity bond

in such reasonable amount as a majority of

its board of directors who were not persons

covered bythe bond should determine, subject to modification by the Commission as

to the amount, type, form and coverage of

such bond. In the last fiscal year,ll the

Commission amended the Rule to require

the amount of the bond to be at least equal

to an amount computed in accordance with

a schedule set forth in the Rule. The minimum amount depends on the gross assets

of the particular investment company.

The amendment also now makes clear

that a registered management investment

company has the option of maintaining

either a single Insured bond in which only

the Investment company is named insured,

or a joint insured bond which names as an

insured with the investment company one

or more additional parties of a type

specified In the Rule.

The amended Rule in addition now provides certain minimum factors which must

be considered by the directors of investment companies in approving the amount

and form of coverage of bonds and the portion of the premium to be paid by investment companies covered under Joint insured bonds. Finally, the amendment tightens the cancellation, termination and modification requirements of fidelity bond coverage.

Investment Company Shareholder

Account Processing Requirements

Dunngthe fiscalyear,the Commissiontook

severalsteps to enable mutual funds to provide more economical service in connection With payroll deduction plans, group

rates and retirement plans. In March 1974,

the staff posed no objection to the Investment Company Institute's proposal to

permit funds to distribute In bulk to employers for distribution to employee participants, dividend statements, proxy statements and shareholder reports, and to permit the automatic redemption of small inactive accounts under certain conditlons." At

about the same time, the Commission published a proposal to amend Rule 15cl-4

under the Exchange Act. The amendment

would relax the Rule's confirmation requirements as to purchases of mutual fund

shares pursuant to individual tax-qualified

and group plans."

Amendments of Rule 17d-1

Section 17(d)of the Investment Company

Act prohibits any affiliated person of or

principal underwriter for a registered investment company from effecting any

transaction in which the registered company,or a company controlled by it, isajoint

or a joint and several participant with the

affiliated person or principal underwriter, in

105
contravention of any rule prescribed by the

Commission for the purpose of limiting or

preventing participation by the registered

or controlled company on a basis different

from or less advantageous than that of other

participants.

Rule 17d-1 prohibits affiliated persons of

and principal underwriters for registered

investment companies from effecting any

transaction In connection with any [ornt enterprise or other joint arrangement or

profit-sharing plan In which any such registered company, or a company controlled by

such registered company, IS a participant

unless an application regarding such Joint

enterprise has been filed with, and granted

by, the Commission.

In March 1974, the Oornrnlssron proposed

for comment an amendment to Rule 17d-1

which would enable certain affiliated companies and persons affiliated with such

companies to participate in joint transactions with registered Investment companies

and companies controlled by registered investment companies without an orderofthe

Commission. Other described affiliated

persons and the prlncrpal underwriter of the

registered investment company would not

be permitted to participate or have a financial Interest In the tranaactron.t- The

amendment would also remove doubt in the

present rule by making clear that certain

registered small business Investment company ("SBIC") stock option plans may become operative without an order of the

Commission.

At the close of the fiscal year, the staff was

analyzing comments received on the proposal; adoption of a rule in this area was

expected soon.

Temporary Rule 6c-2(T) and

Proposed Rule 6c-2 Regarding

Alaska Native Claims Act

Corporations

In February 1974, the Commission

adopted Temporary Rule 6c-2(T) 15 to

exempt corporations recently organized

pursuant to the Alaska Native Claims Settlement Act of 197116 ("Settlement Act corporations") from most sections of the Investment Company Act, pending action on

proposed Rule 6c-2.

106

Settlement Act corporations were created

to hold, administer, and distribute the land,

mineral properties and cash which the

United States Government awarded Alaska's Native Indian, Aleut and Eskimo population in settlement of their aboriginal

claims to land in the State of Alaska. These

corporations are owned and managed exclusively by the Alaska natives; over 200

such entities, representing the various regions and Villages in the state, have been

established. Stock in the corporations has

been given to each eligible native and may

not be traded until after January 1, 1992.

These corporations may be viewed as investment companies Within the meaning of

the Act because, pursuant to the terms of

the Settlement Act, they have received significant amounts of the cash portion of the

settlement prior to acquisition of the land

and minerai assets to which they are entitled, and much of this cash has been invested In securities.

Under Rule 6c-2(T), Settlement Act corporations that register with the Commission

under Section 8(a) Will be exempt from all

provisions of the Act except Sections 9, 17,

36, and 37.17 Proposed Rule 6c-2, If adopted

as proposed, would provide the same relief.

MUTUAL FUND DISTRIBUTION

The Oornrmssron has for some time been

concerned about inefficiencies and inequities in the process by which mutual

funds are sold to the public. Of particular

Interest has been the retail price maintenance system, a fundamental aspect of the

distribution process. Under present law, in

the sale of a mutual fund security to the

public, the principal underwriter and any

dealer must sell the security at the current

pubtlc offering price-net asset value plus

stated sales Charge-set forth in the prospectus. The Section thereby precludes retail price competition In the sale of mutual

fund shares.

In 1969 the Committee on Banking and

Currency of the United States Senate requested that the Commission study the potentral consequences of repeal of the section and report its findings to the Committee. Such a study was conducted by the

Commission's staff, and its report, entitled
"The Potential Economic Impact of the Repeal of Section 22(d)," was transmitted to

the Committee in November 1972. The

Commission held public hearings in February and March 1973, to explore the major

Issues in the marketing of mutual funds and

the laws and regulations which affect them.

A broad range of subjects was covered including further liberalization of mutual fund

advertising rules; measurement and portrayal of Investment results and proposed

rules to permit group sales or pooling of

orders for the purpose of obtaining quantity

discounts. The public hearings Included 15

days of testimony from 72 witnesses.

Among others testifying were representatives of the Department of Justice,

the NASD, mutual fund underwriters and

managers and various trade associations

(including the Investment Company Institute, the No-Load Mutual Fund Association,

the Securities Industry Association, the Independent Broker Dealers Trade Association, the National Mutual Fund Managers

Association, and the American Life Insurance Association). More than 100 written

subrnlssrons, many of which were quite extensive, were also made.

At the end of the fiscal year, the staff was

nearing completion of a comprehensive report on the mutual fund distribution system

and was preparing to submit its recommendations to the Commission.

As part of its efforts to deal with the problems in this area the Commission adopted

Rule 22d-2, effective as of March 29,1974.18

The Rule permits an investment company to

offer a shareholder who has redeemed investment company shares a privilege to

reinvest an amount not in excess of the proceeds, in shares of the same company or In

any investment company which offers

shareholders In that Investment company

an exchange privilege at net asset value.

This reinvestment privilege (a) must be offered pursuant to a uniform offer described

in the prospectus or supplements thereto

filed pursuant to Rule 424(c) under the Securities Act; (b) may be exercised only once

by an investor with respect to any particular

investment company; and (c) must be exercised within 30 days of redemption.

Action may be taken In the near future

with respect to two other significant rule

proposals which were published shortly before the 1973 mutual fund distribution hearings and which were the subject of comment and testimony at those hearings. One

is a proposed amendment of Rule 22d-1

under the Investment Company Act to permit quantity discounts for group purchases

of open-end investment company securities

under certain limited circumstances.ts The

other ISa proposed amendment of Rule 134

under the Securities Act to permit greater

flexibility In investment company advertisements by expanding the categories of

information Includible in the advertisements.20

Litigation Relating to Mutual

Fund Distribution

In early 1973, the Department of Justice

and private persons separately brought civil

suits in the District Court for the District of

Columbia, alleging that the defendants (including several funds, underwriters, dealers, the NASD, and the Investment Company

Institute) had conspired, In violation of the

Federal antitrust laws, to inhibit a market for

brokerage transactions In fund shares and

to suppress growth of a secondary dealer

market in fund shares. Specifically, plaintiffs attacked the agreements between the

principal underwriters and the dealers in

fund shares, which require dealers to sell to

everyone at net asset value plus a stated

sales load (the current public offering

price). Moreover, all redemptions of shares

are made by a particular fund at the prevailing net asset value. This precludes a competitive secondary market.

Defendants moved to dismiss the complaints on various grounds. The Commission set out its position in a letter to the

district court. After oral argument, on December 14, 1973, the court dismissed the

complaints for failure to state claims upon

which relief could be granted.21

The court held that the challenged conduct was explicitly authorized by the Act

and thereby immune from antitrust challenge. The court noted first that the mutual

fund distribution network was "patently

repugnant to the free and open competition

requirements of the Sherman Act," but that

plaintiffs had conceded antitrust immunity

107
for the primary distribution system. The

court stated that plaintiffs had failed to take

into account the fact that the maintenance

of a free and open secondary market would

be totally inconsistent with and might destroy the primary marketing system created

by the Act and particularly by Section 22(d),

the repeal of wrucn, the court noted, had

several times been urged upon Congress

with no success. The court further stated

that Congress knew of the existence before

the passage of the Act of a secondary market In shares of mutual funds termed the

"bootleg" market, and wanted to suppress

this market. By Section 22(f), a fund was

given the right to limit transferability of Its

shares; by Section 22(d), all dealers, including non-contract dealers, were required to

maintain the public offering price. "Congress designed Sections 22(d) and 22(f) to

create and protect a primary distribution

system which is repugnant to the antitrust

laws and did so in complete recognition of

the fact that the legislature would frustrate

the growth of a free secondary market." In

this manner, non-contract dealers would be

deprived for all practical purposes of a supply of fund shares other than through the

contract dealer network.

The court also held that the practices

challenged were impliedly immune from the

antitrust laws. The court found that the

Commission and the NASDwere given pervasive statutory control over the area. Indeed, Section 15A(b)(8) specifically requires the Commission to employ antitrust

standards when reviewing rules promulgated by the NASD The court concluded

that Congress "clearly Intended to substitute a pervasive regulatory scheme, i.e.,

Section 22 of the 1940 Act, for the usual

antitrust prohibitions in the narrower area

of distribution and sales of mutual fund

shares.

The Department of Justice filed an appeal

directly to the Supreme Court under the Expediting Act. On October 7, 1974, the Supreme Court noted probable [unsdlction.

VARIABLE ANNUITY

ILLUSTRATIONS

For a number of years, representatives of

the life insurance industry have maintained

108

that variable annuity contracts could best

beexplained through the useof illustrations

based on hypothetical investment experience. These illustrations have not been

permitted by the Commission's 1957Statement of Policy which governs.

After the close of the fiscal year, the

Commission proposed for comment an

amendment to the Statement of Policy to

permit variable annuity illustration The

proposal is designed to allow portrayal of

the operation and unique characteristics of

variable annuities and provide a baSISfor

meaningful comparisons of potential costs

and benefits of different variable annuity

contracts.22

RECIPROCAL BROKERAGE

PRACTICES

Over the past several years, the Commission has been qurte concerned with reciprocal brokerage practices. And, In February

1972,in its "Statement on the Future Structure of the Securities Markets," the Commission urged the NASD to initiate measures designed to terminate reciprocal practices. Thereafter, in May 1973, the NASD

adopted a new sub-section (k) to Article III,

Section 26 of its Rules of Fair Practice (the

"Anti-Reciprocal Rule"). This rule broadly

prohibits reciprocal arrangements with respect to the sale of mutual fund shares and

the allocation of brokerage by fund managers.

Recently, the NASD and representatives

of the investment company and securities

industries requested the Commission to review suggested interpretations of and

amendments to the Anti-Reciprocal Rule. In

response, the Commission at the close of

the fiscal year announced that it would hold

public hearings23 to consider the folloWing

Issues:(1)whether there is any relationship

between the comparatively high portfolio

turnover ratesof investment companies and

the allocation of brokerage on the basis of

sales of shares of investment companies;

(2) whether existing shareholders benefit

from such allocations; (3) whether there is

any pressure on investment companies to

select broker-dealers which do not haveadequate capabilities to provide best execution; (4) whether broker-dealers recom-
mend shares of particular investment companies to customers on the basis of allocation of brokerage; and (5) whether such allocations of brokersage create anticompetitive Impacts on smaller investment companies and broker-dealers.

NUMBER OF REGISTRANTS

As of June 30, 1974, there were 1,288 investment companies registered under the

Investment Company Act. with assets havIng an aggregate market value of over $62

billion. Those figures represent a decrease

of 73 In the number of registered companies

and a decrease of nearly $11 billion In the

market value of assets since June 30,1973.

Further data IS presented in the statistical

section of this Report. At June 30. 1974.

3.014 investment advisers were registered

with the Commission. representing an increase of 122 from a year before

During the year, the staff of the Commission conducted 168 investment company

examinations and 283 investment adviser

examinations As a result of the Commission's Inspection and Investigation program. numerous violations of the Investment Company Act and of the Investment

Advisers Act were uncovered. and approxrmately $669.281 was returned to Investment

companies and their shareholders. Fortyone investment company and 16 Investment

adviser matters were referred to the Division

of Enforcement for possible action.

APPLICATIONS

One of the Commission's principal activities in its regulation of investment companies and investment advisers is the consideration of applications for exemptions

from various provisions of the Investment

Company and Investment Advisers Acts or

for certain other relief under these Acts. Applicants may also seek determinations of

the status of persons or companies. During

the fiscal year. 279 applications were filed

under both acts. and final action was taken

on 261 applications. As of the end of the

year. 176 applications were pending under

both Acts. Of the totals described, the predominant number were applications under

the Investment Company Act. With respect

to the Advisers Act. only four of the applrcanons filed sought relief from ItS provrsrons:

final action was taken on two such applications, and four were pending at year end

By virtue of Section 17 of the Investment

Company Act. affiliates of a registered investment company cannot participate In a

JOint arrangement or JOint enterprise With

the registered company or purchase secunties from or sell securities to the registered

company unless they first obtain approval

of the Commission pursuant to Section 17.

Many of the applications filed under the Investment Company Act relate to this Section.

Section 3(a)(1) of the Act defines "investment company" to Include any issuer

which IS engaged primarily In the business

of Investing. reinvesting or tradrnq in secunties. However, Section 2(b) exempts from all

provrsions of the Act any agency. authority

or instrumentality of the United States

Student Loan Marketing Association

("SLMA") IS a United States Governmentsponsored private corporation created by

the 1972 Amendments to the Higher Education Act of 1965. Its purpose is to provide

liquidity to lenders under the Guaranteed'

Student Loan Program ("GSLP"). another

Congressional program pursuant to which

the United States Government, the States,

and a limited number of non-private agencies Insure loans made to students by ellqrble lenders. SLMA is authorized to make

advances on the security of. purchase. service. sell or otherwise deal in GSLP loans at

prices and on terms and conditions determined by SLMA.

SLMA filed an apphcation pursuant to

Section 6(c) of the Act for exemption from

all of the provisions of the Act.24 SLMA

maintained that the participation in and

control over ItS activities by the United

States Government was sufficiently comprehsnsrve to warrant treatment of SLMA as

an Instrumentality of the United States Government Within the meaning of Section 2(b).

SLMA cited the control of the Government

over ItS functions and the statutory

privileges accorded ItS secuntlessprlvlteqes

generally reserved for quasi-governmental

organizations SLMA stock and obligations

are "exempt securities" within the meaning

of the Federal securities laws to the same

extent as securities which are direct oblrqa109
tlons of or obligations guaranteed as to

principal or interest by the United States.

SLMA argued that certain of its functions

could not practically be performed if it were

required to register. Based on the application, the Commission exempted SLMAfrom

the Act to the extent it might be deemed

subject to iUs

The Bank of New York acts as custodian

of the assetsof eight plans for the accumulation of mutual funds shares. Since

amounts contributed by participants in

such plans are invested In mutual fund

shares,the plans themselvesare investment

companies and are registered under the Act

as unit investment trusts. Section

26(a)(2)(0)of the Act requires acustodian of

a unit investment trust to be In possession

of all securities or other property in which

the funds of the trust are Invested. Strict

compliance with this provision requires

such a custodian to have physical possession of stock certificates representing

mutual fund shares owned by a plan. However, the Bank, together with the sponsors

of the involved plans, applied for an exemption from Section 26(a)(2)(0) to permit the

Bank to hold up to 5 percent of the fund

shares owned by the plans in the form of

"book shares," i.e., as entries on the records of the transfer agent of the mutual

funds.26The Commission, by the Division of

Investment Management Regulation, approved the application based on the applicants' statement of the Impracticality of

compliance and the lack of danger to mvestors.27

As previously reported,28 In September

1971,Pacific Scholarship Trust Sponsored

by the Pacrnc Scholarship Fund filed an application requesting exemptions from certain sections of the Investment Company

Act to permit the sale of scholarship plans.

The plans would require investors to deposit sums In bank savings accounts, from

which earnings would be periodically transferred to atrust fund and mvestedto provide

funds for the eventual college education of

designated child beneficiaries. A portion of

the payouts to students who did attend college would be derived from amounts forfeited by other investors in the plans. A for110

teiture would result if the designated child

failed to enter college or to complete the

first year successfully, or if the investor

failed to maintain his savings account or to

make required periodic payments. In order

to offer plans which include such a forfeiture feature, the trust required exemptions

from several sections of the Act, including

an exemption from Section 27(c)(1), which

prohibits the sale of non-redeemable

periodic payment plan certificates. After

hearings, the parties waived an initial decision and the Commission heard oral argument.

On October 31, 1973, the Oornmlssron

denied an exemption from Section 27(c)(1).

It found that applicant had failed to show

forfeitures and dilution of planholder interests to be consistent with the protection of

investors and the purposes of the Act or to

be necessary or appropriate In the public

interest 29In reaching this result, the Commission specifically overruled its previous

decision in The Trust Fund Sponsored by

the Scholarship Club, Inc.3o

Litigation Involving Applications

In Independent Investor Protective

League v. S.E.C.31the Court of Appeals for

the Second Circuit dismissed, for lack of

standing, petitions filed by the Independent

Investor Protective League, an organization of mdividual investors, to review the

propriety of the Commission's entry of

orders granting exemptions from provisions of the Investment Company Act to

certain applicants. The reviewprovisions of

the Act grant standing to "any person

or party aggrieved" by an order of the

Oommissron. The court agreed with the

Commission that, in the absenceof a showing that the League or any of its members

owned securities of the applicant companies or suffered any actual injury or discrimination as a result of the Commission's

orders, the League had no standing to obtain court review under the Investment

Company Act. The court deemed insufficient petitioner's claim that its members

might in the future own securities of the

applicant compames.
NOTES FOR PART 5

1H.R.6821, S.1050(93d Cong., 1stSess.).

2S. 3681, H R. 15304 (92d Congo 2d Sess.).

3445 F. 2d 1337 (1971).

4S. 470 (93d Cong., tst Sess.).

5H.R. 10570 (93d Cong., 1st $ess.).

6 SEC,/nstitutiona//nvestor Study Report,

H.R. Doc. 64, 92d Cong., 1st Sess., Vol. 1 at

X, XI (March 10, 1971).

7Democracy In the Markets, an Address

by then SEC Chairman G. Bradford Cook

Before the Economic Club of Chicago, April

25, 1973, at 20-22.

8S. 2234 (93d Cong., 1st Sess.).

9S. 2683 (93d Cong., 1st Sess).

10H.R. 13986 (93d Cong., 2d Sess.).

11Investment Company Act Release No.

8267 (March 14, 1974), 3 SEC Docket 704.

12Letter from Director, Division of Investment Management Regulation, to President, Investment Company Institute, March

13,1974.

131nvestment Company Act Release No.

8275 (March 15, 1974), 3 SEC Docket 714.

141nvestment Company Act Release No.

8273 (March 14, 1974),3 SEC Docket 711.

15Investment Company Act Release No.

8251 (Feburary 26, 1974), 3 SEC Docket

631.

1643 U.S.C. 1601, et seq.

17Section 9 generally prohibits certain

persons from controlling an investment

company. The remaining sections essentrally are designed to prevent self dealing

on the part of the persons controlling the

investment company.

181nvestment Company Act Release No.

8235 (February 20, 1974),3 SEC Docket 579.

191nvestment Company Act Release No.

7571 (December 21, 1972).

20Securities Act Release No. 5537, Investment Company Act Release No. 7632

(January 18, 1973).

21 U.S. v. NASD, dismissed sub nom. Haddad v. Crosby Corp., CCH Fed. Sec. L. Rep.

Para. 94,319, 1973, probable JUrisdiction

noted U.S.S. Ct. (October 14,1974).

22Securities Act Release No. 5516 (July

30, 1974),4 SEC Docket 647.

23Securitles Exchange Act Release No.

10867 (June 20,1974),4 SEC Docket 474.

241nvestment Company Act Release No.

8077 (November 8, 1973), 3 SEC Docket 23.

251nvestment Company Act Release No.

8121 (December 3, 1973), 3 SEC Docket 186.

261nvestment Company Act Release No.

8136 (December 12, 1973), 3 SEC Docket

241.

271nvestment Company Act Release No

8176 (January 11, 1974),3 SEC Docket 381.

2839th Annual Report, p. 104.

291nvestment Company Act Release No.

B065 (October 31, 1973), 2 SEC Docket 702.

30Investment Company Act Release No

5524 (October 25, 1968).

31495 F. 2d 311 (CA 2, 1974).

111

PART 6

PUBLIC UTIL

HOLDING COMPANIES

PART 6

PUBLIC UTILITY

HOLDING COMPANIES

I

Underthe Public Utility Holding Company

Act of 1935, the Commission regulates interstate public utility holding company systems engaged In the electnc utility business

and/or retail dlstnbution of gas The Commission's Jurisdiction also covers natural

gas pipeline companies and other nonutility companies which are subsidiary

companies of registered holding companies. There are three principal areas of

regulation under the Act: (1) the physical

integration of public utility companies and

functionally related properties of holding

company systems,and the simplification of

intercorporate relationships and financial

structures of such systems; (2) the financing operations of registered holding companies and their subsidiary companies, the

acquisition and disposition of secunties

and properties and certain accounting

practices, servicing arrangements, and intercompany transactions; (3) exemptive

provisions relating to the status under the

Act of persons and companies, and provrsions regulating the right of persons affiliated with a public-utility company to become affiliated with another such company

through acqursrtron of securities

COMPOSITION

At the end of calendar year 1973, there

were 22 holding companies registered

under the Act.' Twenty were included in the

17 "active" registered holding company

systerns.s The remaining two registered

holding companies, which are relatively

small, are not considered part of "active"

systems.s In the 17 active systems, there

were 78 electnc and/or gas utility subsidlarles, 63 non-utility subsidianes, and 16

Inactive companies, or atotal, including the

parent holding companies and the subholding companies, of 177 system companies.

Table 27 In Part 9 lists the active systems

and their aggregate assets.

PROCEEDINGS

New England Electflc System," The

Commission approved a plan submitted by

NewEngland Electric System("NEES"), for

the saleof three of ItSgas utility subsidianes

and of an LNG-gas subsidiary to Eastern

Gas and Fuel Associates, an exempt holding company." A Massachusetts township

and other intervenors which had opposed

the acqursrtlon by Eastern entered into a

settlement and withdrew from the proceeding. The Commission noted that the acquisition by Eastern was not subject to its approval under Section 10,and stated: "Since

the participants have settled their dispute

and withdrawn from the proceeding, we

haveno occasion ... to consider our jurisdiction, If any, With respect to the alleged

consequences of Eastern's acqusltion.'

In aseparateproceeding the Commission

approved the sale, for cash, of Lawrence

Gas Company, ("Lawrence"), the last remaining NEES gas subsidrary, to Spnngfield Gas Light Company (now Bay State

Gas Company), an exempt holding company 6 The plan provided for the retirement

115
of the publicly held minority stock In Lawrence. In addition, Bay State agreed to pay

for the minority stock the same price per

share that NEESreceived for its stock interest in Lawrence.7

The Association of Massachusetts Consumers opposed the acqursrtron and requested a hearing. The Commission denied

the request" and a subsequent petition for

reheannq." The Association has filed a petition for review in the court of appeals."

which at the close of the fiscal year was

pending.

Utah Power and LIght Company. An application was filed by Utah Power and Light

Company ("Utah"), an operating company

as well as a registered holding company,

seeking permission to acquire all of the assets of The Western Colorado Power Company ("Western Colorado"), its sole subsidiary utility company, thus terminating its

holding-company status under the Act. The

Commission ordered a hearing principally

to determine whether the proposed merger

of the Western Colorado system with the

Utah system would satisfy the Integration

standards of Section 11(b)(l) of the ACt.11

Prior to hearing, Utah withdrew its application, consented to an order that it divest

Western Colorado pursuant to Section

11(b)(l), and submitted a plan under Section 11(e) to sell the assets of Western Colorado. Utah accepted one of three final offers for the assets, subject to Commission

approval A hearing has been held on the

proposed sale. At the close of the fiscal

year, the matter was pending.

Delmarva Power & Light Company. 12-0n

June 26, 1974. an administrative law judge

rendered an initial decrsion In consolidated

administrative proceedings to determine

whether under Section 11(b)(l) of the Act

Delmarva,an operating utility company and

a registered holding company, should be

required to divest ItSgas utility properties

and whether Delmarva's application for

exemption from the Act under Section

3(a)(2),should be granted The administrative law judge found that Delmarva's gas

sytem was not retainable under Section

11(b)(1), but that Delmarva was entitled to

an exemption from the Act under Section

3(a)(2). He accordingly concluded that the

11(b)(1) proceeding should be dismissed

116

and that divestiture should not be ordered.

He further concluded that the current

shortage of gas supply made it unnecessary

to require at this time that the exemption be

conditioned on divestiture of the gas properties. The Division's petition for review was

granted by the Commission and briefs 'have

been filed.

Union Electric Company.13 The Commission granted Union Electric Company ("Union"), an exempt holding company, permission to acquire the common stock of MIssouri Utilities Company("MU").14 The

Commission also continued Union's

exemption as a holding company under

Section 3(a)(2) of the Act.

The Commission declined to impose

conditions requiring Union to divest MU's

small water properties and a small isolated

electric distribution property of MU which,

unlike the other properties of MU,would not

be a part of Union's integrated electric system.lt held that an acquisition by an exempt

holding company was not rigidly governed

by the Integration requirements of Section

11(b)(l) and that the minuscule size and

other characteristics of the nonintegrated

properties did not warrant a finding that

their acquisition by Union, as an exempt

holding company, was contrary to the Act

under the "unless and except" clause of

Section 3(a).

The Commission also held that it would

not order at this time divestiture of the gas

properties of Union and MU. It took note of

the recent adverse developments in gas

supply and concluded that it could not decide on the record whether such divestiture

should be ordered. It considered further

hearings In the pending proceeding inappropriate In view of the current state of the

Industry. The City of Cape Girardeau, Missouri, has filed a petition for review in the

court of appeals, which is pending.15

General Public Utilities Corporation. The

Commission authorized, pursuant to Sections 6 and 7of the Act, certain amendments

to the first mortgage bond indenture of Metropolitan Edison Company ("Met Ed"), a

subsidiary of General Public Utilities, and

authorized also the solicitation of proxies

for bondholder consent to those amendments.16Later, Met Ed filed a request for an

extension of time to solicit the requisite
consents. The Commission ordered a hearIng,17 at which a bondholder, Walplan and

Company, opposed the solicitation, alleging that the proxy material was false and

misleading. Walplan also urged that the

amendments were contrary to the Act. In its

brief to the Oomrnlssron, the DIvision supported Met Ed's position The matter IS

pending before the Commission

Prior to its appearance in the administrative proceeding, Walplan sued Met Ed 18 alleging that Met Ed's proxy statement was

false and misleading, substantially in the

same respects as urged before the Commission. The suit was dismissed by the district court. Walplan appealed.t'' The Commission filed a brief amicus curtee urging

that the district court had no Jurisdiction to

entertain the complaint. The case IS now

awaiting decisron by the court of appeals.

John H. Ware-Penn Fuel Gas, Inc An

individual, John H Ware, III, filed an application In 1969 to acquire a controlling stock

Interest In North Penn Gas Company, an

operating gas utility, which was at that time

unaffiliated with Ware or Penn Fuel Gas,

Inc, an exempt utility holding company

controlled by Ware Ware's application was

approved on condition that the minority

stockholder interest In North Penn be elrrrunated.2o Ware and Penn Fuel filed a plan

under Sections 9 and 10, offering to Issue

shares of Penn Fuel stock in exchange for

all the outstanding shares of North Penn

stock held by Ware and by the minority.

The Commission issued a notice and

order for hearing.21 The principal issue was

whether the proposed exchange offer satisfied Ware's commitment to eliminate the

North Penn minority In light of the fact that,

under the exchange offer, the minority

stockholders of North Penn would become

minority stockholders of Penn Fuel A

number of rninonty shareholders appeared

to oppose the exchange offer. The matter

was pending at the close of the fiscal year.

FINANCING

Volume

DUring fiscal 1974, a total of 15 active registered holding-company systems issued

and sold 62 issues of long-term debt and

capital stock pursuant to authonzations by

the Commission under Sections 6 and 7 of

the Act. All of the issues were sold at competitive bidding. Except for approximately

$85 million needed to refund maturing

long-term debt, all of the Issues were for

purposes of raising new capital Table 28 In

Part 9 presents the amount and types of

securities Issued and sold by these holding

company systems.

The volume of external financing by these

companies aggregated $2.562 billion in fiscal 1974, a decrease of 5.7 percent from the

total of $2 715 billion the prior fiscal year.

Leasing

Rule 7(d) adopted In fiscal year 1973 requires lessors of utility equipment to file

Form U 7D for each lease of utility equipment.22 DUring the initial filing period endIng July 31, 1973, a total of 21 certificates

covering $562 million In leased facilities

were filed. DUring the period August 1,

1973-June 30,1974, a total of 16 certificates

were filed covering leased property valued

at approximately $100 million.

Rule 7(d) concerns the status ofthe lessor

under Sections 2(a)(3) and 2(a)(4) of the Act.

but does not deal With the regulatory requirements applicable to the public-utility

company as lessee. Since Section 2(a)(22)

of the Act includes a lease within the definition of the word "acqursttion," the leasinq

of utility assets, such as generating equipment or nuclear fuel, IS an acqursitron subject to Section 10. In a case of first rmpressron, the Commission approved under Section 10 the leasinq of nuclear fuel, at an

estimated cost of about $40 million, by Arkansas Power & Light Co. ("AP&L"), a subsrdiary of Middle South Utilities, Inc 23 Although, as a mat1erof accounting, AP&L did

not propose to capitalize the lease obligation, the Commission stressed that the lease

must be considered under Section 10(b)(3),

which "requires registered systems to

maintain an appropriate balance of equity

capital. . [which] requirement cannot be

avoided by indiscriminate use of lease obhgatlons.24 The Commission found that the

lease in question did not have the effect

proscribed by Section 10(b)(3).

117
Competitive Bidding

The Commission's Rule 50, adopted m

1941,25 requires that securities issued by

registered holding companies or their subsidiaries be sold by competitive biddmg,

where two or more mdependent bids have

been received, the best bid may be accepted

by the issuer without further authorization

by the Commission. For more than 30 years,

Rule 50 has provided an effective and economical procedure for marketmg utility securities. In 1974, a group of registered holdmg companies and security underwriters informally presented to the Cornrnissron information and studies purportmg to show

that recent, generally unsettled securities

markets, high mterest rates and the utilttres'

unprecedented demand for new capital,

have (1) adversely affected the capacity of

the secunties industry to handle utility

common stock Issues and (2) rendered It

unfeasible for the utility industry to raise

effectively the required common equity capital through competitlve bidding.

Based on that preliminary presentation

and on ItS own awareness of prevailing

conditions in the securities markets, the

Commission on July 19, 1974 noticed for

comment a proposed temporary suspension of the competitive biddmg requirements of Rule 50 with respect to the sale of

common stock of registered holding companies. In its release, the Commission

stated, ". . . It appears that registered holding companies under our jurisdiction have

reason for concern as to their ability to

comply with Rule 50 m the immediate future. The risks of contmued insistence on

competitive biddmg procedures for holdmg

company common stock Issues seem substantial In comparison With the effects of a

temporary suspension of that requirement." 26The issuance and sale of preferred

stocks and debt obligations of registered

holding companies or their subsidiaries

would however continue to be subjectto the

full requirements of Rule 50.

Revenue Bonds

As an additional source of capital, electric

utility companies have turned increasingly

to the use of tax-exempt revenue bonds to

118

finance the substantial costs of pollution

control equipment. Typically, such trnancmg arrangements, made with local governmental authorities, involve the Issue and

sale of revenue bonds by the authonty m an

amount equal to the estimated cost of the

facilities; disbursement of the bond proceeds to cover construction expenditures;

and, when construction IS completed, the

sale of the facilities to the utility company

pursuant to an mstallment-sale contract.

The sale contract, which is pledged as security for the revenue bonds, obligates the utilIty company to make semi-annual payments

thereunder rn amounts sutncient to cover

interest and principal, when due, on the related revenue bonds In some cases the

company also pledges a special series of

first mortgage bonds Issued under its own

mortgage indenture as additional security

for holders of the revenue bonds

In each case the transaction IS "capitalized" on the company's books, i.e., the

pnysrcal equipment IS Included In plant account and the liability (equal to the pnncrpal

amount of the related revenue bonds) is included in long-term debt. Besides facilitatIng the companies' compliance with a wide

range of laws and regulations aimed at environmental protection, the tax-free revenue

bond financmgs provide the companies

With capital at costs considerably below the

current costs of direct financing.

Where a revenue bond transaction involves a registered holding company or any

of its subsidiary companies, the Commission's approval must be obtamed under applicable provlsions of the Act; during fiscal

1974 the first Significant number of such

transactions were authorized. In fiscal year

1974, applications filed by 16 electric-utility

companies involved revenue bond agreements with authorities acting under the

laws of ten states.27 The applications covered approximately $263 million princrpal

amount of revenue bonds;28 and in the two

months immediately following the close of

fiscal 1974, filings covering another $217

million principal amount were pending.

NOTES TO PART 6

"One holding company, VGS Corporation, terminated its registration dUring the

year.
2Three of the 20 are subholdrnq utility

companies In these systems. They are The

Potomac Edison Company and Monongahela Power Company, public utility subsidranes of Allegheny Power System, Inc.,

and Southwestern Electnc Power Company, a public utility subsidiary of Central

and South West Corporation

3These holding companies are British

Amencan Utilities Corporation; Kinzua Oil &

Gas Corporation and ItS subsidiary company, Northwestern Pennsylvania Gas Corporation.

4Previously reported In 39th Annual Report, p. 110.

5Holding Company Act Release No. 18132

(October 23, 1973), 2 SEC Docket 635.

6Holding Company Act Release No. 18149

(October 31, 1973), 2 SEC Docket 680.

7Application for enforcement of the plan

with respect to those minonty shareholders

of Lawrence who have not surrendered

their stock was filed on July 1, 1974, In the

United States District Court for the District

of Massachusetts, Civil Action No. 74-

2466M. The application was later approved

by the C0:.;;-t.

8Holding Company Act Release No. 18149

(October 31, 1973), 2 SEC Docket 680.

9 Holding Company Act Release No. 18254

(January 11, 1974),3 SEC Docket 373.

1oAssociation of Massachusetts Consumers, Inc. v. SEC, C.A.D.C., No. 74-1325.

11Holding Company Act Release No.

18189 (November 27,1973),3 SEC Docket

128.

12Previously reported, 39th Annual Report, p. 110; 38th Annual Report, p. 108.

13Prevlously reported In 39th Annual Report, p 110; 38th Annual Report, p. 109, and

37th Annual Report, pp. 172-173.

14Holding Company Act Release No.

18368 (April 10, 1974),4 SEC Docket 89

15Clty of Cape Girardeau v. SEC, CAD.C.

No. 74-1590.

16Holding Company Act Release No

18001 (June 12, 1973), 1 SEC Docket No. 20,

P 16

17Holdlng Company Act Release No

18220 (December 13, 1973), 3 SEC Docket

236.

18E.D. Pa No. 73-1684 (July 24, 1973).

19Walplan and Company v. Metropolitan

Edison Co., CA 3, No. 74-1099.

2oHolding Company Act Release No.

16319 (March 29, 1969).

21Holding Company Act Release No.

18344 (March 26,1974),3 SEC Docket 762

22A summary explanation of Rule 7(d) IS

given in the 39th Annual Report, p 112.

23HOlding Company Act Release No.

18442 (June 4,1974),4 SEC Docket 395.

24Holdlng Company Act Release No.

18442, p. 6, 4 SEC Docket 397.

25Holding Company Act Release No. 2676

(AEril 8,1941)

6Holdlng Company Act Release No

18504, 4 SEC Docket 604.

27See, e.g., Georgia Power Company,

Holding Company Act Release No. 18088

(September 12, 1973), 2 SEC Docket 438.

28ThiS figure includes $73 million approved Just pnor to the start of fiscal 1974.

119

PART 7

CORPORATE

REORGANIZATIONS

The Commission's role under Chapter X

of the Bankruptcy Act, which provides a

procedure for reorganizing corporations In

the United States district courts, ditters

from that under the various other statutes

which it administers. The Commission does

not Initiate Chapter X proceedings or hold

ItS own hearings, and it has no authority to

determine any of the Issues In such proceedings. The Commission particlpates In

proceedings under Chapter X to provide independent, expert assistance to the courts,

participants, and Investors In a highly complex area of corporate law and finance. It

pays special attention to the Interest of public security holders who may not otherwrse

be respresented effectively.

Where the scheduled mdebtness of a

debtor corporation exceeds $3 million, Section 172 of Chapter X requires the judge,

before approving any plan of reorganization, to subrmt It to the Oornmrssron for its

examination and report. If the indebtedness

does not exceed $3 munon, the judge may, If

he deems It advisable to do so, submit the

plan to the Oornrrussion before decidinq

whether to approve It. When the cornrrussion files a report, copies or summaries

must be sent to all security holders and

creditors when they are asked to vote on the

plan. The Oornrrnssron has no authority to

veto a plan of reorqaruzatron orto require ItS

adoption

The Ocmrmsslon has not considered It

necessary or appropriate to participate in

every Chapter X case. Apart from the excessive administrative burden, many of the

PART 7

CORPORATE

REORGANiZATIONS

cases Involve only trade or bank creditors

and few public Investors. The Commission

seeks to participate principally In those

proceedings In which a substantial public

investor Interest In involved However, the

Comrmssron may also partlcrpate because

an unfair plan has been or IS about to be

proposed, public security holders are not

represented adequately, the reorganization

proceedings are being conducted In Violatron of important provisions of the Act, the

facts lndrcate that the Comrmssron can perform a useful service, or the judge requests

the Oornmrssron's participation.

The Commission in ItS Chapter X acnvities has divrded the country into five

geographical areas. The New York,

Chicago, Los Angeles and Seattle regional

offices of the Oornrnlssron each have responsrbrhty for one of these areas. Supervision and review of the regional offices'

Chapter X work IS the responsibility of the

Drvlsion of Corporate Regulation of the

Oornmissron, which. through ItS Branch of

Reorganization, also serves as a field office

for the southeastern area of the United

States

SUMMARY OF ACTIVITIES

In fiscal year 1974, the Oornrmssron entered 23 new Chapter X proceedings involving companies With aggregate stated assets

of approximately $1.1 brtuon and aggregate

Indebtedness of approximately $1.0 billion.

Includrnq the new proceedings, the

Commission was a party In a total of 132

123
reorganizations proceedings during the fiscal year.' The stated assets of the companies Involved in these proceedings totaled approximately $3.3 billion and their

indebtedness about $2.8 billion

During the fiscal year, 17 proceedings

were closed, leaving 115 In which the Commission was a party at fiscal year end.

ADMINISTRATIVE MATTERS

In Chapter X proceedings, the Commission seeks to protect the procedural and

substantive safeguards afforded parties In

such proceedings. The Commission also attempts to secure Judicial uniformity In the

construction of Chapter X and the procedures thereunder.

East Moline Downs, Inc.2-This

publicly-held company operates a horse

race track It filed a voluntary petition under

Chapter X. A number of mechanics lien

claimants filed an answer to the petition alleging essentially that It was "unreasonable

to expect that a plan of reorganization could

be effected." The claimants sought dlsmrssal of the petition for lack of good faith; and

the special master so recommended. The

district judge, however, approved the petition, relying in part on a commitment of a

substantial loan to the debtor that was

negotiated subsequent to the special master's report. The hen claimants appealed

and their appeal is still pending. In the

meantime, despite the pendency of the appeal, the district court approved a plan of

reorganization that incorporates the loan

commitment and provides for the continuation of the debtor's operations.

tmpenet '400' National Inc. 3_The district

jUdge discharged counsel for the trustee

pursuant to a resolution by the Judicial

Council of the Third Circuit to the effect that

when a chent of counsel for a Chapter X

trustee or of his law firm is a plan proponent

there IS "the appearance of a conflict of

Interest."4 The district court" refused a

mandamus application seeking relief

against the council. The court of appeals on

appeal from that order, in view of the long

lapse of time since counsel's removal, remanded the case for reconslderatlon.s The

Judicial Council petitioned for a rehearing.

It asserted that the remand for a hearing

124

should have been made to the Judicial

Council ratherthan to the district court The

court of appeals however denied a rehearIng since the district court was "au courant

with the affairs ofthe case." 7 Subsequently,

the district court accepted the trustee's

counsel's resignation nunc pro tunc as of

the date of the original order of removal.

Traders Compress Company.8-As previously reported,9 the debtor, a small

publicly-owned corporation, IS engaged

primarily in the distribution of liqurfled petroleum gas ("LPG") to over 8,500 rural customers In Oklahoma. A major supplier has

sought to discontinue sales of LPG to the

debtor, asserting a shortage of supply. The

trustee, supported by the Commission, obtained a district court order permanently enjoining the supplier from terminating its

agreement to supply the debtor. The Commission argued that the Chapter X court had

summary jurisdiction to enter the injunction

In order to preserve the going-concern

value of the debtor for the benefit of its credrtors and shareholders if local law prohibited termination of the supply contract. The

court found that the termination was discriminatory and Violated state public utility

and antitrust laws. During the fiscal year,

the supplier withdrew its appeal from the

order

Equity Fundmg Corp. of America. 10_Two

days before the debtor filed its Chapter X

petition, its depository banks set-off about

$10 million In deposits against secured

notes of Equity Funding. The order approvIng the Chapter X petition directed the

banks to reverse the set-offs, and the banks

appealed. The court of appeals granted a

temporary stay of the district court's order.

Prior to the submission of briefs on the

merits, the trustee stipulated to a dismissal

of the appeal and the retention by the banks

of the funds set-off. Trustee's counsel was of

the opinion that the reorganization court

lacked summary [unsdlotlon over tbrs matter; but no plenary action was initiated by

the trustee. The Commission urged that a

reorganization court has power to prevent a

set-off which would interfere With the continued operation of the business being

reorqanlzed." Such power does not alter

the underlying rights of either party. Without the set-off the trustee would have use of
the debtor's bank account; the estate would

remain fully Indebted to the bank; and the

plan of reorganization would give equitable

recognition of any secunty interest the bank

might have had in the bank account.

The Supreme Court subsequently dealt

with the subject of set-off In reorganization

proceedings, in an aspect of the reorganization of the Penn Central Transportation

Company under Section 77. In Its opmron,

the Court concluded that a set-off "IS a form

of discrimination to which the policy of Section 77 ISopposed. As a general rule of administration ... the set-off should not be

allowed."12

In the Equity Funding proceeding, the drstnct court also authonzed the trustee to sell

the assets of Liberty Savings & Loan Association ("Liberty"), a wholly-owned subsidiary of the debtor, to another savings and

loan institution. Liberty IS but one subsrdiary In the debtor's large and complex

corporate system. The trustee had determined that Liberty was not needed for the

reorganization of the debtor, and that It was

In the best Interest of the debtor to sell LIberty prior to the conclusion of these proceedings. The Commission supported the

trustee in his effort to prune the debtor's

business In order to tacrhtate a successful

reorqaruzatron.t? The court further ordered

that the proceeds from the sale be deposrted In an Interest beanng account from

which no disbursement could be made except with approval of the court and upon

notice to interested parties.

The sale was opposed by a group of

former Liberty shareholders, who had exchanged their stock for convertible preferred stock of the debtor in a 1971 merger

of Liberty with Crown Savings & Loan Association, then a subsidiary of the debtor.

The objectors asserted the nght to rescind

the 1971 transaction for alleged fraud and to

reclaim the assets of Liberty. They appealed

from the drstnct court's order authorizing

the sale.

The court of appeals, as urged by the

Commission, affirmed the order of the district court.t- The court of appeals agreed

with the lower court's findings of fact" ...

that the market value of Liberty was likely to

detenorate In the near future, that it might

be a very substantial decline and that the

proposed sale would be In the best interest

of the bankrupt estate." It also stated that

impoundment of the proceeds adequately

protected the interest of the appellants until

their claims for rescission and reclamation

should be resolved.

The objectors have asked the Supreme

Court to overturn the ruling of the court of

appeals Further proceedings have been

continued pending settlement negotiations. The sale was concluded by agreement, and a settlement agreement ISpendIng before the bankruptcy court.

First Home Investment Corp. of Kansas.

Inc. 15_The debtor (" FHI") ISa publicly-held

face-amount certificate company registered under the Investment Company Act of

1940. Over 22,000 public Investors purchased more than $50 million of ItS stock

and face-amount certificates Sales of FHI

securities ceased after a Commission staff

investigation disclosed that fraudulent misrepresentations had been made in the sale

of the securities by Bush & CO.,1ea brokerdealer and prlncrpal underwriter for FHI.FHI

filed a Chapter X petition because It was

unable to meet ItS obligations on over $30

million In loan commitments. Theretofore.

the continuing sale of securities had been

the princrpal source of funds to meet loan

commitments. Subsequently the trustee

was able to sell the bulk of the outstanding

loan commitments but at a loss of almost $3

million pnmanly because of money market

conditions and the uneconomic terms of

the commitments

The debtor's primary liability consists of

face-amount certificates, of which over $33

million were outstanding when the Chapter

X petition was filed The trustee, with approval of the court, resumed redemption of

these face-amount certificates. The trustee

has thus far redeemed over $20 million of

these certificates.

Dunng the course of the proceedings, a

former officer and director of the debtor and

others associated with him began soliciting

funds from public Investors, as well as authority to represent them in the proceedings.H The Commission obtained an order

from the court enjoining further solicitations

and directing an accounting of receipts and

disbursements.ts The Commission subsequently filed objections to the accounting

125
and req uested disallowance of substantially

all claimed expenses. The district court has

not yet rendered a decision

Farrington Manufacturmg Compeny.w-«

In approving the trustee's plan to distribute

cash to creditors, the court ordered that

stockholders, classified as creditors for alleged claims based on Violations of the Federal securities laws, should be given notice

of the plan by publication only Atthe urging

of counsel for creditor-stockholders and

the Commission, the court amended its

order to provide that they be gIven notice by

mall and to receive, on request, the material

required to be submitted to security holders

under Section 175 of Chapter X.

Courts have held that fundamental reqursrtes of due process require that persons

whose rights are to be affected and whose

Identity can be ascertained With reasonable

effort receive notice reasonably calculated

to apprise them of the pending action. Publication IS not a substitute for actual

notlce.20

TRUSTEE'S INVESTIGATION AND

STATEMENTS

A complete accounting for the stewardship of corporate affairs by the prior management ISa requisite under Chapter X. One

of the primary duties of the trustee IS to

make a thorough study of the debtor to assure the discovery and collection of all assets of the estate, Including claims against

officers, directors, or controlling persons

who may have mismanaged the debtor's affairs. The staff of the Commission often aids

the trustee In his investigation

EquIty Fundmg Corp. of Amertca.21-The

Commission filed an injunctive action

against this holding company, alleging VIOlations of antifraud and numerous other

provisions of the Federal secunnes laws.22

After entry of a permanent injunction and

appointment by the court of a special investigator and directors, the company filed ItS

Chapter X petition.

Within ten months of hrs appointment, the

trustee filed With the court an extensive report of hrs preliminary investigation of the

debtor's affairs. A summary of It was transmitted to creditors and stockholders The

trustee reported that a large amount of the

126

insurance policies, purportedly issued by a

principal Insurance subsidiary of the debtor

were fictlttous and a substantial portion of

ItS assets were non-existent.

If the debtor had published ItS annual report for 1972, it would have shown consolidated assets of about $737.5 million and

consolidated stockholders' equity of about

$143.4 million. As adjusted by the trustee,

consolidated revenues for 1972 were about

$103.6 million, consolidated assets, about

$4889 million; consolidated stockholders'

equity showed about a $42.1 million deficrt.

Westec Corporatlon.23-The trustee has

entered Into a compromise settlement with

almost all the major defendants in a civil

action based on alleged violations of the

securities laws and breaches of fiduciary

duty, In connection with alleged manipulation of the debtor's stock.24 The action was

brought against 92 defendants on behalf of

the debtor estate and the class of allegedly

defrauded shareholders. Total estimated

damages were about $37 million of which

$28 million represented the out-of-pocket

losses suffered by the class of shareholders.

In various separate settlements approved

by the court to date, the major defendants

have contributed approximately $6.8 million to the settlement fund, which IS being

held In escrow pending conclusron of the

lawsuit. Thereafter, allocation will be made

among the reorganized company, the class

plaintiffs and certain creditors, pursuant to

the confirmed plan of reorganization.

R. Hoe & Co., Inc.25-As a result of rus

mvestrqatron, the trustee commenced in

1971 a lawsuit against the debtor's former

auditors and management. The claims

against the auditors were based on their

alleged failure to perform properly the protessionat services for which they were retained. The claims against debtor's management were based on ItS alleged waste

and mismanagement of corporate assets

and to recover profits from alleged msider

trading In the debtor's secuntres. Both before and after the filing of the Chapter X

petition, a number of mdrvidual and class

shareholder actions had been initiated

against the debtor, ItS former officers and

management based upon substantially the

same acts Since the order approving the

Chapter X petition enjoined the contmua-
tion of SUitS against the debtor, proofs of

claim in excess of $25 million have been

filed In the Chapter X proceeding on behalf

of class and individual shareholders.

After more than two years of negotiations,

an overall settlement was proposed. A settlement fund of $4.5 million was created by

the debtor's former officers, directors, auditors and their insurers. Under the proposed settlement $2.7 million plus Interest

was to be allocated to the shareholders In

the class actions and $1.8 million plus interest to the estate.

The Commission urged that to determine

whether the allocation was fair the court

hold a hearing so that evidence be presented to permit a fair assessment of the

compromise 26 Following such a hearing,

the Commission advised the court that It

had no objection to the terms of the settlement, which the court subsequently approved

King Resources Company.27-The trustee, during the fiscal year, continued to resolve key problems regarding the estate. He

negotiated agreements of settlement With

Global Natural Resources Properties, Ltd.

and National Resources Company concernIng the development of over 25 million acres

of Canadian Artie oil and gas properties.

Next, the court approved the sale of debtor's mining Interests in South Africa for $4

million, which enabled the trustee to enter

Into a compromise agreement With the

Bank of America to release ItS claims and

liens on the property.

The court also approved the sale of debtor's interest in certain real estate in Denver,

Colorado, and certain exploratory rights in

the Dutch North Sea, from which the trustee

realized a net of about $3 million and $1.4

million, respectively. These funds were

used to repay the balance owed on trustee's

certificates and to exercise an option to

purchase certain property which the trustee

had under lease. The trustee also settled

claims of Canadian lien creditors on the

same terms that had previously been accepted by domestic lien creditors, I.e., 75

percent in cash and the balance to be

treated as an unsecured claim.

Dtversitted Mountaineer Cotporetton. 28_

The debtor, a financial service holding company, operated through eleven of ItS whollyowned Subsidiaries, located In four states,

an uninsured Industrial savings and loan

business. Over 20,000 persons Invested

over $50 million In ItS pass book savings

accounts.

The debtor's board of directors did not

file reorganization petitions for the parent

and all subsrdrarles in one [unsdrctron as

permitted under Section 129 of Chapter X.

Rather, the parent debtor and all of the West

Virginia subsidranes filed under Chapter X

in the appropriate court In West Virginia

about a month after the other subsidiaries,

located In Kentucky and Tennessee, had

filed Chapter XI petitions In their respective

states.29 The Virginia subsrdianes were

placed under the control of state courtappointed receivers at the Insistence of the

Virginia State Corporation Cornrmssron.t''

The ftducrarles appointed by the four

junsdrctions each took different positions

With respect to the interpretation of the

Inter-company debt and transfers that occured prior to reorganization and commenced litigation against one another. The

primary controversy was whether certain

sales of loan receivables by one subsidiary

to another With the proceeds subsequently

funnelled to the parent, were bona fide

transactions or whether the sales were actually loans to the parent Improperly collateralized by assets of the seiling subsrdiary. The flducrarles recognized the

complex nature of the inter-corporate

transactions, and after extensive arm's

length negotiations, In which Commission counsel assisted, entered Into an overall settlement of all Inter-company matters

The settlement was subsequently approved

by the courts in all the junsdrctrons

PLANS OF REORGANIZATION

Generally, the Commission files a formal

advisory report only in a case which involves substantial public Investor Interest

and presents significant problems When

no such formal report ISfiled, the Commission may state its views briefly by letter, or

authonze ItS counsel to make an oral or

written presentation During the fiscal year

the Cornmlssron published two advisory reports to supplement a prior advisory report

dealing With four plans of raorqaruzatron."

127
Its views on five other plans of reorganrzation were presented to the courts either orally or by written memoranda."

Imperial '400' National, Inc.33-The court

of appeals affirmed the district court's order

of valuation subject to reconsideration In

light of, among other things, "the manner of

dealing with a possible tax carry-forward."34 Subsequently, the district court

reconsidered the valuation in connection

with the various proposed plans of reorganization and concluded that It should be

increased by "a maximum of $200,000" for

the value of the tax loss carry-forward 35

One plan proponent amended rts plan to

comply substantially with the suggestions

contained In the Commission's supplemental advisory report36 and the district court's

oplruon." The court approved the amended

plan and an appeal was taken by a stockholder,3s who had proposed a competing

plan which the court declined to approve 39

Shortly after the approval of its amended

plan, the successful plan proponent reported a sharp decline in gross revenues

and net after-tax earnings. The plan was

further amended at the court's direction,

and after its approval the plan was subrmtted to Imperial's creditors and shareholders

for their acceptances The shareholder,

who appealed from the original approval

order, also has appealed from the order approving the plan as amended.40 The two appeals were consolidated. The plan was

not accepted by creditors or stockholders.

The Commission's motion to stay the appeals

on the ground that they may be moot, was

granted. A new plan ISto be proposed by the

trustee.

TMT Trailer Ferry, Inc.41-The trustee's

plan provided In the alternatrve for an internal reorganization or a sale of TMT as a

going-concern to a privately-held shipping

firm. The proceeds from the sale would be

used to pay creditors in full, including

post-bankruptcy interest, and to pay the

holders of common stock $3 per share after

adjustment for a one-for-five reverse split

effected In 1958, which reduced the number

of outstanding shares to about 800,000. In

the interim, settlements of the pnncipal disputed claims had been approved and the

settlement amounts paid After hearings,

128

the court directed the trustee to proceed

with the sale alternative.

The Commission filed a memorandum

advising the district court that the alternative plan could be found to be fair, equitable

and feasible. After the close of the fiscal

year, the alternative plan was approved by

the district court, accepted by the stockholders (the only affected class) and confirmed.

Atlanta International Raceway, Inc.42

The court approved the trustee's amended

plan of reorganization, based on the solvency of tnrs automobile race-track

operator, which provided that (1) the mortage debt would be partially paid off and the

remainder assumed at a higher rate by the

reorganized debtor; (2) other creditors

would receive new shares In satisfaction of

their claims; (3) proponents would receive

52 percent of the reorganized company's

outstanding shares In payment for a capital

contribution and making available certain

loans; and (4) existing stockholders would

retain their shares, representing about 20

percent of shares to be outstanding. The

creditors overwhelmingly accepted the

plan; but stockholders, also overwhelmingly, voted against the plan

Although a plan providrnq for the resrdual

equity of a reorganized company to remain

with ItS present stockholders does not alter

substantive rights, the proponents agreed

to purchase the shares of dissenting stockholders at $1.60 per share. Since the court

previously found a reorganization value of

not more than $1 per share, it concluded

that the proponents' offer provided the "adequate protection" required by Section

216(8), and confirmed the plan.

An appeal from the order of confirmation

was taken by a shareholder and one of the

proponents of a competing plan.43 The

Cornmlssron In ItS brief supported the district court's order confirming the plan. On

December 6,1974, the Court of Appeals for

the Fifth Crrcurt affirmed per curiam Without

opinion the district court's confirmation order.

Tilco, Inc.44_ The debtor IS a publiclyheld holding company with a number of

wholly-owned subsidranes engaged In the

business of producrnq 011and gas One of

-
the debtor's subsidiaries, Natural Resources Fund, Inc. ("NRF"), ISthe general

partner in six limited partnerships formed

for the purpose of exploring, drilling, and

operating oil and gas properties. About

5,500investors contributed Inexcess of $27

million for interests in the SIX limited

partnerships.

The trustee submitted a plan of reorganization which calls for the sale of the principal debtor corporations. Administration

costs and secured creditors will be paid In

full with any balance remaining to be distributed pro rata to the unsecured creditors.

Shareholders will not participate under the

plan since the debtor is insolvent. With respect to the limited partners of NRF, the

trustee will make an offer to purchase the

individual partnership Interests based on

the cash liquidating value as computed

under the original partnership agreement.

The Commission advised the court, inter

eti«, that the plan was unfair to the limited

partners since it ignored their right under

two separate provisions of the partnership

agreements to liquidate the partnership

properties for their own account without

being limited to the cash Iiqurdatmq value

relied on in the plan. The court approved the

plan.

Showcase Corp 45_The trustee filed a

plan of reorganization for this small

publicly-held company whose business is

leasing microfilm IIbranes of construction

materials. The plan made provrsion for

shareholders even though the debtor was

found to be Insolvent; shareholders were

offered the nght to purchase stock of the

reorganized company for cash In exchange

for their old shares. The money from the

offering was to be used to pay about

$500,000of administrative, prionty and secured indebtedness The court concluded

that under Section 264(a){2) of Chapter X

the shares to be offered to the public shareholders were exempt from registration

under the Securities Act of 1933.The Commission objected, urging that Section

264(a){2)did not apply.

The Commission argued that Section

264(a){2) by ItSterms requires that securities Issuedpursuant to a plan of reorganization be in exchange, at least in part, for

secunnes of or claims against the debtor.

The legislative history of Chapter X clearly

shows that new securities not so Issuedare

not exempt from registration merely becauseIssuedpursuant to a plan of reorganization.46Several district courts have so interpreted Section 393a(2) of Chapter XI47

and Section 3(a){10) of the Securities Act of

1933,48which also provide exemptions for

securities issued in bankruptcy proceedIngs.

The Commission also urged that for the

"exchange" to come Within Section

264a(2),the old stock must have some subsisting value. It has no value when the

debtor ISinsolvent

The Commission had intervened in the

proceeding as the agency charged Withthe

enforcement of the Federalsacuntres laws,

and in that capacity appealed the court's

ruling on the exemption Subsequently, the

trustee amendedthe plan to provide for registratron of the securities to be offered for

sale to the old shareholders. The Commission will withdraw its appeal If the amended

plan is confirmed

Waltham Industries Corporatlon.49-The

trustee's plan of reorganization, confirmed

bythe court, provided for an orderly tlquidation of the debtor's assets.The most Important feature was a settlement With debtor's

major secured creditor who ISto receivethe

stock of the debtor's most substantial subSidiary In exchange for its entire claim.

Under the settlement the major creditor

also ISto pay $625,000to the estate which

when added to the funds already on hand

will permit the trustee after payment of all

priority and administrative claims to makea

pro rata distribution estimated at 17percent

to the debtor's other creditors. Since the

debtor is insolvent, ItScommon shareholders were excluded from participation.

Eastern Credit Corporation. 50-The

equity receivership, which originated from

an injunctive action by the comrmsston.s'

was superseded by a Chapter X proceeding

after the receiver had determined that asale

of the debtor asa gOing-concern could best

beeffected by a Chapter X plan of reorganization.

Thedebtor's preferred stock and about89

percent of its common stock are owned by

Eastern Finance Corporation and the re129
maining 11 percent of the common stock by

about 120 persons. Smce the debtor was

solvent, funds from the sale would be available for distribution to Eastern Fmance and

to the public holders of common stock. The

reorganization was concluded in about four

months from the date the Chapter X petition

was flled.52

ACTIVITIES WITH REGARD TO

ALLOWANCES

Every reorganization case ultimately presents the difficult problem of determinmg

the compensation to be paid to the vanous

parties for services rendered and for expenses incurred in the proceeding. The

Commission, which under Section 242 of

the Bankruptcy Act may not receive any allowance for the service it renders, has

sought to assist the courts 10 assurmg

economy of adrrunlstratron and in allocat109compensation equitably on the basis of

the claimants' contributions to the admmistratron of estates and the formulation of

plans. During the fiscal year 319 applications for compensation totaling about $11

million were reviewed.

Yale Express System, Inc. 53-Twelve applicants sought final allowances (includmg

amounts previously paid), and reimbursement of expenses aggregating about

$2,696,000. The Commission recommended payment of about $1,654,000. The

court awarded fees and expenses totaling

about $1,684,000 54

Two applicants, aformer trustee and trustee's counsel, requested interest at the rate

of 6V2 percent per annum on the unpaid

portion of their respective allowances. That

was the rate applied to the claims of Yale's

creditors under the confirmed plan of reorganization. The court, as urged by the

Commission, did not award interest to these

applicants. The court noted that they had no

specific claim to fees and that they did not

have the same status as Yale's credltors.P

Cybern Education, Inc. 55-The court of

appeals vacated an order award 109the trustee and his counsel fees that equalled the

cash remainmg 10 the debtor's estate after

liquidation of all its assets." On remand,

counsel for the trustee requested a final allowance of $30,000, and trustee waived any

130

further allowance to himself. The distnct

court in award 109 only $10,000 to counsel

for the trustee stated that "(a] request for

one-half of an estate is not for the benefit of

the debtor or the creditors, but is for the

attorneys' benefit, and cannot be allowed."

In addition, the distnct court ordered that

counsel for the debtor who had filed the

debtor's Chapter X petition return to the

estate $4,800 of a $6,000 fee received prior

to the lnstrtutron of these proceedings.

The district court confirmed the trustee's

plan of llquidatlon which provided for distribution of the remaining cash for adrnlrustrative costs and tax claims. A final decree

closmg the proceeding was entered after

the end of the fiscal year.

INTERVENTION IN CHAPTER XI

Chapter XI of the Bankruptcy Act provides

a procedure by which debtors can effect

arrangements with respect to their unsecured debts under court supervision. Where

a proceedmg is brought under that Chapter

but the facts mdicate that It should have

been brought under Chapter X, Section 328

of Chapter XI authorizes the Oommlssron or

any other party in interest to make application to the court to dismiss the Chapter XI

proceeding unless the debtor's petition is

amended to comply With the requirements

of Chapter X, or a creditors' petition under

Chapter X is fried.

The Supreme Court adopted Chapter XI

rules effective as of July 1, 1974. Under Rule

11-15, which governs the filing of Section

328 rnotrons, the Commission as well as

other parties in interest, except the debtor,

have 120 days from the first date set for the

first meeting of creditors to file a motion.

The time may be extended for good cause. A

motion made by the debtor for transfer,

however, may be made at any time. The rule

also requires a showing that a Chapter X

reorganization is feasible. Tms 10 effect

means that a motion can be granted only if

the Court finds both that Chapter XI is inadequate and reorganization under Chapter X

is possible. The prior procedure for filing a

Chapter X petition after the granting of the

motron and a separate hearing on the petition have been abolished.

Attempts are sometimes made to misuse
Chapter XI so as to depnve Investors of the

protection which the Secunties Act of 1933

and the Securities Exchange Act of 1934 are

designed to provide.s8 In such cases the

Commission's staff normally attempts to resolve the problem by Informal negotiations.

If this proves fruitless, the Commission intervenes in the Chapter XI proceeding to

develop an adequate record and to direct

the court's attention to the applicable provrsions of the Federal securities laws and

their bearing upon the particular case.

Arlan's Dept. Stores, Inc. 58-The company operates a chain of discount stores.

For the two and one-quarter years prior to

the Chapter XI proceedings, it reported

losses in excess of $45 million. The company's capitalization includes$15 million in

subordinated convertible debentures held

by 775 public Investors. The Commission In

ItS motion pursuant to Section 328 urged,

among other things, that rehabilitation of

the company required a substantial adjustment of widely-held public debt. The court

granted the Commlssron's motlon,60 and

subsequently a voluntary Chapter X petition

was approved and a trustee appointed.

Lyntex Corporation. 61_ The company ISa

wholesale distributor of sewing materials.

For the two and three-quarter years prior to

the Chapter XI proceedings, it reported

losses in excess of $19 million. Shortly before the inception of the Chapter XI proceedings, the company's financial statements reflected a deficit net worth of $10.5

million. The company's capitalization includes $13.7 million in subordinated convertible debentures held by 1,450 public investors. The Oornrnlssron in its Section 328

motion urged, among other things, that

there was a need for a thorough investigation by an Independent trustee and that rehabilitation of the company required a substantial adjustment of widely-held public

debt. The court granted the Commission's

motion. A Chapter X petition was thereafter

filed and approved, and a trustee appointed.

Welfare Finance corporeuon. 62_ The

debtor is engaged in the small loan business. It had financed its operations through

the sale of over $63 million in debt instruments to about 8,000 persons. In filing a

Section 328 motion, the Oornrnlssron urged

that the financial condition of the debtor

called for more than a simple composition

of unsecured debt, and that a disinterested

trustee was needed to investigate potential

causes of action against certain officers and

directors of the debtor.

A plan of arrangement was filed before

the motion was acted upon. It provided for a

sale of the debtor to an unaffiliated

publicly-held corporation. Public creditors

Will be paid $50 million, $10 million in cash

at confirmation, and $40 million In various

debt Issues of the purchaser bearing interest at different rates and maturing over a

16-year period. The Commission raised

questions as to whether the debtor had accepted the best offer. Thereupon, the court

appointed an Investment banking firm to

evaluate the purchase offers made by the

three bidders, all substantial publicly-held

corporations. As a result, the proponent improved his onqrnal offer by over $1 million.

The plan also provides for new management; assignment of causes of action

against certain officers and directors to a

special designee who will pursue them for

the benefit of the public Investors; and effectively eliminates any participation by

past management. Under these circumstances, the Oomrrussron withdrew its

Section 328 motion.

North Western Mortgage Investors

Corporatlon.63-Over 1,700 persons purchased from the debtor, corporate notes

secured by fractional Interests In over 100

mortgages, real estate contracts, and parcels of real property. The debtor's sole

shareholder filed a preliminary plan that

sought in essence to retain his control over

the corporation while creditors, including

the public secured creditors, would be

asked to wait for up to three years for payment. The Commission, supporting a creditor's Section 328 motion, urged that there

was a need for a new management and a

disinterested investigation into the prior

acts of management. It also urged that the

secunty was so fractionalized that the reorganization machinery was essential to preserve its value for public creditors. The motion was granted. Thereafter, the court approved an Involuntary Chapter X petition

that had been previously filed by creditors

and appornted a trustee

Puts & Call, Inc. 64_ The company was en131
gaged in the business of issuing and brokering commodity option contracts on unregulated commodities. After the commencement of the Chapter XI proceeding, a

California state court found that debtor had

been selling a security and enjoined the further sale of commodity futures contracts

until qualified under California law.65This

effectively put the debtor out of business,

although it had conducted no operations

since the Chapter XI proceeding began.

The debtor's assets were liquidated leavin $600,000 In cash. More than 4,000 creditors, mostly customers, held claims exceeding $26 million. A plan of arrangement was

proposed which provided for a privatelyheld commodity broker to acquire debtor's

assets, for which it would pay a modest

amount in cash and issue Its stock in exchange for claims against the debtor.

The court granted the Commission's motion to intervene specially to enforce the

Federal securities laws.66 The purpose of

the intervention was to develop the record

as to the adequacy of the disclosure of material facts and to assist the court in its task

of scrutinizing securities which were to be

issued pursuant to the arrangement and

thus prevent the distribution of stock of

doubtful value to an unsuspecting public.s7

During the hearing, the proposed arrangement was Withdrawn.

Section 393a(2) of Chapter XI provides an

exemption from the registration provisions

of the Securities Act for "any transaction in

any security issued pursuant to an arrangement in exchange for claims against

the debtor .... Since the debtor had

ceased its operations, It was the Commission's view that there was no business to

rehabilitate in Chapter XI, and that the

claimed exemption would serve no purpose

other than a public distribution of the nondebtor's stock without reglstratron.68

Digital Application, Inc.69-The debtor, a

publicly-held manufacturer of certain electronic equipment (printed circuit boards),

proposed a Chapter XI arrangement with its

unsecured creditors whereby another public company would purchase through a

newly created subsidiary all the assets of

the debtor. Creditors Will be offered cash or

common stock of the subsidiary in exchange for their claims. The pubhc share132

holders, In exchange for their common

stock In the debtor, will receive 20 to 25

percent of the common stock of the newly

created corporation, depending on the

amount of stock creditors choose to accept.

In order to comply with the registration provisions of the Securities Act for these securities, the Issuer filed with the Commission a

combination registration, prospectus and

proxy pursuant to Rule 145 under the Securities Act.

NOTES TO PART 7

1A table listing all reorganization proceedmgs in which the Commission was a

party dunnq the year is contained in Part 9.

2S.D. III., No. RI-Bk-73-295.

3D.C. N.J., No. 8-656-65. Previously reported in 39th Annual Report, pp. 124-125;

38th Annual Report, pp. 117, 122, 125; 36th

Annual Report, pp. 176-177, 190; 35th Annual Report, p. 161; 33rd Annual Report, pp.

132, 137; 32nd Annual Report, p. 94.

4Previously reported in 38th Annual Report, p. 117.

5346 F. Supp. 500 (D. N.J., 1972).

6481 F. 2d 41 (C.A. 3), cert. denied, 94

S.Ct. 68, 71 (1973).

7486 F. 2d 297, 298 (CA 3, 1973).

8W.D. Okla, No. Bk-72-644.

9See 39th Annual Report, p. 120.

10C.D.Calif., No. 73-03467. Previously reported in 39th Annual Report, p. 73. 11 Lowden v. Northwestern National Bank

& Trust Co., 298 U.S. 160 (1936); Susquehanna Chemical Corp. v. Producers

Bank & Trust Co., 174 F.2d 783 (C.A. 2,

1949); In re Yale Express Systems, Inc., 362

F. 2d 111 (C.A. 2, 1966); In re Penn Central

Transportation Company, 453 F. 2d 520

(C.A. 3,1972).

12Baker V. Gold Seal Liquors, Inc., 417

U.S. 467, 474 (1974).

13For a full discussion of the Commission's position on sales of major assets, see

39th Annual Report, pp. 120-121.

141nre EqUity Funding Corp. of America,

492 F. 2d 793 (C.A. 9,1974). 150. Kans., No. 24075-8-2

lsln June 1973, the Commission revoked

the registration of Bush & Co., as a brokerdealer for its activities in connection with

the sale of FHI securities. The individual re- spondents have all consented to the imposition of sanctions. 17Cf. Halsted v. Securtties and Exchange

Commission, 182 F. 2d 660.663-664 (C.A.

D.C.),cert. denied, 340 U.S. 834(1950). Similar matters otherwise unreported may be

found in the 39th Annual Report, p. 119;

"
38th Annual Report, pp. 117-118; 31 st Annual Report, p. 98; and 30th Annual Report,

p.100.

181nre First Home Investment Co. of Kansas, Inc., 368 F. Supp. 597 (D. Kan., 1973).

19E.D. Va., Nos. 17-71-A, 256-71-A and

257-71-A. Previously reported in 39th Annual Report, pp. 123-124, 38th Annual Report, p. 118.

20City of New York v. New York, New

Haven & Hartford RR Co., 344 U.S 293, 297

(1953); Mullane v. Central Hanover Bank &

TrustCo., 339 U.S 306,314-316(1950); In re Intaco Puerto Rico, 494 F. 2d 94, 97-99 (C A.

1,1974); In re Harbor Tank Storage Co., Inc.,

385 F 2d 111, 115 (CA 3,1967).

21See supra, p. 124.

22S.E.C. v. EquIty Funding Corp. of

Amence, C.D. Calif., No. 73-714.

23S.D. Texas, No. 66-H-62. Previously reported In 38th Annual Report, p. 119; 35th

Annual Report, pp. 163-164; 34th Annual

Report, pp. 150, 152, 158; 33d Annual Report, p. 131.

24Carpenter v. Hall, No. 688738. See 38th

Annual Report, p. 119.

25S.D.N.Y., No. 69-S-461. Previously reported in 37th Annual Report, pp. 183, 194-

195; 36th Annual Report, p. 179.

26See Protective Committee v. Anderson,

390 U.S. 414, 424 (1968). 270. Colo., No. 71-S-2921. Previously reported In 39th Annual Report pp. 121-122.

28S.D. W. Va., No. 74-71-CH.

29Kentucky subsidiaries-Fayette Loan &

Thrift, E.D. Ky., No. 74-22. Tennessee

subsidiary-Commonwealth Loan & Thrift,

E.D. Tenn., No. Bk-2-74-6.

300n January 3,1974, the Virginia Circuit

Court of Chesterfield County, appointed

two receivers to take charge ofthe affairs of

the two subsidiaries in Virginia-Richmond

Industrial Loan & Thrift and Roanoke Industrial Loan & Thrift.

311nre Imperial '400' National, Inc., Corporate Reorganization Release Nos 313

(August 29, 1973) 2 SEC Docket 377 and 314

(May 15, 1974),4 SEC Docket 339.

321n re Atlanta International Raceway,

tnc., N.D. Ga., No. 7056; In re Eastern Credit

Corporation, E.D. Va., No. Bk-74-154-N; In re Pan American Financial Corporation, D.

Hawaii, No. 72-280; In re Tllco, tnc., D. Kansas, No. 23662; In re TMT Trailer Ferry, tnc.,

S.D. Fla., No. 3659-M-Bk-WM; and In re Waltham Industries Corporation, C.D. Calif.,

No. 9442o-CC.

33D.C. N.J., No. B-656-65. Previously

reported in 39th Annual Report, pp. 124-

125; 38th Annual Report, pp. 117, 122, 125;

36th Annual Report, pp. 176-177, 190; 35th

Annual Report, p. 161; 33d Annual Report,

pp. 132, 137; 32d Annual Report, p. 94. 34487 F. 2d 1394.

35374 F. Supp. 949, 954-956 (D. N.J.,

1974).

361mperia/'400' National, lnc., et et., Corpo rate Reorganization Release No. 313

(August 29, 1973), pp. 21-26; 2 S.E.C. Docket 377, 384-386. See also, Corporate Reorganization Release No. 314 (May 15,1974),4

SEC Docket 339.

37374 F.Supp. at 972-979.

38C.A. 3, 74-1666.

39374 F.Supp. at 957-960.

40CA 3, No. 74-1853.

41S.D. Fla., No. 3659-M-Bk-WM. Previously reported In 39th Annual Report, pp.

119, 122-123; 38th Annual Report, pp. 125-

126; 37th Annual Report, pp. 191-193; 36th

Annual Report, pp. 179-180; 35th Annual

Report, pp. 160, 168; 34th Annual Report, p.

153; 33d Annual Report, p. 135; 32d Annual

Report, pp. 92-93; 31st Annual Report, p.

100, 30th Annual Report, p. 105; 29th Annual Report, pp. 91-92; 28th Annual Report,

p. 100; 27th Annual Report, pp. 132, 134;

26th Annual Report, pp. 155, 158, 160.

42N.D. Ga., No. 70556.

43C.A. 5, No. 74-1974.

44 D. Kansas, No. 23662. Previously reported in 39th Annual Report, pp.118-119.

45E.D. Mich., No. 71-2899.

46S.Rep. No. 1916 on H.R. 8046, 75th

Cong., 3d Sess. (1938) 38-39, states: "Under

thrs provlsron [Section 264a(2)] no registration in compliance With the Securities Act of

1933 is required for the issuance of securities to the security holders or creditors of

the debtor in whole or part exchange for

their old secuntres or claims. However, new

issues sold by the reorganized company for

cash are required to be registered under the

Securities Act just as any other new issues

of securities, In order that prospective investors may have all material information

before buying."

47The Southern District of New York has

Interpreted Section 393a(2) to mean that:

"Stock issued entirely for cash does not

meet the requirements of the statute on its

face. To be exempt the stock must be partly

or completely in exchange for claims

against the arrangement debtor, and cannot be completely in exchange for cash."

S.E.C. v. Century Investment Transfer Corp.

CCH Fed. Sec. L.Rep. Para. 93,232 at p.

91442 (1971) See also S.E.C v. Granco

Products Inc., 236 F.Supp. 968 (S.D.N.Y.,

1964), where the district court held that registration was necessary for a sale to the public at large of securities to be issued to creditors under the Chapter XI arrangement.

48ln S.E.C. v. Philip S. Budin & Co., Inc.,

the court stated: "However, I find that the

wording of Section 3(a)(10) does not

exempt from registration new issues purchased entirely for cash from a reorganized

company. That section IS intended to

exempt only exchanges of old stock or

claims or part cash and part stocks or

claims." CCH Fed. Sec. L. Rep. Para. 93,088

at p. 91005 (1971). [emphasis in original)

49C.D. Calif., No. 9442o-CC. Previously

133

-
rer,orted 10 38th Annual Report, p. 114.

°E.D. Va., No. Bk-74-154-N. See 39th

Annual Report, p. 123 for reorganization of

American Loan & Finance Company, an associate company.

51See Securtttes and Exchange Commisston v. F. Wallace Bowler, 427 F.2d 190 (CA

4,1970).

52The receiver expects to liquidate Eastern Finance, which appears to be msolvent.

It was a holding company, with no sIgnIficant operations of its own. 53S.D.N.Y, No. 65-B-404 Previously re- ported 10 38th Annual Report, pp. 121-122;

34th Annual Report, pp. 149, 153-154; 33d

Annual Report, p. 133; 32d Annual Report,

pp.88--89. 54366 F.Supp. 1376 (S.D.N.Y., 1973). 55366 F.Supp. at 1382.

56N D. III , No. 7~B-5299. Previously reported 10 the 39th Annual Report, p. 125;

38th Annual Report, p. 125.

57In re Cybern EducatIon, lnc., 478 F.2d

1340 (C.A. 7, 1973).

58See 39th Annual Report, p. 127; 38th

Annual Report, p. 126; 37th Annual Report,

p. 138; 36th Annual Report, p. 197.

59S0 N.Y., No. 73-B-468

6°353 F.Supp. 523 (S D.N.Y., 1974).

61S.D.N.Y , No. 73-B-751.

134

62S.0. Ohio, Nos. 69085-6.

63W.0. Wash., No. 642-73-B-2.

64C.D. Cal., No. 73-03706

6SVan Camp v. Puts & Calls, tnc., No.

C-51071 (Superior Court of the State of

California for the County of Los Angeles,

dated August 6, 1973).

66The Supreme Court has held that the

Commissron's right to intervene in Chapter

XI proceedings is not limited solely to mov- 109under Section 328 for atransfer to Chapter X.Securtttes and Exchange Commission

v. Amencen Trailer Rentals Co., 379 U.S.

594, 612-613 (1965).

671nre Synergistlcs, Inc., No. 7~ 1251 (D.

Mass., confirmation order dated December

22, 1971), previously reported in 38th Annual Report, p. 126; In re Transystems, lnc.,

No. 71-164-Bk--.!E-Y, (S.D. Fla, filed September 28, 1971), previously reported in

37th Annual Report, pp. 199-200. See also 10 thrs connection In re BarIum Realty Co.,

62 F.Supp. 81, 88 (E.D. Mich., 1945); In re American Department Stores Corp., 16

F.Supp. 977, 979-980 (D. Del., 1936).

6aln re Amencsn Trailer Rentals Co., 325

F.2d 47, 52-53 (CA 10, 1963),rev'd on other

grounds, 379 U.S. 594 (1965).

69S.D.Texas, No. 73-H-381
PART 8

SEC M N E ENT

R I NS

PART 8

SECMANAGEMENT

OPERATIONS

1974 was another year in which the Commission made optimum use of its money

and personnel for the public interest.

ORGANIZATIONAL CHANGES

The Commission effected some orqaruzational changes to ensure the best possible

application of Its resources. The more significant changes are mentioned below.

Three new specialized offices were

created in the Division of Enforcement: a

Branch of Investment Management Enforcement to handle proceedings against

investment companies and advisers; a

Branch of Program Management to handle

special projects such as a tax shelter study

and a program on delinquent filings; and a

Chief Counsel's Office to render legal advice to the staff, regions, and other Federal

agencies on enforcement matters. In addition, the Dlvrsion's organizational structure

was modified to provide that the only persons reporting directly to the Director are its

three Associate Directors.

Changes were made in the structure of

several of the Regional Offices to give all

nine offices parallel organizations. The staff

in each office has been divided between the

two program areas, enforcement and regulation, with one senior official reporting directly to the Administrator on each program.

The Executive Director added a senior

level official to his staff to serve as Regional

Office Coordinator. The coordinator's position was established to insure uniformity

among the Regional Offices In program objactlves and resource availability, to Improve communication, and to give those offices a voice at headquarters.

EXECUTIVE MANAGEMENT

CONFERENCE

The Oomrrusston held ItS first executive

management conference In October 1973.

In announcing the conference, the Chairman stated that Its purpose was "to assemble the SEC's top management team ...

for a concentrated discussion of our

priorities and objectives for the next two or

three years." The conference was an attempt to avoid "the constant danger of becoming so engulfed in critical day-to-day

decrsions that we may not adequately focus

upon the necessarily broad perspective of

our overall objectives and Congressional

mandates." The eight conference sessions

focused on current Cornrnlssron responsibilities, probable future responsibilities,

and the agency's management process.

Since October, each of the major DiviSions

has had the opportunity to meet with the

Commission for an informal discussion of

projects, priorities, and special areas of

concern.

The need for Improved communications

amon9 the Regional Offices themselves and

between the Offices and Headquarters was

recognized as paramount. West Coast and

East Coast conferences of Regional Administrators were scheduled later in the

year. The topics discussed at these confer137
ences included case referrals, examination

programs, the manpower reportmg system,

equipment budgets, training. and grade

structures.

PERSONNEL MANAGEMENT

The permanent personnel strength of the

Commission totalled 1,814 employees on

June 30, 1974, as shown by the table below

Commissioners ... 5

Staff .. . .

Headquarters Office. . .. 1.140

Regional Offices 669

Total Staff 1.809

Grand Total 1,814

Recruitment

With the Congressional autncrtzatron of

263 addrnonal positions during the fiscal

year, the Commission launched an intensive recruitment program. Attorney recruiting trrps to schools from New England to

California resulted In applrcanons from

many highly qualified students. Special efforts were made to Identify senior accountants for a varrety of staff positrons More

than 200 responses were received from a

notice placed in the CPA Bulletin. Many of

those responding received eligible ratings

10 the senior level civil service examination.

In addition to filling the Commission's own

needs, this nationwide effort resulted in

greatly Increasing the number of accountants on the register who are now available

to other Federal agencies Extensive efforts

were also made to recrurt secretarres, 10-

cluding trrps to business schools in several

states outside the Immediate Washmgton,

D.C area.

During all of the recruitment efforts, the

Oommlssron's commitment to increase opportunities for rrunoritres and women was

emphasized. Of all new and vacant pOSItlons which were filled during the year 19

percent were filled by women and

rnlnorines. Of attorneys hired, 23 percent

were women or rnrnorrty group members.

Training and Development

Two new upward mobility programs were

mitiated during the year Under a pilot Tui138

non Support Program, many employees

who enroll in college degree programs may

receive tuition assistance for those courses

which relate to their present positions orthe

Comrmsslon's general area of work. At the

same nrne a Career Opportunrties Program

ISenabling an Initial group of 10 employees

to receive training 10 tYPing, EnglIsh, and

office skills to qualify them to move out of

their present clencal jobs.

Seminars, conducted by the staff on a variety of subjects, were offered to the Comrmsslon staff as well as the staffs of companion Federal, state, and industry agencies.

EIght of the Regional Offices sponsored

three to frve day semmars on enforcement

and regulatory matters. encouraging

cooperation and developing expertise

among all area officials On a larger scale,

two of the major DiVISIonssponsored seminars for enforcement officers and securities

compliance examinars, respectively. These

programs included mock trials and analysis

workshops.

Personnel Management

Evaluation

In February 1974, the CIVil service Commlssion rrutrated a nationwide review and

evaluation of the ccrnnussion's personnel

management program CSC evaluators visited nine regional and three branch otnces

durmg the following three months. Members of the Office of Personnel assisted the

regional and branch offrces in preparmg for

the evaluations and participated in the oral

close-out presentations made by CiVil Service Comrmssron personnel. The Headquarters Office revrew was scheduled for October 1974

INFORMATION DISSEMINATION

The full disclosure program requires that

an acnve program of mtorrnatton drsserrunation be mamtamed by the Commission

Public lntormatron is made available

through a variety of services and publicanons

As noted above, the Commission has Public Reference Rooms in Washmgton, DC.,

New York, Chicago, and Los Angeles, where

members of the public may examme Comrnlssron records. Because of space
shortages, the Washington Public Reference Room was moved from the headquarters bUilding to Eleventh and LStreets, N.W.

Despite some temporary confusion, visitors

now find a greater availability of carrels, microfiche readers and reader/printers, and

Xerox machines than before.

Microfiche copies of reports filed with

the Commission are made available to the

public under a contract which was awarded

at no cost to the government. During the

second year of that contract, several services have been expanded Exhibits which

are filed with registration statements and

various other reports filed with the Commission are now being filmed with the baste

document A comprehensive financial

thesaurus and other research tools which

are of great assistance In accessing the files

were also developed during 1974.

Subscriptions to the SEC Docket, a

weekly compilation of Commission releases

numbered 10,000 by year end A decision

was made in June to change the format of all

releases In early 1975 so that Act, Rule and

Regulation citations are consistent with

those used in the Code of Federal Regulations and the Federal Register.

AUTOMATED INFORMATION

SYSTEMS

Significant progress was made during the

year with respect to Improving the SEC's

research and reporting capabilities

The capacity of the Commission's own

computer was increased by the Installation

of additional core storage and several disk

drives. This equipment provides for a larger

memory and direct access capability, allowing more Jobs to be run simultaneously and

eliminating costly processing time Involved

In sequential access systems.

The Office of Data Processing developed

several new products during the year. A system was developed from which a Public Delinquency List will be published periodically, identifying firms which have failed to

timely file required reports. In July 1973, a

system designed to coordinate Broker/

Dealer examinations conducted by the

Commission, SIPC, and the Industry's selfregulatory organizations, became operational. The system provides information to

the examining authorities which enables

them to perform more effective examinations.

One other new product from the Office of

Data Processing was Computer Output

Microfiche (COM) This process, by which

computer output is filmed rather than

printed, IS cheaper, more durable, and requires far less storage space than traditional printed computer reports Expanded

use of this technique will be continued In

1975.

A JOint NASD/SEC Task Team dunnq the

year explored the potential use of computer

technology for Improving the surveillance

and enforcement programs.

Some experience with time-sharing and

other types of hardware was also acquired

during the year A programmable calculator

was purchased for the Office of Economic

Research. The calculator can satisfy many

of OER's analysis needs at less cost than the

computer and without delay. In order to respond to the needs of the Central Market

System Advisory Committee for fast,

sophisticated analyses, an account was established with the National Institutes of

Health. The Commission ISthus able to use

exrstlnq soft-ware and obtain Instant feedback. Two automated systems, one for accounting and the second for legal research

were reviewed during the year to determine

their cost effectiveness as research tools.

FINANCIAL MANAGEMENT

Fees collected by the Commission In fiscal 1974 amounted to 60 percent of funds

appropriated by the Congress for Commission operations.' The Commission is required by law to collect fees for (1) registration of securities issued; (2) qualification of

trust indentures; (3) registration of exchanges; (4) registration of brokers and

dealers who are registered with the Commission but are not members of the NASD;

and (5) certification of documents filed with

the Commission. In addltron, by fee schedule, the Commission imposes fees for certain filings and services such as the filing of

annual reports and proxy material.

With reference to the fee schedule, on

March 29, 1974, the Commission announced the repeal of certain provrsrons of

139
Rule 203-3 under the Investment Advisers

Act of 1940. One of the paragraphs repealed, Rule 203-3(b), required each registered Investment adviser to pay a $100 annual fee to the Commission during the

period of its registration. The action was

taken following the Commission's consideration of recent decisions of the United

States Supreme Court2 with respect to the

Independent Offices Appropriation Act of

1952,31 U.S.C. 483(a), which was thoughtto

140

provide the statutory basis for establishing

these fees. The Commission is presently reviewing all other fees imposed pursuant to

the same Act.

NOTES TO PART 8

1See p. 181, supra.

2Natlonal Cable Television Assn., Inc. v,

United States, 415 U.S. 336 (1974); Federal

Power Commission v. New England Power

Co., 415 U.S. 345 (1974).
PART 9

S J1511(5

THE SECURITIES INDUSTRY

Income and Expenses

Gross revenue of broker-dealers from all

activities fell 21 percent to $5.5 billion In

1973 from $7.0 billion In 1972. Except for

interest Income on customers' accounts,

commodities income and other business,

all income sources registered sizeable declines compared to 1972. Revenue derived

from over-the-counter market making, tradIng In non-exempt securrties and underwritIng activities fell more sharply than the

other revenue Items. (Note: A small number

of firms pnncrpally engaged In the insurance business have been deleted from all

PART 9

years on this table to eliminate distortions

created by the disproportionately large

amounts of their other Income unrelated to

the securities busmess.)

Total expenses decreased 9 percent 10

$5.5 billion In 1973 from $6.0 billion In 1972.

Registered representatives' compensation

and clerical and administrative employees

costs accounted for nearly all of the $559

million decrease. In contrast, commissions

paid to other brokers and Interest expenses

increased $188 million In 1973 Brokerdealers' operating Income, before partners'

compensation and taxes amounted to $57

million In 1973 compared With $976 million

in 1972.

143
Table 1

BROKER.DEALERS INCOME AND EXPENSESI

(MIllions at Dollars)

Revenue 1969' 1970' 1971' 1972' 1973'

Securities cornrrussron business $2,930 $2,185 $3,405 $3,533 $2,954

Exchange comrmssron bus mess 2,268 1,756 2,761 2,778 2,429 Floor Actrvrties 86 74 94 94 69 Over-the-counter busmess 576 355 550 661 456

Interest Income on customers accounts 474 380 364 527 621

Dealer business and/or trading acnvrnes 706 847 1,101 1,039 606

Over-the-counter market makers 400 289 463 493 240 MUniCipal and government bond dealers 210 435 440 350 312 Traders In non-exempted secunnes 96 123 198 196 54

Underwriting busrness 645 625 982 939 509 Investment company secu ntres 384 223 234 189 179 Investment advrsory tees 80 67 86 101 86 Commodities buemees 90 88 99 125 178 Gain or loss In fl rm Investment 151 66 251 210 14 Other business 362 319 347 359 397

Gross revenue 5,822 4,800 6,869 7,022 5,544

Expenses

Commissions paid to other brokers 182 132 197 205 224 Floor brokerage. clearance. comrnrssron fees 228 191 250 257 227 Registered representatives' compensation 1,192 903 1,297 1,363 1,076 Interest 581 553 528 641 810 Clencal and administrative employees 1,571 1,356 1,651 1,770 1,517

Communication 446 389 451 504 479 Occupancy and equipment" 351 372 434 480 453 Promotional 216 173 201 227 199

Other 494 460 581 599 502

Total expenses 5,261 4,529 5,590 6,046 5,487

Operating Income or loss before taxes! 561 271 1,279 976 57

Number of firms 2,619 2,332 2,539 2,512 2,164

1 Broker-dealers With gross secuntres Income at $20,000 and over Excludes lite Insurance companies With over $100 million In assets not related to the securities or commodities busrness 2 Includes depreciation and arnornzatron

3 Before partners' compensation

r ReVised

p Preliminary

Source SEC X-17A-l0 Reports

Securities Industry Dollar

Of each dollar received by broker-dealers

;n calendar 1973 a total of 533 cents was

derived from the securities cornmfssron

busmess, 109 cents from trading activities,

9.2 cents from the underwriting business

and the remaining 266 from secondary

sources of revenue such as Interest Income

on customers' accounts, sale of investment

company securities and gain or loss from

firm Investments

144

Total expenses amounted to 99.0 cents of

each securities industry dollar The two

largest components of expenses were registered representatives' compensation, 19.4

cents per dollar, and clerical and administrative employee costs, 27.4(:; per dollar of

revenue. Operating Income before partners'

compensation and taxes accounted for 1 0

cent of the average securities Industry dollar.
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Assets and Liabilities

Broker-dealers' reported assets total

$25.9 billion at year-end 1973 compared

With $33.7 billion at year-end 1972. This 23

percent decline in total assets was attributable to the 28 percent drop In securities

failed to deliver to $1.9 billion, the 33 percent drop In debit balances earned for customers securities accounts (including both

cash and margin accounts), and the 17 percent drop in long positions in securities and

commodities to $10.0 billion. The 14 percent decrease in the number of reporting

firms to 2,164 accounted for much of the

decline In these assets. (NOTE: A small

number of firms principally engaged in the

insurance business have been deleted from

all years shown on this table to eliminate

distortions created by the disproportionately large amounts of their assets unrelated to the securities business.)

Total liabilities, not including subordinated borrowrnqs, were $21 3 billion at

year-end 1973 compared With $28.1 billion

at year-end 1972, which represented a 24

percent declme. Money borrowed, the

largest component, fell 31 percent to $10.0

billion, securities failed to receive fell 36

percent to $1.8 billion; while free credit and

other credit balances owed secuntres customers declined only 8 percent to $4.6 billion

Total capital aggregated $4.7 billion at

year-end 1973 compared with $5.6 billion at

year-end 1972, a decline of 18 percent. Subordinated borrowmqs for capital purposes

-Including subordinated loans, accounts

covered by equity or subordination agreements and secured demand notes-declined 10 percent to $1 3 billion. Equity

capital declined 20 percent to $3.4 billion.

Registered Broker-Dealers

As of June 30, 1974, there were 3,982

broker-dealers registered, compared with

4,407 a year earlier. Ttus represents a decrease of 425, or 9 percent, since June 30,

1973. DUring the year 766 registrations were

terminated, 702 new applications were reNumber

5500

5000

4500

4000

BROKER-DEALER REGISTRATIONS

As of End of Fiscal Years, 1965-1974

o_c:c

1965 66

I

67

!

68

I

69

C

70

l

71

,=C=C

72 73 1974

147
ceived, 341 applications were made etfec- requested by the registrants for a variety of

tive, and 363 applications were returned, reasons, while 77, or 11 percent, were the

denied or withdrawn. Approximately 689,or result of Commission action (cancellation

89 percent, of the 766 terminations were or revocation).

Table 3

LOCATION OF BROKER.DEALERS

[June 30. 1974)

Number of propnetors. partners,

Number of regIstrants officers. etc :.1

t.ocatron of pnncrpal otnce Sale Sale

pro- Part- Cor- pro- Part- CorTotal pne- ner- para- Total pne- ner- porator- ships tlons" tor- ships tlons'

ships ships

Alabama 25 3 2 20 132 3 5 124

Alaska 1 1 a a 1 1 a a Anzona 18 3 a 15 62 3 a 59

Arkansas 19 3 2 14 69 3 7 79 California 428 eo 28 320 2.925 83 288 2.554

Colorado 66 9 3 54 420 9 60 351

Connecllcut 58 4 7 47 480 4 120 356 Delaware 14 2 a 12 38 2 a 36 Distnct of Colurntna 37 5 6 26 345 5 53 287 Flonda 113 13 4 96 444 13 9 422 Georgia 44 1 2 41 396 1 4 391 HawaII 23 1 a 22 106 1 a 105 Idaho 6 a a 6 20 a a 20 Illmors 178 15 30 133 1,412 15 238 1.159 Indiana 49 8 1 40 264 8 2 274 Iowa 42 2 3 37 225 2 11 212 Kansas 23 2 2 19 145 2 9 134 Kentucky 11 3 a 8 73 3 a 70 LOUISiana 23 8 4 11 175 8 16 151 Matne 12 1 2 9 41 1 9 31 Maryland 38 6 5 27 253 6 69 178 Massachusells 167 34 19 114 1,151 34 127 990 MIchIgan 63 8 3 52 421 8 100 313

Mtnnesota 85 3 2 80 654 3 4 647

MISSISSIPPI 14 2 5 7 60 2 13 45

MISSOUri 66 3 8 55 712 3 119 590

Montana 5 2 a 3 16 2 a 14

Nebraska 21 1 a 20 200 1 0 199

Nevada 7 2 a 5 19 2 a 17

New Hampshire 4 1 a 3 12 1 a 11

New Jersey 178 39 23 116 577 39 63 475

New MeXICO 5 1 a 4 27 1 a 26

New York (excludtng New York

CIty) 345 105 33 207 1,032 105 260 667

North Carohna 29 8 2 19 148 8 4 136

North Dakota 6 a a 6 30 a a 30

OhIO 87 6 16 65 726 6 226 494

Oklahoma 25 7 a 18 119 7 a 112

Oregon 33 4 1 28 146 4 3 139

Pennsylvania 193 23 33 137 1,236 23 222 991

Rhode Island 21 5 2 14 50 5 10 35

South Carohria 15 0 2 13 70 a 9 61

SOuth Dakota 3 2 a 1 13 2 a 11

Tennessee 42 3 1 38 253 3 27 223

Texas 148 21 4 123 997 21 21 955 Utah 53 3 4 46 187 3 12 172

Vermont 6 3 a 3 26 3 a 23

Virginia 45 7 5 33 336 7 35 294

Washtngton . 66 8 4 54 304 8 10 286

West Vlrgtnla 6 2 a 4 23 2 a 21

Wisconsin 39 3 a 36 314 3 a 311

Wyomln9 7 2 1 4 21 2 2 17

Total (excludtng New York

CI~) 3.012 478 269 2,265 17.948 481 2.167 15.298 New York Ity 937 71 222 644 11.506 71 2.480 8,955

Sub Total 3.949 549 491 2.909 29,452 552 4,647 24,253

Foreign' 33 3 1 29 314 3 2 309

Grand Total 3.982 552 492 2.938 29.766 555 4.649 24.562

1Registrants whose pnncrpa! offices are located 10 foreign countnes or other junadrcuons not listed

'Includes directors. officers, trustees and all other persons occupy 109srrrutar siatus or performtng srmrlar functions 'Allocations made on the baSISof locanon of pnncrpal offices of registrants, not actual locations of persons 'Includes ell forms of orqaruzatrons other than sole propnetorships and partnerstups

148
BROKER-DEALERS AND BRANCH OFFICES

3000 6000 9000

1969 Bill

I

1970

I ~-I~9

1971 I 7169 I

1972 71r.ll~

1973

8roker-Dealers ____ I Branch Otf ices

1969

1970

1971

1972

1972

R=Ret't~ed

EMPLOYEES

(Thousonds)

fl.JU

(13,J

( 185)

is«)

338

36~

400

p: Prel

-

munarv

Registered

Representatives

R= Revi s e d

____ I Other Employees

149

SOURCE X-17A-10 REPORTS

BRANCH OF FINANCiAL REPORTS

OFFICE OF ECONOMIC RESEARCH

05-5051

_

t
Broker-Dealers, Branch Offices,

Employees

The numbers of broker-dealers and

branch offices have declined In each successive year since 1969. The number of employees declined between 1969 and 1970,

Increased dUring 1971 and 1972, and then

decreased again dUring 1973. There were

about 349 thousand employees at year-end

1973. Registered representatives employed

by the securities industry totaled 183 thousand, or about 52 percent of total employment.

SECO Broker-Dealers

The number of broker-dealers who are

not members of a registered national securities association increased from 276 to 300

dUring the past fiscal year. The largest increases were in real estate syndicators and

rental pool condominium dealers while the

largest decreases were in put and call brokers and dealers and exchange specralists

This year was the first since 1968 In which

the number of SEeD broker-dealers increased; the increase was due primarily to

the registration as broker-dealers of

specialized firms which attain fewer competitive advantages In Joining the NASD

than do traditional broker-dealers.

Table 4

PRINCIPAL BUSINESS OF SECO BROKER.DEALERS

F.scal year-end

1970 1971 1972 1973 1974

Exchange member primarily engaged rn

floor activrtres 18 16 15 17 17 Exchange member primarily engaged rn

exchange cornrmssron business 32 37 33 28 20

Broker or dealer In general secunnes

busmess 82 79 69 66 65

Mutual fund underwriter and distnbutor 35 27 27 24 18

Broker or dealer seiling vanable annuities 15 22 21 18 18

sene.tor of savings and loan accounts 19 15 10 9 7

Real estate syndicator and mortgage broker

and banker 20 16 18 21 33

Broker or dealer seiling 011 and gas mterests 4 4 3 3 6

Put and call broker or dealer or optron

writer 27 23 22 20 15

Broker or dealer seiling sacuntres of only

one Issuer or assocrated Issuers (other than

mutual funds) 16 15 17 18 19

Broker or dealer selling church sacuntres 20 21 15 16 17

Government bond dealer 24 4 3 3 7

Broker or dealer In other secunties

business 21 19 30 26 31

Broker or dealer In Interests In condorrurruurns 14

tnacuve 4 3 11 7 13

Total 336 301 294 276 300

Not separately tabulated m prior years

150

•
FINANCIAL INSTITUTIONS resulting in net purchases of $7.5 billion.

This compares with purchases of $56.2 brtStock Transactions lion, sales of $45.4 billion, and net purchases of $10.8 billion In 1972. Their comDuring 1973, private noninsured pension mon stock activity rate, defined as the averfunds, open-end investment companies, life age of gross purchases and sales divided by

insurance companies, and property-liability the average market value of holdings, fell to

insurance companies purchased $46.7 bu- 22.9 percent from 27.8 percent a year

lion of common stock and sold $39.2 billion, earlier.

Table 5

COMMON STOCK TRANSACTIONS AND ACTIVITY RATES OF

SELECTED FINANCIAL INSTITUTIONS: 1965-1973

(MIllions of Oollars)

1965 1966 1967 1968 1969 1970 1971 1972 1973

Pnvate nomnsured pension funds'

Purchases 5.585 6.610 10.035 12,285 15.230 13,955 21,685 23.220 20,325

Sales 2.560 3,165 5.655 7.815 10.270 9.370 12,800 15.650 14,790

Net purchases 3.025 3.445 4.380 4,470 4.960 4.585 8.885 7.570 5,535

ActIVIty rate' . 114 126 172 187 213 205 221 197 165 Open.End rnvestment companoes2 Purchases 6,530 10.365 14,925 20.100 22,060 17.130 21,555 20.945 15,560

Sales 5,165 9.320 13,325 18.495 19.850 15.900 21,175 22.550 17.505 Net purchases 1.365 1.045 1,600 1.605 2,205 1.225 380 -1.610 -1.945

ACbvlty rate' 218 340 407 484 510 456 482 448 390 Life Insurance cornpames''

Purchases 985 1.110 1,685 2.930 3.705 3.770 6.230 6,910 6.320 Sales 600 825 875 1.725 2.185 1.975 2.775 4,425 4,035

Net purchases 390 285 605 1,205 1.520 1.795 3,455 2.485 2.290

ActIVIty rate' 138 160 182 268 294 278 310 296 248 Property-liabIlity rnsurance companoes Purchases. 770 900 1.165 2.245 3,780 3,615 4.170 5.130 4,520

Sales 965 825 980 1.645 2,680 2.720 1,945 2.740 2,855

Net pu rchases -190 80 185 600 900 890 2.225 2.390 1.865

ActIVIty rate' 82 86 97 160 267 281 232 238 203

Total selected mstrtunons

Purchases 13.875 18,985 27.810 37.565 44.775 38.465 53,645 56.205 46.725 Sales 9.285 14,135 20.835 29.680 35.185 29,970 38.695 45,370 39.185 Net purchases 4.585 4.850 6,975 7.885 9.590 8,500 14.950 10,835 7.545

ActiVity rate. 147 198 247 294 324 298 308 278 229 ForeIgn rnvesto .... Purchases 3.720 4.740 8.035 13.120 12,430 8,925 11.625 14.360 12,760

Sales 4,135 5.075 7,275 10.850 10,940 8.300 10.895 12.175 9.955

Net purchases -415 -335 755 2,270 1.485 625 730 2.185 2.805

, Includes funds of corporatrons, uruons, and muttremployer groups. and nonpront organIZatIons. also deferred protot

shanng funds

'Mutual funds reportrng to Investment Company lnstrtute, a group whose assets constrtute about runety percent of the

assets of all open-end Investment compames

'Includes both general and separate accounts 'TransactIons of foreIgn rndtviduals and msntuncns rn domesbc common and preferred stocks ActIVIty rates for

foreIgn rnvestors are not calculable.

NOTE Transactrons may not add to totals because fIgures are rounded to nearest $5 rruthon , ActIVIty rate rsdetrned as the average of purchases and sales dIVIded by average market value of stockholdrngs, stated as an annual rate Annual actIvIty rates presented above dIffer slightly from those previously published by the secunues

and Exchange Oornrmssion Under the old activrty rate method, average market value of stockholdrngs was based on

vatuanon at begrnnrng and and of the year The new actIvIty rate ccrnputatrcns utihze the mean values of four quarters for

the average market value of stockholdmqs, trus method ISbelieved to be more representabve Quarterly actIvIty rates are

not affected by trns change

SOURCE PensIon funds and property-habrhty rnsurance comparues, SEC, rnvestment cornparues, Investment Company Instrtute, life rnsurance cornparues, lnstrtute of LIfe Insurance, foreIgn rnvestors. Treasury Oepartment

151
Stockholdings their share of total stock outstanding rose

from 34.1 percent in 1972to 36.3 percent at

At year-end 1973,the institutional groups the close of 1973. During the same period,

listed In the table below held $335 billion of the share held by other domestic investors,

corporate stock, both common and pre- individuals and institutions not listed, deferred, versus $397 billion a year earlier. clined from 62.8 percent to 59.8 percent

Even though the value of stock held by while foreign investors increased their

these institutions declined 15.6 percent, share from 3.1 percent to 3.9 percent.

Table 6

STOCKHOLDINGS OF INSTITUTIONAL INVESTORS AND OTHERS: 1965-1973

(Bllhons of Dollars, End of Year)

1965 1966 1967 1968 1969 1970 1971 1972 1973

1 Private norunsured pension funds $ 408 $ 395 $ 511 $ 615 $ 614 $ 671 $ 886 $1152 $ 890 2 Open-end Investment companies 335 312 428 509 450 439 526 580 433

3 Other Investment companies 76 62 82 82 66 62 69 74 66

4 Life Insurance companies 91 88 109 132 137 154 206 268 259

5 Property-habrhty Insurance

companies' 120 110 130 146 133 132 166 218 196

6 Common trust funds 35 33 39 48 46 46 58 73 63 7 Personaltrust funds 697 667 759 836 796 786 941 1102 955

8 Mutual savings banks 15 15 17 20 22 25 30 36 40 9 State & local retirement funds 16 21 28 41 59 80 112 142 178 10 Foundations 195 187 202 220 200 220 250 285 245 11 Educational endowments 70 62 77 85 76 78 90 107 88

12 Subtotal 2058 1952 2382 2734 2599 2693 3334 4037 3413 13 Less Instrtutronat holdings

of Investment company shares 20 21 28 34 40 49 60 71 67

14 Total rnsntuncnat Investors 2038 1931 2354 2700 2559 2644 3274 3966 3346 15 Foreign Investors2 199 181 215 260 252 267 294 364 355

16 ncmesnc indIviduals' 4900 4366 5679 6790 5783 5618 6326 7302 5506

17 Total stock outstanding' 7137 6478 8248 9750 8594 8529 9894 1,1632 9207

1 Excludes holdings of Insurance company stock 2 Includes estimate of stock held as direct Investment

'Computed at residual (hne 16~17-14-15) Includes both indIviduals and rnatrtutronal groups not hsted above 'Includes both common and preferred stock Excludes Investment company shares but Includes foreign Issues outstandmq In the US

152

•
Number and Assets of

Registered Investment Companies

As of the end of the 1974 fiscal year, 1,377

Investment companies were registered with

the Commission, an increase of 16 from the

number of one year earlier. Of the registered

companies, 89 were classified as"inactive."

Approximately 62 percent of the active

companies were management open-end

companies ("mutual funds").

The 1,288 active companies had total assets having an approximate market value of

$62 billion, with mutual funds accounting

for about 74 percent of that value. The $62

billion figure respresents about an 18 percent decline from the $73.1 billion total at

the end of the last fiscal year. Despite this

decline, the investment company industry

has experienced tremendous growth in the

years since the Investment Company Act

was enacted, a fact which can be appreciated by noting that In 1950 there were

366 Investment companies with total assets

of about $4.7 billion, and that, as recently as

1960, there were only 570 companies With

assets of $23.5 billion.

Table 7

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS OF

JUNE 30, 1974

Approxrmate

market value of

Number of registered companies assets of acnve

cornparues

Active Inactive- Total (millions)

Management open-end ("Mutual Funds") 798 28 826 46,110

Funds haVing no load 233 6,382 Vanable annutty-separate accounts 55 1,013

Capital leverage companies 7 262 All other load funds 503 38.453

Management closed-end 197 36 233 8.954

Small business investment companies 38 251

CapItal leverage companies 2 40

All other closed-end companies 157 8.663

Unltlnvestmenl trusts . 288 22 310 6.167'

Van able annuity-separate accounts 47 150 All other unit mvestrnent trusts . 241 6.017

Face-amount certificate compames 5 3 8 1.056

Total. 1.288 89 1.377 82.287

"Inactive" refers to regIstered companies which as of June 30.1974. were the process of being nquidated or merged.

or have fIled an apphcencn pursuant to Section 8(1)of the Act for dereglstratlon. or which have otherwise gone out of

existence and rernarn registered only until such time as the Commission Issues order under seencn 8(1)terminating their

re~lstratlon Includes about $3 1 billion of assets of trusts which mvest In seeuntres of other Investment companies. substantially all

of them mutual funds

153

• '"
NUMBER AND ASSETS OF

REGISTERED INVESTMENT COMPANIES

No. of Companies

1500

(Flacal)

1000

500

o

1107

lUI 1377

1965 66 67 68 69 70 71 72 73 1974 o

20

60

40

Dollars Bi !lions

80

Face Amount Certlflcote Companies

Unit InYestment Trusts I

Management Closed.End

Management Open-End

"Mutual Funds. 05-5048

154

~
Investment Company

Registrations

Dunng fiscal 1974, 106 new Investment

companies registered, an increase of 15

from the previous fiscal year. This marked

the first time since 1969 that the number of

new registrations in a fiscal year exceeded

the number of new registrations in the previous fiscal year. However, the number of

existing companies terminating their registrations increased from 64 in fiscal 1973 to

90 in fiscal 1974, resulting in a net gain of

only 16 companies.

Table 8

NEW INVESTMENT COMPANY REGISTRATIONS

1974

Management open-end

No-loads 16 Vanable annumes 3 All others 41

Sub-total 60

Management closed-end

SBIC's 0 All others 19

Sub-total 19

Unit Investment trust Vanable annuities 11 All others 16

Sub-total 27 Face amount cernncates 0

Total RegIstered 106

Table 9

INVESTMENT COMPANY REGISTRATIONS TERMINATED

1974

Management open-end

No-loads 15

Vanable annumes 0

All others 45

Sub-total 60

Management closed-end seic:s 4

All others 20

Sub-total 24

Unit Investment Trust

Vanable annumes 2 All others 4

Sub-total 6

Face amount certrncates 0

Total Terminated 90

155
Private Nonlnsured Pension

Funds: Assets

On December 31, 1973. total assets of private noninsured pension funds were $124.4

billion at book value and $129.9 billion at

market value. A year earller therr total assets

were $117.5 billion (book) and $154.3 billion

(market). The book value of common stockholdings rose from $74.6 billion In 1972 to

$79.2 billion while the market value fell from

$113.4 billion to $88.0 billion.

156

Private Nonlnsured Pension

Funds: Receipts and

Disbursements

Information on the receipts and drsbursements of private non insured pension

funds for 1973 is not available. In 1972, net

receipts were $11.6 billion. Of the $20.1 billion In total receipts. $12.7 billion was contributed by employers and $1.2 billion by

employees. Investment income (interest,

dividends, and rent) and net profit on sale of

assets added $4.3 billion and $1.7 billion,

respectively. Of the $8.5 billion in total disbursements. $8.3 billion was paid out to

beneficiaries.
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SECURITIES ON EXCHANGES

Exchange Volume

Dollar volume of all securities transactions on registered exchanges totaled

$187.2billion In 1973,down 13 percent from

the $215.5 billion volume In 1972. Of thrs

total, $177.9 billion represented stock tradIng, $8.3 billion, bond trading, and the balance, trading In rights and warrants. The

value of NewYork Stock Exchange transactions, was $154.7 billion in 1973.Thrs figure

represents a decline of 8.4 percent from

1972.NYSEshare volume declined 3.5 percent from Its record high of $4.5 billion in

1972. On the American Stock Exchange,

value of shares traded dropped 50 percent

to $10.3 billion. The AMEXshare volume of

734million shares was off 33.4 percent from

the 1972 figure. Share volume on the regional exchanges declined 8.2percent from

the 1972figure to 652.1 million shares, valued at $21.2 billion.

Table 12

EXCHANGE VOLUME: 1973

(Data m thousands)

Bonds Stocks RIghts and warrants Total

dollar Dollar Principal Dollar Share Dollar Number volume volume amount volume volume volume of Units

187,156.719 8.294.9949.420.762177.877,5675.723.164

11.247.018 399.269 633.018 10,269,776 734,499

1,793.049 0 0 1,792,908 42,171

o 0 0 0 0

118,869 20 29 118,849 2.838

380.589 0 0 380.532 10.676

8,136,948 653 1.213 8.131.114 240.415

23.987 24 145 23.896 7,462

154,664.323 7.865.380 8.736,821 146.450,834 4,336,581

6,388.529 28.934 48.154 6.315,636 206.234

All registered exchanges 984.158 176.264

American

Boston

Chicago Board of Trade Cmclnnatl

Detroit

Midwest

National

New York

Pacrtrc Coast Ph uadelphre-Battrrno reWashmgton

Intermountain

Spokane

Exempted Exchange-Honolulu

4,395.727

996

6,685

1,899

715

o

o

2

1.382

o

o

4.386.341 996

6,685

1.897

126.991

2.262

13,031

260

577.973

141

o

o

57

5.181

67

348.109

43.959

8.671

o

o

o

76.959

30

o

o

12

1.350

471

84,008

10.886

2.538

o

o

o

NASDAQ Volume

NASDAQ share volume and pnce information for over-the-counter trading has

been reported on a daily basts since

November 1, 1971.At the end of 1973there

158

were 2932 issues In the NASDAQsystem.

Volume for 1973 was 1.6 billion shares.

down 27 percent from 1972. This trading

volume reflects the number of shares

bought and sold by market makers plus

their net Inventory changes,
Table 13

SHARE VOLUME BY EXCHANGES'

Total Share Volume In Percentage

Year (Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others'

1935 681,971 7313 1242 191 269 110 96 85 03 691 1940 377,897 7544 1320 211 278 133 119 82 08 305 1945 769,018 6587 2131 177 298 106 66 79 05 551 1950 893,320 7632 1354 216 311 97 65 55 09 261 1955 1,321,401 6885 1919 209 308 85 48 39 05 502 1956 1.182,487 6631 2101 232 325 83 47 49 05 527 1957 1,293,022 7070 1814 233 273 111 40 39 06 414 1958 1,400,579 7131 1914 213 299 84 45 35 05 274 1959 1,699,697 6559 2450 200 281 97 37 31 04 341 19W 1,428,552 6908 2246 222 314 89 39 34 05 141 1961 2,121,050 6566 2584 225 345 80 31 31 04 134 1962 1,699,346 7184 2026 236 298 88 32 37 05 95

1963 1,874,718 7317 1890 234 283 84 30 47 04 111

1964 2,118,326 72 81 1942 244 265 93 29 55 04 86 1965 2,663,495 7010 2260 264 234 82 27 53 05 64 1966 3,306,386 6954 22 89 257 269 86 40 46 06 52

1967 4,641,215 6448 2845 236 246 88 43 33 03 58 1968 5,408,582 6200 2975 263 265 90 79 32 01 96

1969 5,133,498 6318 2762 285 348 123 51 13 01 100

1970 4,834,523 71.29 1903 316 368 163 52 11 02 55

1971 6,172,668 7134 1843 353 372 192 43 16 03 44 1972 6,518,132 7048 1823 371 413 222 59 15 04 45 1973 5,899,419 7493 1375 410 368 220 72 18 05 39

1Share Volume for Exchanges Includes Stocks, RIghts and Warrants

'Others Include Intermountain Stock Exchange, Spokane Stock Exchange, NatIonal Stock Exchange and Honolulu Stock Exchange 3 Data revised as of 1960

DOLLAR VOLUME BY EXCHANGES'

In Percentage

Dollar Volume Year ($ Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others'

1935 $ 15,396,139 8664 783 132 139 88 134 40 04 16 1940 8,419,772 8517 768 207 152 111 191 36 09 09 1945 16,284,552 8275 1081 200 178 96 116 35 06 13 1950 21,808,264 8591 685 235 219 103 112 39 11 05 1955 38,039,107 8631 698 244 190 103 78 39 09 08 1956 35,143,115 8495 777 275 208 108 80 42 08 07 1957 32,214,846 85 51 733 269 202 112 76 42 08 07 1958 38,419,560 85 42 745 271 211 110 71 37 08 05 1959 52,001,255 8366 953 267 194 109 66 33 07 05 19603 45,276,616 8387 936 273 195 104 60 34 08 04 1961 64,032,924 8249 1072 276 ZOO 104 50 38 07 05 1962 54,823,153 8638 682 276 200 105 46 42 07 05 1983 64,403,991 8524 752 273 240 107 42 52 06 04 1964 72,415,297 8355 846 316 249 115 43 67 06 04 1965 89,498,711 8183 992 345 244 1.13 43 70 08 03 1966 123,643,475 7981 1185 314 285 1.11 57 57 08 02 1967 162,136,387 7732 1449 308 280 113 67 44 04 04

1968 197,061,776 7358 1800 312 266 114 104 35 02 09 1969 176,343,147 7351 1760 340 313 144 68 12 01 13 1970 131,708,798 7845 1111 376 381 200 68 11 03 05 1971 186,375,172 79 07 998 400 379 229 59 19 05 04 1972 205,956,263 7777 1038 429 395 257 76 18 05 06 1973 178,861,725 8207 606 455 356 246 100 21 07 02

1 Dollar Volume for Exchanges Includes Stocks, RIghts and Warrants

'Others Include Intermountain Stock Exchange, Spokane Stock Exchange, NatIonal Stock Exchange and Honolulu

Stock Exchange

3 Data revised as of 1960

159
Third Market Volume

Over-the-counter volume in common

stocks listed on the New York Stock Exchange was 249 million shares in 1973.This

represented adecline of 24 percent from the

record volume attained in 1972 and was the

only decline in third market volume since

reports on these transactions were first required by the Commission in 1965. Dollar

volume of over-the-counter transactions

declined 25 percent in 1973 to $10.2 billion.

In 1973, the ratio of over-the-counter

share volume to total NYSE share volume

was 5.8 percent compared to 7.3 percent in

1972. Dollar volume of over-the-counter

transactions was 7.0 percent of total NYSE

dollar volume In 1973, compared to 8.5 percent, the previous year

12

Dollars Br llren s

'THIRD MARKET' VOLUME IN NYSE STOCKS

Dollar Volume

Percent

12

8 8

160

o

1965 66 67 68 69 70 71 72 1973

DS-!i052

o

~
Table 14

COMPARISON OF THIRD MARKET AND NYSE VOLUME

Yeer Over-the-counter sates

of NYSE-hsted common

stocks

New York Stock Exchange volume

RatIo of over-thecounter sales to

New York Stock Exchange volume

(percent)

Share volume (thousands)

1965

1966

1967.

1968

1969

1970

1971

1972.

1973

48.361

58.198

85.081

119.730

155,437

210.067

297.850

327.031

249.387

1.809.351

2.204.781

2.885.748

3,298.665

3,173,564

3.213.069

4.265,279

4.496,187

4,336.581

27

26

29

36

49

65

70

73

58

Dollar volume (thousands)

1965

1966

1967

1968

1969

1970

1971

1972

1973

2.500,416

2.872.660

4.151.917

5.983,041

7.127.834

8.020.839

12.383.965

13,580.785

10.186.256

73.199.997

98,565.294

125.329,106

144.978,410

129.603.420

103.063.237

147.098.396

159,700.186

146,450.834

34

29

33

42

55

78

84

85

70

161
Special Block Distributions

In 1973, the total number of special block

distributions declined 9.8 percent. However, the value of these distributions declined 62 percent to $1.2 billion.

Secondary distributions accounted for

more than half of the total number of special

block distributions in 1973 and 93 percent

of the total value of these distributions.

However, the number of secondarydistributions, which reached a record high of 229 in

1972, declined 48 percent to 120 in 1973.

The value of secondary distributions was 64

percent lower in 1973.

The Special Offering method, employed

only once since 1962, was used 91 times in

1973 and accounted for 40 percent of the

total number of all spacial block distributions in 1973, but at $79.9 million, accounted for only 3.9 percent of the value of

all special block distributions.

The number of exchange distributions,

declining since 1964,fell 27 percent m 1973.

The value of exchange distributions was $9.1

million, representing a declme of 70 percent

from the 1972 figure.

Table 15

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(value & volume In thousands)

secondary distributions Exchange distributions Spec,al offerings Year

Number Shares Value Number Shares Value Number Shares Value sold sold sold

1942 116 2.397.454 $ 82,840 79 812,390 $22.694

1943 81 4.270,580 127,462 80 1.097.338 31,054 1944 94 4,097.298 135,760 87 1,053.667 32.454 1945 115 9,457,358 191,961. 79 947.231 29.878 1946 100 6.481.291 232,398 23 308.134 11.002 1947 73 3.961.572 124,671 24 314.270 9.133 1948 95 7.302,420 175,991 21 238.879 5,466

1949 86 3.737,249 104.062 32 500.211 10.956 1950 77 4.280,681 88.743 20 150.308 4.940 1951 88 5,193.756 146.459 27 323,013 10.751 1952 76 4,223.258 149.117 22 357.897 9,931 1953 68 6.906.017 108.229 17 380,680 10.488 1954 84 5.738,359 218,490 57 705,781 $ 24.664 14 189,772 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 29.454 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 12.143,656 658.780 41 2,345,076 65.459 2 48.200 588 1963 100 18.937,935 814,984 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 1988 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

162
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds on

U.S.stock exchanges at year-end 1973was

$888 billion, a decrease of 15 percent over

the previous year-end figure of $1,047 billion Thetotal was comprised of $764billion

In stocks and $124 billion in bonds. The

value of listed stocks declined by 20 percent

in 1973 and the value of listed bonds increased nearly 29 percent. Stocks with primary listing on the New York Stock Exchange were valued at $721 billion and represented 94 percent of the common and

preferred stock The value of NYSE-listed

stocks declined from their 1972 year-end

total by $166 billion or 19 percent. Stocks

with primary listing on the AMEXaccounted

for 5 percent of the total and were valued at

$39 billion. The value of AMEX stocks declined $20 billion or 34 percent In 1973.

Stocks with primary listing on all other exchanges were valued at $4.1 billion and declined 28 percent over the 1972 total.

The net number of stocks and bonds

listed on exchanges increased by230 issues

or 4 percent In 1973.The largest gain was

recorded on the NYSE, where listings increased by 263 issues Data on the number

and value of foreign securities are in a footnote following Table 16.

Table 16

SECURITIES LISTED ON EXCHANGESI

(December 31. 1973)

Common Preferred Bonds Total Secunhes

Market Market Market Market Exchange Value Value Value Value

Number (Millions) Number (Millions) Number (Millions) Number (Millions)

RegIstered Amencan 1.279 $ 37.376 81 $ 1.346 190 $ 2.801 1.550 $ 41.523 Boston 41 159 2 1 1 3 44 163

CIOcIOnat, 8 27 3 6 3 30 14 63 DetroIt 5 11 1 0 0 6 11

MIdwest 29 617 8 81 1 10 38 708

Nahonal 107 346 0 0 4 50 111 396

New York 1.536 697.996 522 23.016 2.188 120.536 4.246 841.548

PacIfic Coast 44 1.381 7 48 16 415 67 1.844

P-B-W 33 216 98 829 6 41 137 1.088

Intermountain 44 28 0 0 0 0 44 28

Spokane 23 22 0 0 0 0 23 22

Exempted

Honolulu 19 348 7 9 5 2 31 359

Total 3.168 $738.527 729 $25.336 2.414 $123.888 6.311 $887.751

"Less than 5 million but greater than zero 1Excludes secunties which were suspended from trading at the end of the year. and securities which because of

macnvity had no available quotes Includes the followIOg foreign stocks

Market Value Exchange Number (Millions)

New York 33 $17.693 Amencan 69 15.600 P-B-W 2 7

National 4 174

Honolulu 2 7

Total 110 $33,481

163
MARKET VALUE OF SECURITIES TRADED ON

ALL U. S. STOCK EXCHANGES

00110,. BilI.on. !(Il-------------~

200

160

:.~.. Stocks, Rights

.. ':; & Warrants

Bond.

., . . . '.= : .:' .':

.

. . .

120 .. . . .. . .

80

.. . .

40

. .. . ..

..

..

o

1964 65 66 67 68 69 70 71 72 1973 cs ts07G

164

'

~
Table 17

VALUE OF STOCKS LISTED ON EXCHANGES

(Dollars onbrthons)

New York American Exclusively Dec 31 Stock Stock on other Totals Exchange Exchange Exchanges

1936 $ 59.9 $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 1046 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 1173 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 25.4 42 3373 1980 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 48 680 7

1971 7418 491 47 7956

1972 8715' 556' 56' 9321'

1973 7210 387 41 7638

r ReVised

165
Securities on Exchanges

As of June 30.1974. a total of 6,459 securities. representing 3,482 issuers. were admitted to trading on securities exchanges In

the United States. This compares with 6.353

Issues. involving 3,475 issuers, a year earher Over 4.300 Issues were listed and registered on the New York Stock Exchange, accounting for 53.5 percent of the stock Issues

and 90 percent of the bond Issues. Data

below on "Securities Traded on Exchanges" involves some duplication since it

Includes both solely and dually listed securities.

Table 18

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(June 30. 1974)

Issuers

Registered exchanges Stocks Bonds Total involved

Registered and listed 3.920 2,452 6.372 3.421

Temporarily exempted from reglstrahon 3 2 5 2

Admitted to unlisted trading priVileges 44 3 47 36

Exempted exchanges

Listed 23 5 28 16

Admitted to unlisted trading priVileges 7 0 7 7

Total 3.997 2,462 6,459 3.482

Table 19

SECURITIES TRADED ON EXCHANGES

Stocks

Issuers Bonds'

Temporarily

Registered exempted Unlisted Total

Amencan 1.287 1.314 50 1.365 201

Boston 819 107 747 854 15

Chicago Board Options 1 1 1

Chicago Board of Trade 3 1 2 3

Cincinnati 333 26 314 340 14

Detroit 384 68 335 403

Honolulu' . 37 46 5

Intermountain 56 54 2 56

Midwest 624 385 323 709 13

National 106 108 108 4

New York 1.865 2.096 3 2.099 2.211

Pacmc Coast 884 848 185 1,033 rr PBW 992 280 889 1.169 59

Spokane 37 35 5 40

I Issues exempted under Section 3(a)(12) of the Act. such as obligations of U S Government, the states. and Cities. are

not Included In trns table

2 Exempted exchange had 39 listed stocks and 7 admitted to unlisted trading

166
1933 ACT REGISTRATIONS

Effective Registrations;

Statements Flied

During fiscal year 1974. 2.890 securitres

registrations valued at $57 billion became

effective. The number of effective registrations fell 12 percent from fiscal 1973 and the

dollar value declined 4 percent. These decreases reflect fewer small equity registrations and more registered debt.

The number. dollar value and type of registration statement filed with the Com mission offer further lnsiqht into the decline In

the numbers of small issues during fiscal 197 4. There was a 16 percent decrease in

the number of registration filings. from

3.744 in fiscal 1973 to 3.149 in fiscal 1974.

The dollar value was the same for both

years-$63 billion. Among these statements. there were 1.309 first-time registrants In fiscal 1973 and su bstantially

fewer. 731. in fiscal 1974 Thus. almost all

the decline In the numbers of filings is accounted for in the drop-off of first-time registrants.

Table 20

EFFECTIVE REGISTRATIONS

(Dollars In millions)

Cash sale for account of Issuers

Total Bonds, Common debentures, Preferred

FIscal year ended June 30 Number Value stock and notes stock Tolal

1935' 284 $ 913 $ 168 $ 490 $ 28 $ 686

1936. 689 4,835 531 3,153 252 3,936

1937. 840 4,851 802 2,426 406 3,635

1938 412 2,101 474 666 209 1.349

1939 344 2,579 318 1,593 109 2.020

1940 306 1,787 210 1,lt2 110 1,433

1941 313 2.611 196 1.721 164 2,081

1942 193 2.003 263 1,041 162 1,465

1943 123 659 137 316 32 466

1944 221 1,760 272 732 343 1,347

1945 340 3.225 456 1,851 407 2,715

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 1,766 2,127 468 4.381

1951 487 6,459 1,904 2.838 427 5,169

1952 635 9,500 3,332 3.346 851 7,529

1953 593 7,507 2.808 3,093 424 6,326

1954 631 9.174 2,610 4,240 531 7.381

1955 .. 779 10.960 3.864 3.951 462 8,277

1956 906 13.096 4.544 4,123 539 9,206 1957 876 14.624 5.858 5,689 472 12,019

1958 813 16,490 5,998 6,857 427 13,281

1959 1.070 15,657 6.387 5,265 443 12,095 1960 1,426 14.367 7,260 4.224 253 11,738

1961 . 1.550 19.070 9.850 6,162 248 16,260

1962 1.844 19,547 11.521 4,512 253 16,286

1963 1,157 14,790 7,227 4,372 270 11.869 1964 1,121 16,860 10.006 4,554 224 14,784 1965 1,266 19,437 10,638 3,710 307 14.656 1966 1,523 30,109 18.218 7,061 444 25,723 1967 1.649 34,218 15,083 12.309 558 27.950 1968 22,417 254,076 22,092 14.036 1,140 37.269 1969. 23,645 286,810 39,614 11,674 751 52,039 1970 23,389 259.137 28,939 18,436 823 48,198 1971 22.989 269.562 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

CumulatIve total . 47,223 778.345 329,007 242,933 26,627 598,573

, For 10 months ended June 30. 1935

2 Includes regIstered lease obligatIons related to industrial revenue bonds

167
SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

Dollors BoIl.ons

90

75

1935 1974

60

45

30

15

30

20

10

o

BILLIONS OF DOLLARS

-+--

168

1935 40 45 50 55

(F.scol Yeors)

60 65 70

OS 4737 17-74J

-

----~-~-----

•
Purpose of Registration

Effective registrations for the purpose of

cashsalefor the account of issuersdeclined

two percent, but with," this category there

were substantial changes," the composttion of securities offered. Equity offerings

dropped from $29.2 billion in 1973to $22.1

billion," fiscal 1974. Debt offerings rose

from $14.8to $21.0 billion dunnq the same

time interval.

Among the securities registered for cash

sale, almost all debt issues were for immediate offering. However,two-thirds ofthe

equity registrations were for extended cash

sale. Registrations of extended offerings totaled approximately $14.5 billion in fiscal

1974. Within this amount investment companies accounted for $7.5 billion and employee plans $6.8 billion. Corporate equity

registrations accounted for 29 percent of

Immediate cash sale registrations, down

from 48 percent," 1973 and 40 percent m

fiscal 1972.

Securities registered by an Issuer, but not

for cash sale are primarily common stock

Issuesfor mergers and consolidations. At a

level of $12.2 billion these registrations

were 41 percent greater in 1974than fiscal

1973.

Registrations for the purpose of second.

ary offerings (proceeds gOIngto seiling secunty holders) typically mvolve sales of

common stock. In fiscal 1974,these registrations amounted to about $1.6 billion rep'

resenting a 66 percent decline from fiscal

1973.

Table 21

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL 1974

(Dollars In millions)

Type of security

Bonds. debentu res, Preferred Common

Purpose of registration Total and notes stock stock

All registrations (estimated value) 56,924 22.654 2.896 31.373 For account 01 Issuer for cash sale 43,082 20.997 2,274 19.811 lrnrnedrate offenng 28.429 20,802 2.268 5.359 Corporate 26,417 18.801 2.257 5.359 Offered to General public 25.442 18.786 2.257 4,399

SeCUrity holders 975 15 0 0

Foreign governments 2.012 2,001 11 960 Extended cash sale and other

Issues 14,653 195 6 14,452

For account of Issuer for other than

cash sale 12,216 1.529 610 10.077 Secondary offerings 1,626 129 12 1.485 Cash sale 615 3 0 613 Other 1.011 126 12 872

169
Dollars BillIons

40

30

20

EFFECTIVE REGISTRATIONS

CASH SALE FOR ACCOUNT OF ISSUERS

'I

I,

I I

I I

, ,

I \

I

I

I

I

I

,

,

,

Common Stock l ,

~\', ,

-I

\

,

,

,

10

o

1935

170

40

Bonds

45 50 55

(Fiscal Years)

60

,

,

It ]

\ I

\I

•

65 70 1974

~
Regulation A Offerings

Dunng fiscal year 1974,438 notifications

were filed for proposed offerings under

Regulation A. Issues between $400,000 and

$500,000 In size predominated.

Table 22

OFFERINGS UNDER REGULATION A

FIscal Yaar

1962-71

annual average 1974 1973 1972

SIZe

$100,000 or less 109 40 69 52 $100.000 to $200.000 111 79 107 46 $200.000 to $300.000 429 66 96 118

$300.000 to $400,000 12 39 86 182

$400,000 to $500.000 12 214 459 689

Total 673 438 817 1,087

Underwrrters

Used 237 115 402 590

Not used 436 323 415 497

Total 673 438 817 1,087

Olferors

ISSUingcompanies 644 394 787 1.052

Stockholders . 20 34 18 28

Issuers and stockholders JOintly 9 10 12 7

Total 673 438 817 1,087

171
ENFORCEMENT

Types of Proceedings

As the table below reflects, the securities

laws provide for a wide range of enforcement actions by the Commission. The most

common types of actions are injunctive

proceedings instituted in the Federal district courts to enjoin continued or

threatened securities Jaw violators, and

administrative proceedings pertaining to

broker-dealer firms and/or individuals associated with such firms which may lead to

various remedial sanctions as required in

the public interest. When an Injunction IS

entered by a court, violation of the court's

decree is a basis for criminal contempt action against the violator.

Table 23

TYPES OF PROCEEDINGS

I AdminIstratIve ProceedIngs

BasIs for enforcement action ssnenon or relief

Broker-deeler, Inve.tment advl .. r or •• IIOCI.tad parson

Willful vrotanon of seeunnes acts provrsion or rule. ard- RevocatIon. suspension, or denoal of broker-dealer or In- Ing or abetting of such vrolatron, faIlure reasonably to vestment adviser registratIon, or censure of broker-dealer supervrse others. WIllful rruastaternent In fIling WIth Com- or Investment adviser (1934 act, sec 15(b)(5), AdvIsers mrssron, conviction of Or Injunction against certam seeun- Act. sec 203(d)) nes, or secunnes-retated, vrotanons

Member of regl.tared .acurlUa .... oclaUon

VIolatIon of 1934 act Or rule thereunder. WIllful VIolatIon ExpulSIon or suspension from assocratron (1934 act. sec

of 1933 act or rule thereunder 15A(1)(2))

Mamber Of naUonal •• curlUa. axchange

viorancn 01 1934 act or rule thereunder ExpUlSIon or suspension from exchange (1934 act, sec.

19(a)(3))

Any person

Same as nrst Item Bar or suspension from aseceranon WIth a brcker-deateror

Investment adviser, or censure (1934 act, sec 15(b)(7),

AdvIser Act. sec 203(1))

vrotanen of 1934 act Or rule thereunder. WIllful vrolatron Bar or suspension from assoeratron WIth member of regIsof 1933 act or rule thereunder tered seeuntres aseeeianen (1934 act, sec 15A(1)(2»

WIllful VIolation of securitIes acts provisron or rule, aId- ProhIbItIon, permanently or temporanly, from serving In

Ing or abetting of such viotanon, WIllful rmestatement In certain capacltlas for a regIstered Investment company

fIling WIth commesren (Investmant Co Act, sec 9(b».

PrincIpal of brokar-de.ler

ApPOintment of SIPC trustee for broker-dealer Bar Or suspensron from assoeranen WIth a broker-dealer (securotles Investor ProtectIon Act. sec 10(b»

Registered .acurlUe ... socl.Uon

Rules do not conform to statutory requIrements suspensrcn of regIstratIon (1934 act, sec 15A(b))

VIolatIon of 1934 act or rule thereunder, failure to en- RevocatIon or suspensIon of registratIon (1934 act. sec

force compnanca WIth own rules, engaging In actlvl!': tend- 15A(1)(1»

Ing to defeat purposes of provrslon of 1934 act authorozlng natrona! seeunties assoesancns

172
Table 23-Contlnued

Basis for enforcement action Sanchon or relief

Nallonal securilies exchange

Viotatron of 1934 act or rule Ihereunder, failure to en. Withdrawal or suspension of registration (1934 act, sec

force compliance therewith by member of Issuer of regIs. 19(a)(1))

tered securities

Officer or director of registered 8ecurtlles a •• Dclatlon

Willful tarlure to enforce assocratron rules or willful Removal from office (1934 act, sec 15A(1)(3))

abuse of authoroty

Officer of nallonal securities exchange

Vsolatron of 1934 act or rule thereunder ExpulSion or suspension from exchange (1934 act, sec

19(a)(3))

1933 ACI reglslraUon slalemenl

Statement materoally Inaccurate or Incomplete Stop order suspending effectiveness (1933 act, sec 8(d»

Investment company has not attained $100.000 net Stop order (Investment Co Act. sec 14(a»

worth 90 days after statement became effective

1934 Act reporting reqUirements

Materoal noncompliance Order directing compliance (1934 act. sec 15(c)(4»

Securities Issue

Noncompliance by rssuer with 1934 act or rules there un- Denial. suspension of effectIve date, suspension Or

der Withdrawal of registration on national sec unties exchange

(1934 act, sec 19(a)(2»

Public Interest requires trading suspension Summary suspension of over-the-counter or exchange

trading (1934 act. secs 15(c)(5) and 19(a)(4»

Registered Inveatment company

Failure to file 1940 act registration statement or required Revocation or suspension of registration (Investment Co

report. fIling materoally Incomplete or mrslaadrnq state. Act. sec 8(e))

ment or report Revocation or suspension of registration (Investment Co

Company has not attained $100.000 net worth 90 days Act, sec 14(a»

after 1933 act registration statement became effective Protubrtron of adopnon of such name (Investment Co Act.

Name of company. or of securoty Issued by It, deceptIve sec 35(d»

or rnrsleadmq

Attorney. accounlant, or olher prolesslonal or expert

Lack of req uisrte quahfrcatrons to represent others. lack. Permanent or temporary dental of provllege to appear or

Ing In character orontegroty. unethical oromproper profes- practres before Commission (Rules of Practice, Rule

sional conduct. Willful viotatron of secuntres laws or rules. 2(e)(1»

or aIding and abetting of such VIolation

Attorney suspended or disbarred by court. expert's Automatic suspension from appearance or practice before

license revoked or suspended. convictron of felony or mrs- Cornrntssron (RUles of Practrce, Rule 2(e)(2»

demeanor involVing moral turpitude

Permanent injunction or finding of Violation In Temporary suspension from appearance or practrce be.

Commission-instituted action, finding of Violation by fore Cornmrssron (Rules of Practice, Rule 2(e)(3)

ccmrrnssrcn In administrative proceeding

173
CIvil Proceedmgs I Federal District Courts

Basts for enforcement action

Any person

Person engaging or about to engage In acts or practices

Violating securrtles acts or rules thereunder

Noncompliance With provrsion of law, rule. or regulalron

under 1935 act. order Issued by Commission, Or undertakIng In a regIstration statement

Issuer subject to reporting

requirements

Failure to file reports requiree under section 15(d) of

1934 act

Registered Investment company or

efflllate

Name of company or of security Issued by It deceptive or

misleading

Officer. director. adviser, or underwroter engaging or

about to engage In act or practice constituting breach of

frducrary duty Involvong personal misconduct

Breach of fidUCiary duty respecting receipt of compensatron from Investment company. by any person haVing such duty

Sanction or relief

Injunction against acts Or practices which constitute or

would constitute violatrcns (plus ancutary relief under court's general equity powers) (1933 act. sec 20(b).1934 act. sec 21(e), 1935 act. sec 18(f).lnvestmentCo Act. sec

42(e). Advisers Act. sec 209(e»

Writ of mandamus directing compliance (1933 act, sec 20(c), 1934 act. sec, 21(1), 1935 act. sec 18(g))

Forfeiture of $100 per day (1934 act. sec 32(b))

Injunction against use of name (Investment Co Act. sec

35(d»

Injunction against actmg In certain capacines for investment company (Investment Co. Act, sec. 36(a))

Award of damages (Investment Co Act, sec 36(b))

III Referral to Attorney General for Cnrnrna! Prosecut,on

BaSIS for enforcement action

Any person

W,lIful vrolation of securities acts or rules thereunder

174

Sanction or relief

MaXimum penalties $5.000 foneand 5 years' Imprisonment under 1933and 1939 acts. $10.000 fine and 2 years' irnpnsonment under other acts An exchange may be fined up to

$500.000. a publrc-utrhty holding company up to $200.000

(1933 act. sees 20(b). 24.1934 act, secs 21(e). 32(a). 1935

act. secs 18(f). 29. 1939 act. sec 325. Investment Co Act. secs , 42(e), 49, AdVisers Act. secs 209(e).217)
Enforcement Proceedings

During fiscal 1974, the Commission instituted a total of 148 injunctive actions. In

addition, 15 miscellaneous actions were instituted by the Commission and 19 actions

were brought against it in United States Distnct Courts. DUring the year 23 appellate

cases Involving petitions for review of

Oomrmssron decisions were handled, as

well as 60 appeals in injunctive and miscellaneous actions and 8 appeals In reorganization cases.

Table 24

ADMINISTRATIVE PROCEEDINGS

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974.

Fiscal year Broker-dearer casas

103

43

33

32

103

90

167

122

151

138

Stop order. RegulatIon A

suspension and other

Investment adviser cases disclosure cases

2 26

8 13 3 16

4 6

10 20

12 36

22 28

11 32

20 27

12 25

Table 25

INJUNCTIVE ACTIONS

1965

1966.

1967

1968

1969

1970

1971

1972

1973

1974

Fiscal year Cases mstotuted

71

67

68

93

94

111

140

119

178

148

tnjunctrons

ordered

71

63

56

98

102

97

114

113

145

289

Defendants

enjoined

265

258

189

384

509

448

495

511

654

613

Table 26

CRIMINAL CASES

Number 01 cases

Fiscal relerred to Number 01 Defendants

year [usnce dept Indictments mdrcted Convrctrons

1965 52 34 208 106

1966 44 50 193 76

1967 44 53 213 127

1968 40 42 123 84

1969 37 64 213 83

1970 35 36 102 55

1971 22 16 83 89

1972 38 28 67 75

1973 49 40 178 83

1974 67 40 169 81

175
PUBUC UTILITY HOLDING

COMPANIES

Assets

At nscal year-end there were 20 active

holding companies registered under the

1935 Public Utility Holding Company Act.

The 17 active holding company systems in

which those companies are included represent a total of 177 companies. Aggregate

consolidated assets, less valuation reserves. approximated $33.6 billion at December 31,1974.

Table 27

PUBLIC.UTILITY HOLDING COMPANY SYSTEMS

Solely Registered Electric registered holdmg and/or gas

holdmg operating utility

companies companies subsrdranes

Nonutlllly tnacnve Total sub com- comsrdianes panres parues

Aggregate

system assets

less valuation

reserves. at

Dec 31.1973'

Allegheny Power System. Inc 1 2 5 4 0 12 $1.622.440.000

American Electric Power Co Inc 1 0 9 17 2 29 5.071.320.000

American Natural Gas Co 1 0 2 5 0 6 2.113.781.000

Central & Southwest Corp 1 1 4 1 1 8 1.579.583.000

Columbia Gas System. Inc. The 1 0 9 10 0 20 2.596.856.000

Consolidated Natural Gas Co 1 0 5 4 0 10 1.503.865.000

Delmarva Power & Light Co 0 1 2 0 0 3 702.253.000

Eastern unnnes Associates 1 0 4 1 2 8 222.314.000

General Public Utrhtres Corp 1 0 4 4 1 10 3.034.065.000

Middle South UtIlities. Inc 1 0 6 4 3 14 2.712.788.000

NatIonal Fuel Gas Co 1 0 3 2 0 6 404.221.000

New England Electric System 1 0 4 1 0 6 1.373.519.000

Northeast Utilities 1 0 5 8 6 20 2.255.528.000

Ohio Edison Co 0 1 1 0 0 2 1.498.996.000

Philadelphia Electnc Power Co 0 1 1 0 1 3 57,818.000

Southern Co The 1 0 5 2 0 8 5.378.299.000

Utah Power & L,ght Co 0 1 1 0 0 2 684.203.000

Subtotals 13 7 70 63 16 169 32.811.849.000

Adjustments (a) to take account of JOintly owned cornparues, (b) to add net assets of 8 jcrntly owned companies not Included above2 0 0 (a) +8 0 0 (a) +8 (b) 808.179.000

Total companies and

assets In active systems 13 7 78 63 16 177 $33.620.028.000

1 Represents the consolidated assets. less valuation reserves. of each of system as reported to the Commission on form

U5S for the year 1973

2 These 8 companres are Beechbollom Power Co .mc which ISen mdrrect subsld,ary of American Electric Power Co.

Inc and Allegheny Power System. Inc. Ohro Valley Electric Corp. and ItS subsidiary. Indiana-Kentucky Electric Corp.

which are owned 378 percent by American Electric Power Co , Inc. 165 percent by Ohio Ed,son Co 125 percent by

Allegheny Power System. Inc and 33 2 percent by other companies. The Arktahorna Corp. which rsowned 32 percent by

Central & Southwest Corp system. 34 percent by M,ddle South Utrl,tles. Inc system. and 34 percent by an electric ut,llty

company not associated with a registered system. Yankee Atormc Electric Co • Connecticut Yankee Atormc Power Co • Vermont Yankee Nuclear Power Corp. and Mame Yankee Atormc Power Co . which are statutory utrlrty subsimanes of

Northeast Utrllt,es and New England Electric System

176

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•

•

•

•
Financing

The volume of external financmg by these

companies aggregated $2.56 billion in fiscal

1974, a decrease of 5.7 percent from the

previous year. Bonds issued and sold increased 20 percent, and preferred stock 43

percent. However, the amount of common

stock and debentures Issued and sold decreased 50 percent and 59 percent, respectively.

Table 28

FINANCING OF HOLDING.COMPANY SYSTEMS'

(Fiscal 1974)

In millions of dollars' Holdong-company systems

Preferred Common Debentures stock stock

$ 494

$ 102

163

202

303

305

Alleghany Power System Inc

Monongehela Power Co

Potomac Edison Co .

Amencan Electnc Power Co

AppalachIan Power Co . Indiana & ~Jhchlgan ElectriC Co

OhIO Power Co

Amencan Natural Gas Co

MIchigan Consolidated Gas Co

MIchigan Wlsconson Pipe LoneCo

Central and South West Corp

Central Power & Llg ht Co

West Texas Utilities Co

Columbia Gas Co

Consolidated Natural Gas Co

Delmarva Power & LIght Co

Eastern unnnes AssocIates Brockton EdIson Co .

General Public ununes Corp

Jersey Central Power & Light Co

Metropolitan EdIson Co

Pennsylvanoa Electnc Co

MIddle South UtIlities

Arkansas Power & L,ght Co

LOUISianaPower & Light Co

MISSISSiPPIPower & LIght Co New Orleans Public ServIce, Inc

New England Electnc System

Massachusetts Electnc Co New England Power Co

Northeast UtIlitIes . . Connecticut LIght & Power Co , The

Hartford Electnc LIght Co , The

orne Edison Co .

Pennsylvanoa Power Co

Southern Co , The

Alabama Power Co

GeorgIa Power Co

MISSISSIPPIPower Co Utah Power & Light Co

Total

Bonds

$ 151

500 31098

31392

347

3987

3854

230

347

101

501

200

3802

3803

452

3455

353

3808

646

299

753

32741

1491

1,6311

$ 39 5

495

200

1090

152

30

152

152

101

202

509

153

456

81

386 2

15.2

356

4270

193

499

275

480

1562

278

3944

'The table does not mclude secunnes Issued and sold by subsnnanes to their parent holdong companies, short-term notes sold to banks, porttohc sales by any of the system ccrnparues, or secunnes Issued for stock Orassets of nonaffIliated companies Transactions of thrs nature also require authcrtzanon by the Commission except, as provided by Sec 61b)of the Act, the Issuance of notes havonga matunly of 9 months or less where the aggregate amount does not exceed 5 percent of the pnncrpa! amount and par value of the other seeunues of the Issuer then outstanding 2 Debt secunties are computed at pnce to company, preferred stock at ollerlng pnce, common stock at ollenng or subscrrpnon price

3 Two or more Issues

177
CORPORATE

REORGANIZATIONS

Commission Participation

During fiscal 1974,the Commission was a

party in a total of 132 reorganization proceedings under Chapter X of the Bankruptcy Act. These were scattered among

district courts in 35 states, the District of

Columbia, and 1 terntory. In 23 proceedings, the Commission first entered its appearance during the year; 17 proceedings

were closed.

Table 29

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

(Fiscal year 1974)

SEC notice of Debtor Drstnct court Petition filed appearance flied

Air Industroal Research, Inc 1 NO Cal March 14, 1974 May 6.1974

Amencan Associated Systems, Inc ED Ky Dec 24,1970 Feb 26.1971

Amerocan Land Corp 1 SO OhiO Aug 8,1973 sept. 25, 1973

Amerocan Loan & Finance Co 3 ED Va July 31,1972 Aug 30.1972

Amerocan National Trust SO Ind Feb 13, 1968 March 27. 1968

Anzona Lutheran Hospital' o Aroz May 11.1970 May 25,1970 Arlan's Department Stores, Inc 1 SO NY March 8,1974 March 8.1974 Atlanta International Raceway, Inc NO Ga Jan 18,1971 Feb 3,1971

Bankers Trust> SO Ind Oct 7,1966 Nov 1,1966

Beck lndustnes, Inc SO NY May 27.1971 July 30, 1971

Bermec Corp, SO NY Aprol 16, 1971 Apnl 19, 1971

Beverly Hills Bancorp 1 CD Cal Apnl 11, 1974 May 14.1974

Bubble Up Delaware, Inc CD Cal Aug 31,1970 Oct, 19, 1970

Burton's In The Round, Inc 2 NO III March 23, 1970 Apnl 1.1970

BXP Construction Corp 1 SO NY Jan 15.1974 Feb 20.1974

Carobbean Shoe Corf .~, SOFia Dec 21,1973 Jan 9.1974

Coast Investors. Inc WD Wash Apnl 1.1964 June 10, 1964

CoffeYVille Loan & Investment> o Kans July 17, 1959 Aug 10.1959

Combined Metals Reduction Co o Nev sept 30, 1970 Sept 7.1972

Commonwealth Financial Corp 3 ED Pa Dec 4,1967 Dec 13,1967

Community Busmess Services Inc ED Cal June 8.1972 Aprol 30. 1973

Congaree Iron & Steel Co , Inc 2 o SC Aprol 12, 1972 Aug 17.1972

Continental Vending Machlng Corp 2 ED NY July 10. 1963 Aug 7.1963

Cosmo Capital Inc 3 NO III Apnl 22. 1963 Aprol 26, 1963

Cybern Education. Inc 3 NO III sept 11.1970 Sept 25. 1970

Davenport Hotel, Inc ED Wash Dec 20.1972 Jan 26.1973

Diversified Mountaineer Corp 1 SO WVa Feb 8.1974 Apnl 24. 1974

Dumont-Airplane & Marone3 SO NY Oct 22,1958 Nov. 10. 1958 Eastern Oradtto Corp 1 ED Va March 4,1974

East Molone Downs, Inc 1 SO III Sept 11,1973 ~~:~ ~~:1~~~ Educational Computer Syste"';s D. Anz ~~:' ~~: ~~1 Nov 3.1972

Eichler Corp 3 NO Cal Oct 11.1967

EI-Tromcs, Inc 3 ED Pa Nov 25,1958 Jan 16, 1959

EqUItable Plan Co 3 SO. Cal, March 17. 1958 March 24, 1958

EqUity Funding Corp of Ameroca CD Cal Aprol 5, 1973 Apnl 9.1973

Farrington Manufactunng Co ED Va Dec 22.1970 Jan 14.1971

Federal Coal Co 2 SO W.Va. Jan 29.1971 Jan 29.1971

First Baptist Church, Inc of Margate Flonda' SO Fla sept 10. 1973 Oct 1.1973 First Holding Corp 2 SO Ind Oct 7.1969 Dec 10.1969 First Home Investment Co of Kansas o Kans Apnl 24, 1973 Apnl 24, 1973

First Research Corp SO Fla March 2,1970 Apnl 14, 1970 FlYing W Airways, Inc 2 ED Pa Sept 23. 1970 Dec 15,1970 Food Town. Inc 2 o Md July 28, 1959 Aug 10.1959 Four seasons Nursing Centers of Amenca. Inc 2 WD Okla June 26. 1970 July 13, 1970

Wm Gluckln Company, Ltd SO NY Feb 22,1973 March 6.1973

Gro.Plant tndustnes, Inc NO Fla Aug 30.1972 sept 13. 1972

Gulfco Investment Corp 1 WD Okla March 22. 1974 March 28. 1974 Harmony Loan Inc ED Ky Jan 31, 1973 Jan 31.1973 Hawkeye Land, Ltd 1 SO Iowa Dec 19. 1973 Jan 21. 1974 R Hoe & Co Inc SO NY July 7,1969 July 14. 1969

178

•

•

•
SEC nonce of Debtor District court Petrtion flied appearance filed

Home Stake Product,on Co

1 NO Okla Sept 20,1973 Oct 2,1973

Houston Educallonal Foundatron, Inc SO Tex Feb 16,1971 March 2,1971

Hughes Homes, Inc2

o Mont Sept 8,1961 Oct 5,1961

Human Relallons Research Foundatron> SO Cal Jan 31,1964 Feb 14, 1964

Impenal-Amencan Resources Fund. Inc3

o Colo Feb 25,1972 March 6,1972

1mpenal '400' National, Inc

o NJ Feb 18,1966 Feb 23,1966

Indiana Business& Investment Trust SO Ind Oct 10,1966 Nov 4,1966

Interstate Stores, Inc1 SONY June 13, 1974 June 13, 1974

Investors Associated, Inc3 WO Wash March 3,1965 MarCh 17, 1965

Jade 011& Gas Co3 CD Cal June 28, 1967 Aug 16,1967

J0 Jewell, Inc NO Ga Oct 20,1972 Nov 7,1972

King Resources Coo Colo Aug 16,1971 Oct 19,1971

Krrchofar& Arnold3 ED NC Nov 9,1959 Nov 12,1959

Lake Winnebago Development Co, Inc WO Mo Oct 14,1970 Oct 26,1970

Landmark Inns of Durham, Inc2 MO NC sept 3, 1969 Dec 10,1969

Little MISSOUri Minerals Associa- tron, Inc

o NO July 18, 1966 Jan 29, 1968

Los Angeles Land& Investments, ltd

o Hawau Oct 24,1967 Nov 28, 1967

LOUISiana Loan& Thntt Inc ED La Oct 8,1968 Oct 8,1968

Lusk Corp

o Anz Oct 28,1965 Nov 15,1965

Lyntex Corp1 SO NY Apnl 15, 1974 Jan 28,1974

Dolly Madison lndustnas, Inc ED Pa June 23, 1970 July 6,1970

Magnolia Funds, Inc ED La Nov 18, 1968 May 26,1969

Mammoth Mountain Inn Corp CD Cal sept 16,1969 Feb 6,1970

Manufacturers Oredit Corp3

o NJ Aug 1,1967 July 30, 1968

Maryvale cemrnumty Hospltal

3

o Aroz Aug 1,1963 Sept 11,1963

Mayer Central BUlldlng

3

o Aroz July 15, 1965 Jan 19,1966

Mid-CIty B~tlst Church ED La July 30, 1968 Oct 23,1968

Morehead Ity ShipbUlldlng

3 ED NC Nov 9,1959 Nov 12, 1959

Moulded Products, Inc2

o Mlnn July 6,1971 Aug 6,1971

Mount Everest Corp1 ED Pa May 29,1974 June 28, 1974

NatIonal VIdeo Corp3 NO III Feb 26,1969 March 26, 1969

Nevada Industroal Guaranty Co

o Nev May 7,1963 July 2,1963

North Amerocan Acceptance Corp1 NO Ga March 5,1974 March 28, 1974

North Western Mortgage Investors' WO Wash Dec 12,1973 Dec 12, 1973

Pan Amerocan Financial Corp

o Hawau Oct 2,1972 Jan 9,1973

Parkvlew Gem. Inc1 WO Mo Dec 18,1973 Dec 28,1973

Parkwood Inc3 DOC June 13, 1966 June 17, 1966

Peoples Loan& Investment Co2W0 Ark May 13, 1969 May 21, 1969

Phoenix Mortgage Co

o Aroz Aug 14,1967 Apnl 17, 1968

RIC International Industroes, Inc NO Tex Sept 16, 1970 Sept 23, 1970

John R,ch Entert,ses. Inc

o Utah Jan 16, 1970 Feb 6,1970

RIker Oeleware orp3o NJ Aprol 21, 1967 May 23,1967

Roberts Company3 MO NC Feb 12, 1970 March 23, 1970

San Francrseo& Oakland Helicopter Airlines, Inc 2 NO Cal July 31, 1970 Aug 11,1970

Scranton Corp3 MO Pa Aprol 3,1959 Apnl 15, 1959

Sequoyah Industroes Inc1 WO Okla Jan 21,1974 Jan 30,1974

EdwardN SIegler& Co3 NO OhIO May 23,1966 June 7,1966

Sierra Trading Corp3o Colo July 7,1970 July 22, 1970

SIre Plan, Inc2 SO NY Feb 16, 1963 Feb 18,1963

Sire Plan Management Corp2 SO NY March 4,1963 Aprol 5,1963

60 Minute Systems, Inc

M0 Fla July 17, 1970 July 29,1970

Sound Mortgage Co Inc3 WO Wash July 27, 1965 Aug 31,1965

Southern Land Title Corp3 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 tnternatronal Petroleum3 NO Tex May 27,1970 June 10, 1970

Swan-Finch 011 Corp3 SONY Jan 2,1958 Jan 23,1958

Tele-Trorucs Co ED Pa July 26, 1962 sept 12.1962

Texas Independent Coffee Orga",zatlon

3 SO Tex Jan 5,1965 Jan 13,1965

Tllco, Inc...

o Kans Feb 7,1973 Feb 22.1973

TMT Trailer Ferry, Inc SOFia June 27, 1957 Nov 22,1957

Tower creert Corp3

M0 Fla Aprol 13, 1966 sept 6,1966

Traders Compress Co WO Okla May 12, 1972 June 6. 1972

Trans East Air Inc

o Me Aug 29,1972 Feb 22,1973

Trans-lntemanonal Computer Investment NO Cal March 22, 1971 July 26, 1971

Trustors' Corp3 CD Cal Sept 13, 1961 Oct 9,1961

TwentIeth Century Foods Corp2 ED Ark Oct 30,1961 Feb 5,1962

Union Investments. Inc2

o HawaII Feb 2,1970 March 12, 1970

uruservrces. Inc SO Ind Dec 4,1970 Jan 28, 1971

viatron Computer Systems Corp

o Mass Aprol 29, 1971 Apnl 29, 1971

179

•
SEC noloce of

Debtor D,stnct court PetItion fIled appearance flied

vmco Corp 3 ED Mlch March 29. 1963 April 9.1963 Vlrgon Island Properties, Inc D VI Oct 22.1971 Apnlll.1972 Waltham Industnes Corp CO Cal July 14.1971 Aug 19.1971 Webb & Knapp. Inc SD NY May 7.1965 May 11. 1965 H R WeIssberg Corp 3 ND III March 5.1968 Apnl 3.1968

Westec Corp 3 S D. Tex Sept 26. 1966 Oct 4.1966 Western Growth Caprtal Corp . o Anz Feb 10. 1967 May 16,1968 Western National Investment Corp 3 D Utah Jan 4.1968 March 11. 1968 Westgate California Corp' S D Cal Feb 26. 1974 March 8,1974 Wonderbowl. Inc CD Cal March 10. 1967 June 7.1967

Woodmoor Corp 1 D Colo Feb 25, 1974 March 25, 1974 Yale Express System Inc 3 SD NY May 24.1965 May 28.1965

1 comrmssron filed nonce of appearance onfIscal year 1974

2 Reorganozatlon proceedongsclosed dunng frscal year 1974

3Plan has been substantially consummated but no fonaldecree has been enterad because of pendong mailers

SEC OPERATIONS

Net Cost

Fees collected by the Commission in fiscal 1974 amounted to 60 percent of funds

appropriated by the Congress for Commission operations. The Commission is required by law to collect fees for (1) registration of securities issued; (2) qualification of

trust indentures; (3) registration of exchanges; (4) brokers and dealers who are

registered with the Commission but are not

members of the NASD; and (5) certification

of documents filed with the Commission. In

addition, by fee schedule, the Commission

imposes fees for certain filings and services

such as the filing of annual reports and

180

proxy material. With reference to the fee

schedule, on March 29, 1974,the Commission announced the repeal of certain provisions of Rule 203-3 under the Investment

AdvisersAct of 1940.One of the paragraphs

repealed, Rule 203-3(b), required registered investment advisers to pay a $100 annual fee to the Commission during the

period of their registration. The action was

taken following the Commission's consideration of recent decisions of the United

States Supreme Court with respect to the

Independent Offices Appropnation Act of

1952,31 U.S.C.483(a), which had provided

the statutory basis for establishing these

fees. The Commission is presently reviewing all other fees imposed pursuant to the

same Act.
APPROPRIATED FUNDS vs FEES COLLECTED

Dollars Mtllions

40

30

20

10

o

1968 69 70 71 72 73 1974

181
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182

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