1 9 9 6

Annual Report

United States

Securities and Exchange Commission

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The Honorable Albert Gore, Jr.

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Newt Gingrich

Speaker of the House

of Representatives

Washington, D.C. 20515

I am pleased to transmit the annual report of the Securities and Exchange

Commission (SEC or Commission) for fiscal year 1996. The activities and

accomplishments set forth in the annual report continue the Commission's

long tradition of hard work and high achievement. I would like to take this

opportunity to offer my views of the Commission's progress in addressing

several of the major issues facing the Commission.

Enhancing Investor Protections

Under the Commission's regulatory scheme, securities firms and selfregulatory organizations serve as the first line of defense against violations

of the securities laws. The Commission's enforcement, examination, and

investor education activities back up that defense.

In the past year, the Commission continued its traditionally vigorous

enforcement program. For example, administrative proceedings were

instituted against the National Association of Securities Dealers (NASD) to

address its alleged failure to comply with certain of its own rules and its

failure to enforce compliance by market makers on the Nasdaq system with

NASD rules and the federal securities laws. In settling the proceedings, the

NASD agreed to spend an additional $100 million over the next five years

iii
on regulatory enhancements, in lieu of a financial penalty. Changes have

already been made in surveillance and enforcement. These and other

changes made in the context of our settlement will ensure that the NASD

moves into the next century as a vibrant marketplace and staunch defender

of investor interests.

Individual investors have become important players in the municipal

securities market. To protect them, the Commission continued to focus

increased attention on potentially illegal activities in this market. The

Commission brought two enforcement actions and issued a report arising out

of its investigation into the financial collapse of Orange County, California

and the Orange County Investment Pools. The enforcement actions concern

the fraudulent offer and sale of over $2.1 billion in municipal securities

issued in 1993 and 1994 by Orange County, the Flood Control District, and

a school district that was not named in the actions. These actions have also

led to a renewed interest in the securities law obligations of state and local

governments.

Working with the industry self-regulatory organizations and state

regulators, the Commission conducted a sales practice examination sweep of

small and medium-sized brokerage firms. The objective of the sweep was to

identify problem brokers and to ensure that appropriate supervisory

mechanisms are in place and, where necessary, to take appropriate

enforcement action. The joint sweep found deficiencies in sales practices

and in the hiring, retention, and supervisory mechanisms of more than 100

firms.

The Commission continued its strong emphasis on investor education,

through brochures, the internet, seminars, and town meetings. By working

with the securities industry, we have started initiatives that will serve

investors for decades to come.

iv
Securities Deregulation

This past year, we worked with the Congress to revise the securities

laws. Thanks to flexible and bipartisan congressional leadership, and the

cooperation of the industry and state regulators, we ended up with a bill that

can fairly be described as a milestone. The National Securities Markets

Improvement Act will make the SEC's rules work better for all participants

in the securities markets. The law eliminates redundant regulation of mutual

funds by the states and redundant regulation of certain listed securities; the

rules that used to constrain broker-dealer borrowing have been liberalized;

the SEC will be responsible for supervising large investment advisers, while

the states keep an eye on the smaller ones; the SEC budget has been put on

a more solid footing; and books and records and capital requirements will

become uniform throughout the securities industry.

Promoting Capital Formation

Throughout its existence, the Commission has balanced the need for full

disclosure and investor protection against the burden that its rules,

regulations, and requirements may impose on capital formation. During the

year, we continued to remove impediments to capital formation, starting

with our rules. An SEC Task Force on Disclosure Simplification

recommended that we eliminate or modify fully a quarter of our rules and

half of our forms related to corporate finance. We have already eliminated

44 rules and 4 forms; more will go in 1997.

In a far-reaching effort this past July, the Commission sought public

comment on some of the fundamental concepts governing offerings. Several

possible reforms were described, including the idea of "company

registration" put forth by the Advisory Committee on Capital Formation, led

by SEC Commissioner Wallman. '

v
Disclosure Developments

The Commission continued its efforts to simplify and streamline

disclosure. Working with the investment companies and state securities

regulators, the Commission continued to develop a new disclosure document

called the profile. The profile contains a brief summary of a mutual fund's

key features in a standardized format designed to facilitate comparison

among funds.

International Listings

The Commission continued to make progress in widening the range of

choices available to U.S. investors by promoting the internationalization of

our markets. In 1990, 434 foreign companies were registered in the U.S.

At the end of 1996, a record 843 foreign companies from 47 countries were

registered and filing reports with the Commission. We will continue to do

all we can to encourage more companies to list here and to work with our

regulatory counterparts to develop high-quality international accounting

standards, which will open the door to more companies from abroad.

Technological Challenges

Among the greatest challenges in the years ahead are those that have to

do with technology. In just one year, the SEC's home page has become one

of the most popular government sites on the World Wide Web. Our

EDGAR database of corporate information, which was on the cutting edge

of technology 10 years ago, is due for a major overhaul by 1997. Every

advance in communications brings new challenges in applying the securities

laws. We are racing to keep up. The internet has already changed the face

of brokerage and investment management, through on-line trading and other

innovations.

* * *

vi
Many challenges lie ahead for the Commission. The pace of change in

the securities markets has become even more pronounced in recent years,

and the SEC has succeeded by recognizing that fact and responding to it. I

have every confidence that the Commission will continue to perform its

responsibilities with the professionalism and dedication that all of us have

come to expect.

Sincerely,

Arthur Levitt

Chairman

vii
Commission Members and Principal Staff Officers

Table of Contents

xiii

Biographies of Commission Members xvi

Arthur Levitt Steven M.H. Wallman. Norman S. Johnson.

Isaac C. Hunt, Jr.

Regional and District Offices xxi

Enforcement 1

Key 1996 Results

Enforcement Authority • Enforcement Activities • Sources

for Further Inquiry

International Affairs

Key 1996 Results

Arrangements for Mutual Information and Assistance

Exchange • Enforcement Cooperation • International Technical

Assistance International Organizations and Multilateral

Initiatives

Investor Education and Assistance

Key 1996 Results

Investor Complaints • Plain English Initiative • Investor

Outreach. Toll-Free Phone Line

Regulation of the Securities Markets

Key 1996 Results

Securities Markets, Trading, and Significant Regulatory

Issues. Oversight of Self-Regulatory Organizations

viii

28

35

39

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Investment Management Regulation . . . . . . . . . . . . . . . . . . . 56

Key 1996 Results

Significant Investment Company Act and Investment

Advisers Act Initiatives Significant Public Utility

Holding Company Act Developments

Compliance Inspections and Examinations

Key 1996 Results

Investment Company and Investment Adviser Inspections

Broker-Dealer Examinations. Self-Regulatory Organization

Inspections

Full Disclosure

Key 1996 Results

Review of Filings. Rulemaking, Interpretive, and Related

Matters Conferences

Accounting and Auditing Matters

Key 1996 Results

Accounting-Related Rules and Interpretations Oversight

of Private Sector Standard-Setting International

Accounting and Auditing Standards

Other Litigation and Legal Activities

Key 1996 Results

Significant Litigation Developments Significant

Adjudication Developments Counseling and Regulatory

Policy Services • Significant Legislative Developments •

Corporate Reorganizations Ethical Conduct Program

70

77

87

95

ix

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Municipal Securities Initiatives. . . . . . . . . . . . . . . . . . . . . . 116

Key 1996 Results

Municipal Securities Disclosure • Technical Assistance •

Outreach

Economic Analysis

Key 1996 Results

Economic Analysis and Technical Assistance

Program Management and Administrative Support

Key 1996 Results

Policy Management Administrative Support

Endnotes

Appendix

119

123

133

149

Enforcement Cases Initiated by the Commission During Fiscal Year

1996 in Various Program Areas Fiscal 1996 Enforcement Cases

Listed by Program Area Investigations of Possible Violations of the

Acts Administered by the Commission Administrative Proceedings

Instituted During Fiscal Year Ending September 30, 1996

Injunctive Actions • Right to Financial Privacy • Types of

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

Income and Balance Sheet Structure Consolidated Financial

Information of Self-Regulatory Organizations. Self-Regulatory

Organizations--Clearing Corporations, 1995 Revenues and Expenses

Self-Regulatory Organizations-Depositories, 1995 Revenues and

Expenses • Certificate Immobilization • Investment Companies and

Investment Advisers. Section 13(t)(1) Reports. Exemptions

Corporate Reorganizations. The Securities Industry: Revenues,

Expenses, and Selected Balance Sheet Items. Unconsolidated

Financial Information for Broker-Dealers. Unconsolidated Annual

x

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•

•

•

•

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•
Revenues and Expenses for Broker-Dealers Doing a Public Business,

1991-1995 Unconsolidated Balance Sheet for Broker-Dealers Doing

a Public Business Year-end, 1991-1995 Carrying and Clearing

Firms Securities Industry Dollar in 1995 for Carrying/Clearing

Firms. Unconsolidated Revenues and Expenses for

Carrying/Clearing Broker-Dealers Unconsolidated Balance Sheet

for Carrying/Clearing Broker-Dealers. Securities Traded on

Exchanges: Market Value and Volume. Nasdaq (Share Volume and

Dollar Volume) Share and Dollar Volume by Exchange. Market

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

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

by Exchanges • Dollar Volume by Exchanges • Securities Listed on

Exchanges • Value of Stocks Listed on Exchanges • Appropriated

Funds vs. Fees Collected. Budget Estimates and Appropriations

Securities and Exchange Commission Organization Chart

xi

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Commission Members and Principal Staff Officers

(As of November 4, 1996)

Commissioners

Arthur Levitt, Chairman

Steven M.H. Wallman, Commissioner

Norman S. Johnson, Commissioner

Isaac C. Hunt, Jr., Commissioner

Principal Staff Officers

Michael E. Schlein, Chief of Staff

Brian J. Lane, Director, Division of Corporation Finance

Meredith B. Cross, Deputy Director

William E. Morley, Senior Associate Director

Abigail Arms, Senior Associate Director

Robert A. Bayless, Associate Director

Wayne Carnall, Associate Director

Albert S. Dandridge, III, Associate Director

Howard F. Morin, Associate Director

Mauri Osheroff, Associate Director

David A. Sirignano, Senior Legal Advisor

William R. McLucas, Director, Division of Enforcement

Colleen P. Mahoney, Deputy Director

Paul V. Gerlach, Associate Director

Thomas C. Newkirk, Associate Director

Gary N. Sundick, Associate Director

Joan E. McKown, Chief Counsel

Vacant, Chief Litigation Counsel

Term Expires

1998

1997

1999

2000

xiii
Stephen J. Crimmins, Deputy Chief Litigation Counsel

George H. Diacont, Chief Accountant

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

Barry Barbash, Director, Division of Investment Management

Heidi Stam, Associate Director

Robert Plaze, Associate Director

Douglas Scheidt, Associate Director

Jack Murphy, Associate Director

Richard Lindsey, Director, Division of Market Regulation

Robert L.D. Colby, Deputy Director

Larry E. Bergmann, Associate Director

Howard Kramer, Associate Director

Michael A. Macchiaroli, Associate Director

Catherine McGuire, Associate Director/Chief Counsel

Holly Smith, Associate Director

Richard Walker, General Counsel, Office of the General Counsel

Paul Gonson, Solicitor and Deputy General Counsel

Karen Burgess, Associate General Counsel

Anne E. Chafer, Associate General Counsel

Richard M. Hwnes, Associate General Counsel

Diane Sanger, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

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

Examinations

Mary Ann Gadziala, Associate Director

Gene Gohlke, Associate Director

C. Gladwyn Goins, Associate Director

Michael H. Sutton, Chief Accountant, Office of the Chief Accountant

xiv
Brenda Murray, Chief Administrative Law Judge, Office of the

Administrative Law Judges

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

Victor H. Tynes, Jr., Director, Office of Equal Employment Opportunity

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

Fernando L. Alegria, Jr., Associate Executive Director

Michael Bartell, Associate Executive Director

Wilson A. Butler, Jr., Associate Executive Director

James Donahue, Associate Executive Director

Vacant, Director, Office of International Affairs"

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

Kaye F. Williams, Director, Office of Legislative Affairs

Paul S. Maco, Director, Office of Municipal Securities

Jennifer Scardino, Director, Office of Public Affairs, Policy Evaluation and

Research

Jonathan G. Katz, Secretary of the Commission

*Michael D. Mann left the Commission on November 1, 1996.

xv
BIOGRAPHIES OF COMMISSION MEMBERS

Chairman

Following his nomination by President Bill

Clinton and his confirmation by the Senate, Arthur

Levitt, Jr. was sworn in as the 25th Chairman of

the Securities and Exchange Commission in July

1993.

Before joining the Commission, Mr. Levitt

owned Roll Call, the newspaper of Congress. Mr.

Levitt served as the Chairman of the New York

City Economic Development Corporation from 1989 to 1993 and the

Chairman of the American Stock Exchange from 1978 to 1989. Prior to

accepting the AMEX Chairmanship, Mr. Levitt worked for 16 years on Wall

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

serving for two years in the Air Force.

Upon his arrival at the SEC, Chairman Levitt quickly established four

priorities: improving investor protections; reforming the municipal debt

markets; raising the standards of practice for brokers and strengthening the

international preeminence of the U.S. capital markets.

During Chairman Levitt's tenure, the SEC has established the Office of

Investor Education and Assistance and created the SEC's World Wide Web

site, one of the most popular on the Internet, which allows the SEC to make

all corporate filings available to the public free of charge.

The SEC has worked to sever ties between political campaign

contributions and municipal underwriting business, a practice known as

"pay-to-play," as well as improving the disclosure and transparency of the

municipal bond market.

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

standards and eliminate the conflicts of interest in how brokers are

compensated.

The Commission, together with the industry, has developed the "Profile

Prospectus" and other plain English guidelines for investment products in an

effort to make disclosure documents easier to understand without

compromising the value of the information provided to investors.

Commissioner

Steven M.H. Wallman was nominated to the

Securities and Exchange Commission by President

Bill Clinton and confirmed by the Senate on June

29, 1994. He was sworn in as a Commissioner on

July 5, 1994. His term expires in June 1997.

Since arriving at the Commission,

Commissioner Wallman has concentrated on a

number of issues including capital formation;

technology and its implications for capital markets and structure, capital

formation and securities regulation; accounting models and financial

disclosure, including derivatives and risk disclosure; and international

securities regulation.

Prior to being nominated to the Commission, Mr. Wallman was in private

practice with the Washington law office of Covington & Burling. He joined

the firm in 1978 as an Associate, becoming a Partner in 1986. While at

Covington & Burling, Mr. Wallman specialized in general corporate,

securities, contract and business law. He is a member of the American Law

Institute and the American Bar Association.

Mr. Wallman also worked for the Boston Consulting Group in 1978.

xvii
Mr. Wallman received his J.D. from the Columbia University School of

Law in 1978. In 1976, he earned his Master's degree from the Sloan School

of Management at the Massachusetts Institute of Technology and his

undergraduate degree from M.LT. in 1975.

He and his wife live in Great Falls, Virginia.

Mr. Wallman was born on November 14, 1953.

Commissioner

Following his appointment by President

Clinton, and his confirmation by the Senate,

Norman S. Johnson was sworn in as a United

States Commissioner on February 13, 1996 in a

ceremony presided over by the Chief Federal

District Judge in Salt Lake City, Utah.

Prior to his nomination, Commissioner Johnson

was a senior Partner in the firm Van Cott, Bagley,

Cornwall & McCarthy and had a long and illustrious legal career focusing

on Federal and State securities law. Commissioner Johnson commenced his

career in the private practice after serving as a staff member of the SEC

from 1965 through 1967. In addition, Commissioner Johnson served as an

Assistant Attorney General in the Office of the Utah Attorney General from

1959 to 1965 and also served as a law clerk to the Chief Justice of the Utah

Supreme Court.

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

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

American Bar Association, and was named Chairman of The Governor's

Advisory Board on Securities Matters, State of Utah. In addition,

Commissioner Johnson served on the Governor's Task Force on Officer and

xviii
Director Liability, State of Utah and numerous other committees and groups

concerned with the application of Federal and State securities laws.

Commissioner Johnson has received numerous honors and awards in

recognition of the outstanding contributions he has made to the Securities

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

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

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

Commissioner Johnson has involved himself in many community groups

including the Utah Supreme Court Committee on Gender and Justice.

Married since 1956 to the former Carol Groshell, Commissioner Johnson

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

the State of Utah.

Commissioner

Isaac C. Hunt, Jr. was nominated to the

Securities and Exchange Commission by President

Bill Clinton in August 1995 and confirmed by the

Senate on January 26, 1996. He was sworn in as

a Commissioner on February 29, 1996.

Prior to being nominated to the Commission,

Mr. Hunt was Dean and Professor of Law at the

University of Akron School of Law, a position he

held from 1987 to 1995. He taught securities law for seven of the eight

years he served as Dean. Previously, he was Dean of the Antioch School of

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

Mr. Hunt served during the Carter and Reagan Administrations at the

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

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

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

fields of corporate and securities law, government procurement litigation,

xix
administrative law, and international trade. In addition, Mr. Hunt

commenced his career at the SEC as a staff attorney from 1962 to 1967.

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

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

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

xx
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Central Regional Office

Daniel F. Shea, Regional Director

1801 California Street, Suite 4800

Denver Colorado 80202-2648

(303) 391-6800

Fort Worth District Office

Harol F. Degenhardt, District Administrator

801 Cherry Street, 19th Floor

Fort Worth, TX 76102

(817) 334-3821

Salt Lake District Office

Kenneth D. Israel, Jr., District Administrator

50 South Main Street, Suite 500

Salt Lake City, UT 84144-0402

(801) 524-5796

Midwest Regional Office

Mary Keefe, Regional Director

Citicorp Center

500 W. Madison Street, Suite 1400

Chicago, Illinois 60661-2511

(312) 353-7390

Northeast Regional Office

Carmen J. Lawrence, Regional Director

7 World Trade Center, Suite 1300

New York, New York 10048

(212) 748-8000

xxii
Boston District Office

Juan M. Marcelino, District Administrator

73 Tremont Street, 6th Floor

Boston, MA 02108-3912

(617) 424-5900

Philadelphia District Office

Vacant

The Curtis Center, Suite 1005E

601 Walnut Street

Philadelphia, PA 19106-3322

(215) 597-3100

Pacific Regional Office

Elaine M. Cacheris, Regional Director

5670 Wilshire Boulevard, 11th Floor

Los Angeles, CA 90036-3648

(213) 965-3998

San Francisco District Office

David B. Bayless, District Administrator

44 Montgomery Street, Suite 1100

San Francisco, CA 94104

(415) 705-2500

Southeast Regional Office

Charles V. Senatore, Regional Director

1401 Brickell Avenue, Suite 200

Miami, FL 33131

(305) 536-4700

Atlanta District Office

Richard P. Wessel, District Administrator

3475 Lenox Road, N.E., Suite 1000

Atlanta, GA 30326-1232

(404) 842-7600

xxiii

Enforcement

The Commission's enforcement program is designed to protect investors and

foster confidence by preserving the integrity and efficiency of the securities

markets. During the year, the agency prosecuted a wide range of cases.

Key 1996 Results

In 1996, the Commission brought a significant number of enforcement

actions, and sought and obtained relief drawn from remedies designed to

protect investors and the public interest. The Commission obtained court

orders requiring defendants to disgorge illegal profits of approximately $325

million. Civil penalties authorized by the Securities Enforcement Remedies

and Penny Stock Reform Act of 1990 (Remedies Act), the Insider Trading

Sanctions Act of 1984 (ITSA), and the Insider Trading and Securities Fraud

Enforcement Act of 1988 (ITSFEA) totaled over $67 million. (In some

instances, the payment of disgorgement pursuant to a court order was waived

based upon the defendant's demonstrated inability to pay. Courts also have,

in some cases, noted the appropriateness of civil penalties that were not

imposed because of a defendant's demonstrated inability to pay.)

ENFORCEMENT ACTIONS INITIATED

1992 1993 1994 1995 1996

Civil Injunctive Actions 156 172 196 171 180

Administrative Proceedings 226 229 268 291 239

Civil and Criminal Contempt

Proceedings 11 15 33 23 32

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

Total 394 416 497 486 453

1
In Commission-related cases, criminal authorities obtained 78 criminal

indictments or informations and 57 convictions during 1996. The

Commission granted access to its files to domestic and foreign prosecutorial

authorities in 229 cases.

Enforcement Authority

The Commission has broad authority to investigate possible violations of

the federal securities laws. In its informal investigations, information is

requested on a voluntary basis. The Commission also may conduct formal

investigations and issue subpoenas to compel the production of books and

records and the appearance of witnesses to testify.

The federal court injunction, an order that prohibits future violations of

the law, always has been one of the Commission's principal enforcement

tools. In civil actions for injunctive relief, the Commission may seek

temporary restraining orders and preliminary injunctions, as well as

permanent injunctions, against violators. Conduct that violates the injunction

may result in fines or imprisonment. In addition to injunctive relief, the

Commission often seeks other equitable relief such as an accounting and

disgorgement of illegal profits. When seeking temporary restraining orders,

the Commission often requests a freeze order to protect investor funds and

assets. Civil penalties may be imposed for any violation of the federal

securities laws (except insider trading violations for which penalties are

available under ITSA and ITSFEA). The Remedies Act also affirmed the

authority of the federal courts to bar or suspend individuals from serving as

corporate officers or directors.

The Commission may institute several types of administrative

proceedings. These include proceedings against regulated entities (such as

broker-dealer firms or investment advisers) in which they may be censured

or limited in their activities, or in which their registrations may be

suspended or revoked. The Commission also may impose similar sanctions

on persons employed by regulated firms. In addition, individuals who take

2
part in an offering of penny stock may be barred from such participation. In

administrative proceedings against regulated firms and their employees, the

Remedies Act also authorized the Commission to impose penalties and order

disgorgement.

The Remedies Act further authorized the Commission to institute

administrative proceedings in which it can issue cease and desist orders. A

permanent cease and desist order can be entered against any person violating

the federal securities laws and may require disgorgement of illegal profits.

In emergency situations, the Commission may issue temporary cease and

desist orders against regulated firms or their employees.

Section B(d) of the Securities Act of 1933 (Securities Act) permits the

Commission to institute proceedings to suspend the effectiveness of a

registration statement that contains false and misleading statements.

Respondents can be ordered to comply, or to take steps to effect compliance,

with the relevant provisions. Pursuant to Rule 102(e) of the Commission's

Rules of Practice, administrative proceedings can be instituted against

professionals who appear or practice before the Commission, including

accountants and attorneys. The sanctions that can be imposed in these

proceedings include suspensions and bars from appearing or practicing

before the Commission.

The Commission is authorized to refer matters to other federal, state, or

local authorities or self-regulatory organizations (SROs). The agency often

provides substantial assistance to the Department of Justice for the criminal

prosecution of securities violations.

Enforcement Activities

Set forth below are summaries of significant enforcement actions initiated

in various areas during 1996. Defendants or respondents who consented to

settlements of actions did so without admitting or denying the factual

3

~
allegations contained in the complaint or the order instituting proceedings.

See Table 2 for a listing of all enforcement actions instituted in 1996.

Municipal Securities Cases

Individual investors have become important players in the municipal

securities markets, through direct purchases of municipal bonds and

investments in mutual funds that hold these securities. To protect investors

in municipal securities, the Commission has focused increased attention on

potentially illegal activities in this market.

The Commission brought two enforcement actions and issued a report

arising out of its investigation into the financial collapse of Orange County,

California, and the Orange County Investment Pools:

A civil action was filed against Robert L. Citron, Orange County's

former treasurer-tax collector, and Matthew R. Raabe, the former

assistant treasurer. I

Cease and desist proceedings were instituted against Orange County,

the Orange County Flood Control District, and the Orange County

Board of Supervisors. 2

A report of investigation was issued concerning the activity of

individual members of Orange County's board of supervisors."

The enforcement actions concern the fraudulent offer and sale of over

$2.1 billion in municipal securities issued in 1993 and 1994 by Orange

County, the Flood Control District, and a school district that was not named

in the actions. Among other things, disclosure documents used in the

offerings were false or misleading with respect to (1) Orange County's

Investment Pools, including the Pools' investment strategy and investment

results, manipulation of the Pools' yield, and investment in the Pools of

funds pledged to repay the securities; (2) Orange County's financial

condition; and (3) the tax-exempt status of the offerings. The defendants in

4

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•

•
the civil action consented to the entry of an injunction, and the respondents

in the administrative proceedings consented to the entry of a cease and desist

order. The members of the board of supervisors named in the report of

investigation (which does not constitute an adjudication of any fact or issue

that it addresses) consented to the issuance of the report.

The Commission also instituted cease and desist proceedings against

Maricopa County, Arizona, the sixth largest county in the United States,

alleging antifraud violations in the July 1993 offer and sale of two series of

general obligation bonds (In the Matter of Maricopa County'). The county's

disclosure documents for the offerings contained financial statements for the

year ended June 30, 1992, but did not disclose that the county's financial

condition had worsened significantly by the time of the offerings. In the

period leading up to the offerings, the county had developed a deficit in its

General Fund and had doubled the deficit in its Medical Center Enterprise

Fund, in which current liabilities exceeded assets on June 30, 1993, by 40

percent more than on June 30, 1992. In addition, the county failed to

disclose that its cash flow had worsened since the close of the prior fiscal

year. The county also represented that bond proceeds would be used to

finance specific projects, when in fact it planned to use the bond proceeds to

finance its deficit. The County consented to the entry of a cease and desist

order. The Commission also instituted cease and desist proceedings against

the county's financial advisor, Peacock, Hislop, Staley & Givens, and Larry

S. Givens, an officer of the firm, for causing the county's violations (In the

Matter of Peacock, Hislop, Staley & Given, Inc. 5). The firm and Givens

consented to the entry of a cease and desist order by which they were

required to pay civil penalties of $50,000 and $25,000.

In the Commission's administrative proceedings against an underwriter,

First Fidelity Securities Group consented to the entry of the Commission's

order which found that, as a result of undisclosed kickback schemes engaged

in by the firm to secure underwriting business, First Fidelity defrauded

certain municipal issuers, as well as investors (In the Matter of First Fidelity

Securities Group'). The Commission found that First Fidelity delivered

official statements on the municipal bond offerings to investors that

5
misrepresented the underwriters' discounts or costs of issuance and did not

disclose the kickback scheme. The Commission also found that First

Fidelity violated rules of the Municipal Securities Rulemaking Board

(MSRB) regarding fair dealing, books and records, and gifts and gratuities.

First Fidelity consented to pay disgorgement plus prejudgment interest in the

amount of $1,793,309 and a civil penalty of $500,000.

In the first "pay to play" case, the Commission alleged violations of

MSRB Rule G-37 and related recordkeeping rules in cease and desist

proceedings against FAIC Securities, Inc. (In the Matter of FAlC Securities,

Inc.'). MSRB Rule G-37 provides that brokers, dealers, and municipal

securities dealers may not engage in municipal securities business with an

issuer within two years after making contributions to any official of that

issuer who has responsibility for the hiring of brokers, dealers, or municipal

securities dealers. During 1994, the chairman of FAIC's executive

committee and the chairman of FAIC's board of directors made

contributions through companies under their control to candidates for office

who could influence the awarding of municipal securities business for Dade

County, Florida, and the State of Florida. In this same period, FAIC was

selected to participate in three negotiated underwritings of certain municipal

securities by both Dade County and the Florida Housing Finance Authority.

The underwritings represented sales of approximately $379 million and

generated fees of $224,205 for FAIC. FAIC consented to the entry of a

cease and desist order by which its registration was revoked, and it was

required to disgorge its fees, plus prejudgment interest, and to pay a civil

penalty of $200,000.

The Commission alleged violations of MSRB Rule G-17, which requires

fair dealing by brokers in the municipal securities market, in cease and desist

proceedings against Lazard Freres and Merrill Lynch (In the Matter of

Lazard Freres & Co. U~). Lazard Freres was the financial adviser to the

Massachusetts Water Resources Authority (MWRA) and the District of

Columbia. An individual who was at the relevant times a partner of Lazard

entered into a fee-splitting agreement with Merrill Lynch to market interest

rate swaps. Under the contract, Lazard was to receive an annual consulting

6
fee of between $800,000 and $1 million and a share of Merrill Lynch's

income from successful joint swap proposals. In recommending that the

MWRA and the District of Columbia select Merrill Lynch to provide

financial services, the partner failed to disclose the existence of the contract

or the resulting conflict of interest. Neither Lazard Freres nor Merrill

Lynch took adequate steps to ensure disclosure. The respondents consented

to the entry of a cease and desist order by which Lazard Freres was required

to pay a civil penalty of $2.5 million and to make restitution to the MWRA

and the District of Columbia of $2.12 million and $1.8 million. Merrill

Lynch was required to pay a civil penalty of $2.5 million and to make

restitution to the MWRA and the District of Columbia of $2 million and

$1.8 million.

Offering Cases

Securities offering cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act.

Internet Cases

Communications over the internet have at times been used to solicit the

purchase of unregistered securities or to further securities frauds. In SEC v.

Octagon Technology Group, Inc.," the Commission alleged that a computer

software company and two of its former officers created an elaborate sham

offering of offshore debt securities on the World Wide Web. The complaint

charged that the defendants created a website for a Panamanian shell

subsidiary of Octagon, on which they advertised "Interamerican hard

currency bonds." Although the bonds never existed and the subsidiary had

no business operations or assets, the defendants promised a risk-free

investment with guaranteed annual returns of 11.75 percent, and portrayed

the subsidiary as a successful provider of investment capital to Latin

American businesses. One of the defendants posted messages touting the

bonds on three investment-related internet newsgroups, without disclosing

his relationship to the offering. In addition, the website contained a

purported reproduction of an article in World Financial Report regarding the

7
bonds and the issuer. In fact, the World Financial Report was a fabrication

of the defendants. The defendants consented to the entry of injunctions, and

one of the individual defendants was ordered to pay a civil penalty of

$5,000.

The Commission charged Scott Frye with posting numerous messages on

the internet, in which he solicited investors with promises of riskless profits

and above average returns from investments in two Costa Rican enterprises,

ICP and the Jupiter Agro Development Project (SEC v. Scott A. FryelO).

Frye falsely represented that one of his companies had a major distribution

contract for its product with A&P Supermarkets, when no distribution

contracts existed, and falsely stated that a bank had guaranteed investors'

principal and 15 percent interest for a one-year investment. The Commission

has obtained a preliminary injunction and an asset freeze in this matter,

which was pending at the end of the year.

The Commission's action against IVT Systems, Inc. and Donald Spencer,

the founder, president, and majority shareholder of IVT, involved allegations

that the defendants used the internet, among other means of communication,

to engage in fraudulent securities offerings (SEC v. Donald B. Spencer").

The defendants solicited investments on the internet that they represented

would be used to finance the construction by IVT of a proposed ethanol

plant in the Dominican Republic. Potential returns of 50 percent and greater

were promised when there was no basis for this prediction. Spencer and

IVT consented to the entry of injunctions and an order requiring the

disgorgement of $113,500, representing the amount raised from 12

investors, plus interest.

In SEC v. Wye Resources, Inc., 12 the Commission charged that Wye

Resources and its former president, Rehan Malik, placed messages over the

internet through a New Orleans-based computer bulletin board service called

the Emerging Growth Stock BBS in connection with the offering of

approximately 5.3 million shares of unregistered Wye stock; advertisements

also were placed in U.S. publications. Wye Resources is a Canadian

corporation that claims to own interests in various gold and diamond mining

8
properties; certain of the messages and advertisements misrepresented the

status of the purportedly ongoing exploitation of certain mining properties in

Zaire. Malik consented to the entry of an injunction and an order requiring

him to pay a civil penalty of $25,000. This matter was pending as to Wye

Resources at the end of the year.

Other Offering Violations

In SEC v. Comparator Systems Corporation," the Commission alleged

that Comparator and three of its officers and directors sold tens of millions

of shares of Comparator stock to investors while making material

misrepresentations concerning the financial status of the company, its

purported proprietary interest in certain fingerprint identification technology,

and its other business activities. Among other things, the defendants claimed

that Comparator had developed a new generation of fingerprint identification

technology with substantial market potential and demonstrated a device to

investors that purportedly used the new technology. The complaint alleged,

however, that two of the individual defendants had stolen a prototype of a

device developed by persons who were not associated with Comparator.

The Commission also alleged that Comparator filed false and misleading

financial statements for its fiscal years 1994 and 1995 and for the first three

quarters of 1996, that grossly inflated the company's assets. Comparator

and two of the individual defendants, Robert Reed Rogers and Gregory

Armijo, consented to the entry of injunctions; Rogers and Armijo also were

barred from serving as officers or directors of public companies. A

preliminary injunction was entered by default against the final individual

defendant, Scott Hitt, who was formerly the executive vice-president of

Comparator. The Commission settled related administrative proceedings

against Comparator's former auditor and his accounting firm (In the Matter

of Eli Buchalter, CPA14). The cease and desist order also denied the

respondents the privilege of appearing or practicing before the Commission.

The Commission alleged that over $570 million was raised through the

fraudulent offer and sale of securities by Bennett Funding Group, Inc.

(BFG); Patrick Bennett, BFG's former chief financial officer; and three

9
related entities between 1991 and 1995 (SEC v. The Bennett Funding Group,

Inc. 15). The defendants sold assignments of purported equipment leases

when no underlying lease existed, including the sale of over $55 million in

fictitious and supposedly tax-exempt New York City Transit Authority

leases. In cases where the defendants did have an underlying lease, they

sometimes sold leases that already had been sold to other investors. The

Commission further alleged that materially false BFG financial statements

for 1992 and 1993 were used to sell promissory notes issued by two of its

subsidiaries. The proceeds from the sale of lease assignments and

promissory notes were diverted to various people and entities connected with

Patrick Bennett or the other defendants; the diversion of funds included the

payment of over $10 million to Bennett. Patrick Bennett consented to the

entry of a preliminary injunction and an asset freeze in these proceedings,

which were pending at the end of the year.

The Commission focused on several offering frauds purportedly involving

high-tech telecommunications securities. In SEC v. Douglas Frankel." the

Commission alleged that the defendant created and caused the broadcasting

of fraudulent infomercials to tout investments in wireless cable television and

specialized mobile radio ventures. Frankel repeatedly broadcast four halfhour infomercials during 1993 and 1994. Leads to potential investors

developed through the broadcasts were then sold to some 30 promoters of

high-tech securities. At least 13 of Frankel's clients are the subject of

various Commission enforcement actions charging them with registration or

antifraud violations. The infomercials falsely stated that the risks of the

investments were minimal and falsely projected exorbitant rates of return.

Frankel consented to the entry of an injunction and an order requiring him to

pay a civil penalty of $50,000.

The Commission filed an action against Paul L. Parshall, alleging that he

set up a new Utah corporation, Republic International Corporation, to

assume the identity of a defunct, but publicly-traded, corporation having the

same name (SEC v. Axiom Security Solutions, IncP). Through his own

transfer agent, TransGlobal Securities, Inc., Parshall issued common stock

of the new company in the names of the shareholders of the old company.

10
He then sold the newly created shell corporation to Axiom Security

Solutions, Inc., as a vehicle for taking Axiom public without going through

the required registration process. In addition, Parshall had the new Republic

International assume the identity of the old company for purposes of

delivering information to market makers and making filings with the

Commission. The defendants consented to the entry of injunctions and

orders by which Parshall was ordered to disgorge $150,000 plus $7,594 in

prejudgment interest and to pay a civil penalty of $100,000. Parshall also

was barred from serving as an officer or director of any public company.

The Commission instituted related administrative proceedings in which the

registration of Republic International's stock was revoked by default for

failure to make required periodic filings since 1990 (In the Matter of

Republic International Corporation'ry, The Commission also settled cease

and desist proceedings in which it barred an individual from participation in

penny stock offerings, based on the respondent's preparation of a fraudulent

filing on Form 8-K with respect to Axiom's acquisition of the new Republic

International and a fraudulent Form S-8 registration statement in connection

with Axiom's distribution of certain shares (In the Matter of Norman L.

Sirakl'1.

The Commission alleged in cease and desist proceedings that stocks were

purportedly issued in reliance upon Regulation S to evade registration

requirements (In the Matter of Candie's, Inc."). In three offerings of

securities issued by Candie's, Inc., and one offering of securities issued by

Response USA, Inc., large blocks of stock were sold to foreign purchasers

at a substantial discount to the prevailing market price, in return for shortterm, unsecured promissory notes. The securities were transferred to

accounts with a U.S. brokerage firm and then resold to U.S. customers

shortly after the expiration of the 40-day restricted period of Regulation S.

The foreign purchasers bore little economic risk, since the proceeds of the

U.S. sales could be used to payoff the promissory notes. The issuers, the

law firm that arranged the sales, and Salvatore Mazzeo, the president and

owner of the U.S. brokerage firm, consented to the entry of the cease and

desist order. In addition, Mazzeo was suspended from association with

regulated entities for a period of five months.

11
Financial Disclosure Cases

Actions involving false and misleading disclosures concerning matters that

affect the financial condition of an issuer, or involving the issuance of false

financial statements, often are complex and, in general, demand more

resources than other types of cases. Effective prosecution in this area is

essential to preserving the integrity of the full disclosure system. The

Commission brought 59 cases containing significant allegations of financial

disclosure violations against issuers, regulated entities, or their employees.

Many of these cases included alleged violations of the books and records and

internal accounting control provisions of the Foreign Corrupt Practices Act.

The Commission also brought 20 cases alleging misconduct by accounting

firms or their partners or employees.

The Commission filed an injunctive action against Giancarlo Parretti, a

former director and chief executive officer of Pathe Communications

Corporation (SEC v. Giancarlo Parretti''), and related administrative

proceedings against Florio Fiorini, Pathe's former chairman.F and

Fernando Cappuccio, a former director and chief financial officer of the

company." The complaint in the injunctive action alleged that Pathe

entered into a purported $200 million sale and leaseback transaction in which

ownership of certain theater properties was transferred to Cinema 5 Europe

N.V. In fact, Cinema 5 was not independent of Pathe, and the transaction

was a sham. Pathe provided the funds to establish Cinema 5, the managing

directors of Cinema 5 were friends and business associates of Parretti, and

Cappuccio was Cinema 5' s sole representative in arranging the transaction.

As a result of the transaction, Pathe improperly recognized gains of more

than $100 million in financial statements for 1989 and the first quarter of

1990. The complaint also alleged that Parretti and Fiorini failed to record

material liabilities in Pathe's books and records when it acquired MGM/UA.

When they failed to raise equity financing required to complete the merger,

Parretti and Fiorini borrowed more than $300 million on a short-term basis

and committed Pathe to repay the loans after the merger. Pathe also sold

certain licensing rights to raise more than $100 million that could be used to

finance the merger; however, Pathe was obligated to repurchase the rights at

12
the buyer's option. The short-term loans and the repurchase contingency

were not recorded on Pathe's books and records. Parretti consented to the

entry of an injunction, and Fiorini and Cappuccio consented to the entry of

cease and desist orders.

The Commission charged a biotechnology firm, Cypress Bioscience Inc.,

with filing a Form lO-Q for the quarter ended September 30, 1993 that

contained financial statements which materially overstated revenue, and

materially understated losses, by improperly recognizing revenue from

purported bill and hold transactions (In the Matter of Cypress Bioscience

Inc.).24 Cypress also failed adequately to disclose a change in its

accounting policies by which it recognized revenue on goods that had not

been shipped, failed to disclose that an increase in third quarter revenues

between 1992 and 1993 was primarily attributable to the bill and hold

transactions, and failed to discuss the effect of the bill and hold transactions

on future revenue. Among other things, Cypress, the manufacturer of a

product used in the treatment of human immune system disorders,

recognized revenue generated by a volume discount program. Under the

program, customers could order an amount equivalent to a full year's usage,

but could take delivery at any time within 11 months and were not obligated

to pay until 30 days after delivery. In addition, expired products could be

returned for replacement. Forty-nine percent of Cypress' 1993 third quarter

revenue was attributable to this program. Cypress and Alex P. de Soto, its

chief financial officer, consented to the entry of the cease and desist order,

by which de Soto was denied the privilege of appearing or practicing before

the Commission.

In litigated proceedings instituted in 1994, the Chief Administrative Law

Judge (AU) found that the Bank of Boston Corporation violated the

reporting provisions of the Exchange Act by misstating or failing to disclose

in its Form lO-Q for the second quarter of 1989 certain material facts, and

known trends and uncertainties, concerning the deterioration of its loan

portfolio that could reasonably have been expected to have a material,

unfavorable effect on its financial condition and results of operations (In the

Matter of Bank of Boston Corp P). In the second quarter of 1989 the bank

13
showed a Provision Expense (i.e., an amount to be added to its loan loss

reserve) of $36 million and net income of $97.8 million. This Provision

Expense was in the same amount as in the previous five quarters. In the

third quarter of 1989, the bank had a Provision Expense of $370 million,

and an after-tax net loss of $125 million for the quarter. Although the value

of Bank of Boston's loan portfolio was adversely affected by declines in the

New England real estate market, the bank failed adequately to reflect this

decline in its periodic filings with the Commission. The AU found that

Bank of Boston's top management knew or should have known when it filed

its Form IO-Q on August 10, 1989 that its financials without explanation

were misleading, and that known trends and uncertainties in its real estate

portfolio would reasonably be expected to have a material unfavorable

impact on its fmancial condition. Disclosure in the Form IO-Q is required

in situations such as this because the bank knew, or should have known, that

(1) without explanation its fmancials were misleading, and (2) the bank's

financial statements and accompanying footnotes were insufficient, without a

narrative explanation, for an investor to judge the quality of earnings and the

likelihood that reported financial information is not indicative of material

changes in future operating results. The AU entered a cease and desist

order against Bank of Boston.

The Commission alleged that Christopher Kent Bagdasarian, the chief

executive officer and chairman of Normandy America Inc., and Sam Lance

White, a tax partner with Deloitte & Touche LLP, engaged in a fraudulent

scheme to fabricate Bagdasarian's investment track record, which was

included in the registration statement for Normandy's initial public

offering. 26 Normandy was a reinsurance company with no financial or

operating history and its business plan depended on the ability, through

Bagdasarian, to invest reinsurance premiums in equity securities. The

defendants told Normandy's underwriters that Bagdasarian had achieved a

ten-year annual return of 29.1 percent by managing assets ranging from

$250.6 million in 1990 to $731.3 million during 1994; in fact, the

defendants fabricated the assets and the investment results. This matter was

pending at the end of the year.

14
The Commission alleged that the former senior management of Platinum

Software Corporation devised and implemented a fraudulent accounting

scheme between March 1993 and January 1994 (In the Matter of Platinum

Software Corporation''). Platinum improperly recorded the revenue from a

number of license agreements that were accompanied by side letters giving

the customer the right to cancel the agreement within a specified period of

time, backdated certain license agreements and shipping documents to record

revenue in a prior quarter, and improperly recognized revenue on sales that

were subject to significant uncertainty. Platinum and two of its vice

presidents, John F. Keane and William B. Falk, consented to the entry of

the cease and desist order. In a related civil action, SEC v. Gerald R.

Blackie,28 the Commission charged Blackie, Platinum's former chief

executive officer, president, and chairman; Jon R. Erickson, its former chief

financial officer; and Mark S. Tague, its former executive vice

president/corporate controller, with participation in the financial fraud at

Platinum. In addition, the defendants were alleged to have engaged in

insider trading by selling Platinum common stock while in possession of

material non-public information about the company's true financial

condition. The defendants consented to the entry of an injunction and orders

requiring them to disgorge $2,476,000 representing their losses avoided,

bonuses of $184,125 received from Platinum during the fraud, and

prejudgment interest. Blackie and Tague also were required to pay civil

penalties totaling $150,000. In related proceedings under Rule 102(e),

Erickson and Tague were denied the privilege of appearing or practicing

before the Commission (In the Matter of Jon R. Erickson, CPA;29 In the

Matter of Mark S. Tague, CPA30).

In SEC v. McDonnell Douglas Corporation." the Commission alleged

that the aircraft manufacturer failed to recognize a material loss on its $6.6

billion, fixed-price contract with the U.S. Air Force for the C-17 cargo jet.

As a result, McDonnell Douglas overstated its pre-tax income in financial

statements filed with the Commission for 1990. By June 1990, preliminary

estimates developed by the company's operating division, Douglas Aircraft

Company, projected costs substantially higher than the contract price. In

August 1990, the Department of Defense informed the company that a $6.5

15
billion cost estimate was not supportable and that progress payments would

be withheld until an acceptable cost estimate was submitted. During the last

half of 1990, cost overruns continued to rise and production efficiency

worsened or remained flat; nonetheless, McDonnell Douglas reported for

year-end 1990 that it would break even on the contract. McDonnell Douglas

consented to the entry of an injunction and an order requiring it to pay a

civil penalty of $500,000.

The Commission took action against Kendall Square Research

Corporation, which allegedly issued financial statements for 1992 and the

first two quarters of 1993 that were materially false and misleading in that

revenue and earnings were overstated (SEC v. Kendall Square Research

Corporation''). The complaint alleged that the company recognized

revenue from purported sales of its computers that were subject to material

contingencies, which in certain instances were contained in side letters to the

purported sales contracts. In a number of instances, payment was contingent

on the buyers' receipt of outside funding from third parties. The

Commission also alleged that the three individual defendants, Henry

Burkhardt III, Kendall's former president and chief executive officer; Peter

Appleton Jones, its former highest ranking sales executive; and Karl G.

Wassmann III, its former chief financial and accounting officer, sold Kendall

common stock while in possession of material non-public information about

the company's true financial condition and results of operations. Burkhardt,

Jones and Wassmann consented to the entry of injunctions. Burkhardt was

ordered to pay a total of $1.1 million, representing his losses avoided and

civil penalties, and was barred from acting as an officer or director of any

public company. Jones was ordered to pay a total of $321,526, representing

his losses avoided and prejudgment interest. Wassmann was ordered to

disgorge a total of $241,548, representing his losses avoided and

prejudgment interest. Wassmann also was denied the privilege of appearing

or practicing before the Commission in related administrative proceedings

pursuant to Rule 102(e). The Commission also settled cease and desist

proceedings against Thomas J. MacCormack, Kendall's former director of

contract administration, in which the respondent was required to pay

16
$31,672.75 representing his losses avoided from sales of Kendall stock, plus

prejudgment interest (In the Matter of Thomas J. MacCormacI23).

The Commission alleged that Akhilesh Chandoke, the former president,

chief executive officer, and director of Automated Telephone Management

Systems, Inc. (ATM); Frank Mzyk, ATM's former controller and principal

accounting officer; and David Jacobs, its former secretary and vice president

of sales, engaged in a fraudulent scheme to inflate the company's revenue

for the fiscal year ended September 30, 1993 (SEC v. Automated Telephone

Management Systems, Inc. 34). ATM allegedly recognized $1.3 million in

revenue from a fictitious sales contract that represented 25 percent of the

company's revenue for 1993. The defendants concealed inventory, created

fictitious invoices, and backdated internal documents to conceal the fraud

from auditors. Chandoke and Mzyk consented to the entry of injunctions

and orders barring them from acting as officers or directors of public

companies. Default injunctions were entered against ATM and Jacobs, who

also was barred from serving as an officer or director of a public company.

In a related action, Earl V. Young, a former ATM director, consented to the

entry of an injunction and an order requiring him to pay a civil penalty of

$15,000 (SEC v. Earl V. Young35).

Insider Trading

Insider trading occurs when a person in possession of material non-public

information engages in securities transactions or communicates such

information to others who trade. The Commission often seeks ancillary

relief, including disgorgement of any profits gained or losses avoided, in

addition to permanent injunctions. The ITSA penalty provisions authorize

the Commission to seek a civil penalty, payable to the United States

Treasury, of up to three times the profit gained or loss avoided against

persons who unlawfully trade in securities while in possession of material

non-public information or who unlawfully communicate material non-public

information to others who trade. Civil penalties also can be imposed upon

persons who control insider traders. During 1996, the Commission brought

42 cases alleging insider trading violations.

17
In emergency situations, the Commission will take action to protect the

markets when the identity of potential violators has been concealed or is

otherwise unknown. In SEC v. Certain Purchasers of the Common Stock of

CBI Industries, Inc., 36 the Commission filed a complaint alleging that

unknown persons, acting through the offices of foreign financial institutions

(three Swiss and one German), made highly profitable purchases of common

stock issued by CBI Industries just days before the public announcement of a

proposed takeover of CBI by Praxair, Inc. Because the price of CBI stock

rose by over 50 percent following the public announcement, the defendants

stood to realize substantial profits. The court entered a temporary

restraining order that froze the shares of stock in the accounts at issue, along

with any proceeds from sales of such stock. Subsequently, the court entered

an injunction by default against the two individuals and seven companies that

had been identified as responsible for the trading. The order requires total

disgorgement of $1.4 million, plus $1.2 million in ITSA penalties from

seven of the defendants.

The Commission also filed an action, SEC v. Certain Purchasers of Call

Options of Duracell International, Inc.,37 alleging that unknown persons

purchased call options prior to the public announcement of a merger

agreement between Duracell International and The Gillette Company The

defendants' purchases resulted in profits of approximately $950,000. The

Commission obtained a preliminary injunction and an asset freeze in this

case, which was pending at the end of the year.

The Commission filed an action against six individuals, alleging that they

engaged in insider trading in the securities of Intuit, Inc., or tipped to others

who traded, prior to the announcement of a proposed merger between

Microsoft Corporation and Intuit on October 13, 1994 (SEC v. Kathleen

Lane"). Kathleen Lane learned of the proposed merger from her spouse,

Intuit's chief financial officer, and tipped her son and daughter who in turn

tipped the three other defendants. Seven months later, Lane learned that the

merger plans were to be abandoned and communicated this information to

her son and one of his tippees. The defendants consented to the entry of

18
injunctions and orders requiring the payment of a total of $472,342 in

disgorgement and penalties.

The Commission charged a psychiatrist with insider trading in the

securities of Lockheed Corporation (SEC v. Mervyn Cooper"). In 1994,

Mervyn Cooper provided marriage counseling to a Lockheed executive who

was involved in the due diligence process related to a planned merger

between Lockheed and Martin Marietta Corporation. The executive

confided confidential information concerning a major transaction involving

Lockheed, which Cooper tipped to Kenneth E. Rottenberg, who opened a

brokerage account in which he and Cooper jointly purchased call option

contracts for Lockheed stock. They also purchased shares of Lockheed

stock. As a result of their illegal trading, the defendants had combined

profits of $177,235.60. The defendants consented to the entry of injunctions

and orders requiring Cooper to disgorge profits of $53,458.02 plus

prejudgment interest and to pay a civil penalty of $53,458.02, and requiring

Rottenberg to disgorge $53,909.85.

A complaint filed by the Commission charged Donald Tyson and

Frederick Cameron with insider trading in 1992 in the common stock of

Arctic Alaska Fisheries Corporation (SEC v, Donald John Tyson~.

Tyson, who was then the chairman of the board of directors of Tyson

Foods, Inc. and a majority shareholder of the company, communicated

material non-public information to Cameron, a friend, concerning Tyson

Foods' proposed acquisition of Arctic Alaska. While in possession of that

information, Cameron purchased 9,000 shares of Arctic Alaska stock for

$59,625; following the public announcement of the proposed acquisition, he

realized a profit of $46,125 on the sale of the stock. The defendants

consented to the entry of an injunction and orders by which Cameron was

required to disgorge $46,125, plus prejudgment interest of $18,153.43, and

by which Cameron and Tyson each were required to pay civil penalties of

$46,125.

Three individuals were charged with insider trading in the common stock

of Skybox International, Inc. (SEC v. Hugo Aldo Sallustro"), Sallustro,

19
the managing director of Panini S.r.L., a European subsidiary of Marvel

Entertainment Group Inc., misappropriated information concerning a

possible acquisition of Skybox, and purchased Skybox stock while in

possession of this information; he also tipped Anna Baroni and Ferrucio

Carnponovo, who both traded Skybox stock. Following the public

announcement of Marvel's tender offer for Skybox, the defendants realized

total profits of $152,718. The defendants consented to the entry of

injunctions and orders requiring total payments of $165,980 representing

disgorgement plus prejudgment interest and $102,608 in civil penalties.

Regulated Entities

The NASD Proceedings

Under the Exchange Act, the Commission exercises oversight of SROs in

the securities business. Administrative proceedings were instituted during

the year against the NASD to address its alleged failure to comply with

certain of its own rules and its failure to enforce compliance by market

makers on the Nasdaq system with NASD rules and the federal securities

laws (In the Matter of National Association of Securities Dealers, Inc. 42).

In settling the proceedings, the NASD agreed to provide for more diversity

on its Board of Governors and certain policy making committees, improve

the process by which it disciplines member firms and admits new members,

and strengthen its enforcement efforts and enhance its surveillance regarding

market making activities. The NASD also represented that $25 million had

been authorized to enhance its market surveillance systems and that an

additional $75 million would be committed for this purpose over the next

five years. The Commission released a report of investigation regarding the

NASD and the Nasdaq marker" detailing a number of problem areas

including the anticompetitive pricing convention used by market makers, by

which most stocks were quoted only in even eighths (i.e., $.25, $.50, $.75),

so that spreads were never less that $.25. The report also discussed

regulatory deficiencies at the NASD.

20
Broker-Dealers

A significant number of Commission enforcement actions are filed each

year against broker-dealer firms and persons associated with them. These

actions focus on fraudulent sales practices as well as on violations of the

books and records, customer protection, and net capital provisions of the

federal securities laws. The Commission also can impose sanctions upon

firms and their senior management for failure reasonably to supervise

employees to prevent violative conduct.

In cease and desist proceedings, In the Matter of PaineWebber

Incorporated." the Commission alleged violations by PaineWebber in two

areas. The first area involved the offer and sale of certain public limited

partnership interests and other public investments (referred to by the firm as

direct investments) between 1986 and 1992. Sales and marketing materials

for four families of direct investments overstated benefits and understated

risks of the investments, and characterized certain direct investments as

suitable for conservative investors without sufficiently disclosing the risk of

loss of principal. PaineWebber sold direct investments to numerous

investors for whom they were unsuitable and in concentrations that were too

high given the investors' age, financial condition, sophistication, and

investment objectives. In connection with these sales, PaineWebber failed to

make and keep certain required records and failed reasonably to supervise

employees who made the sales. In the second area, PaineWebber failed

reasonably to supervise ten registered representatives, in eight branch

offices, who engaged in fraudulent sales practices in connection with certain

retail customer accounts. PaineWebber consented to the entry of a cease and

desist order that required the firm: (1) to comply with its representation that

it had paid, or was obliged to pay, a total of $292.5 million for the benefit

of investors; (2) to pay a civil penalty of $5 million; and (3) to comply with

certain other undertakings regarding implementation of policies and

procedures designed to prevent future violations. In a related civil action,

SEC v. PaineWebber Incorporated." the firm consented to the entry of an

order requiring the establishment of a $40 million claims fund (an obligation

included in the total required to be paid in the administrative proceedings).

21
The Commission took action against Gruntal & Co. Incorporated

(Gruntal), a broker-dealer, and its parent, Gruntal Financial Corp. (In the

Matter of Gruntal & Co., Incorporatedry. The Commission's order

alleged that, between 1984 and 1994, certain members of Gruntal's senior

management diverted securities and funds totaling over $11 million from

customer accounts, customer and vendor checks, dividend overages, and

other sources. Approximately $5 million was ultimately transferred to

Gruntal's profit and loss accounts or used to pay Gruntal expenses; the

remaining $6 million was embezzled by participants in the scheme. Gruntal

and Gruntal Financial consented to the entry of the cease and desist order

that required them to pay $5.5 million in disgorgement and prejudgment

interest, and required Gruntal to pay a civil penalty of $4 million. The

Commission also filed a related civil action, SEC v. Gruntal & Co.,

Incorporated" in which the defendants consented to an order establishing a

process for disgorgement and distribution of the diverted funds. In a related

action, the Commission charged that Edward E. Bao, a former executive

vice president and director of both Gruntal and Gruntal Financial, conceived

of and directed the scheme and engaged in insider trading by selling Gruntal

stock while aware of the scheme; this matter was pending at the end of the

year.

The Remedies Act authorizes the Commission to bring emergency

proceedings against regulated entities in which a temporary cease and desist

order can be entered to protect investors from imminent harm. The

Commission invoked this authority for the first time in a case against a

broker-dealer through which fraudulent sales practice abuses were being

committed (In the Matter of A.R. Baron & Co.48). The Commission

alleged that Jeffrey Weissman and Andrew Bressman, the top officers of

Baron, and others acting through Baron, carried out a manipulation of the

market for the common stock of Health Professionals, Inc., in May and June

of 1993. In 1995, Bressman and another Baron principal, Roman Okin,

acting through Baron, allegedly manipulated the market for the common

stock of Cypros Pharmaceutical, Inc. The manipulations involved serious

sales practice abuses, including rampant unauthorized trading in customer

accounts and imposition of a no net sale rule. The Commission instituted

22
and settled a separate proceeding against the firm in October 1996,49 in

which the Commission found that Baron had been involved in the

manipulation of Health Professionals and Cypros Pharmaceutical stock.

Baron consented to the entry of an order by which its registration was

revoked. In light of the revocation proceedings, Baron was dismissed as a

respondent from the emergency cease and desist proceedings, which were

pending at the end of the year as to Bressman and Okin. In related cease

and desist proceedings charging manipulations of Health Professionals from

1991 to 1993, the Commission barred Jeffrey Weissman from association

with regulated entities and ordered him to disgorge $350,000 and to pay a

civil penalty of $100,000. Weissman's father (who was the chairman of

Health Professionals until 1992) was ordered to disgorge $161,250, plus

prejudgment interest of $61,946 (In the Matter of Jeffrey Weissman50).

In In the Matter of Fahnestock and Co., Inc. ,51 the Commission

instituted proceedings against a broker-dealer and one of its branch managers

for failure to supervise Wendell Jeffrey Lee, a registered representative who

misappropriated customer funds. The Commission's order alleged that the

branch manager, William E. Bierlin, Jr., failed to follow existing

supervisory procedures, and that Fahnestock's policies and procedures

regarding checks drawn on customer accounts and wire transfers of cash

from customer accounts either were not followed or were inadequate to

detect and prevent Lee's violative conduct. The order also alleges that

Bierlin altered certain brokerage documents to conceal deficient supervisory

procedures, and produced the altered documents in response to a

Commission subpoena. These proceedings were pending at the end of the

year. The Commission instituted related proceedings against Lee, alleging

his misappropriation of $276,000 from two customer accounts (In the Matter

of Wendell Jeffrey LeeS2

). Lee was barred by default from association with

broker-dealer firms and from participation in any offering of penny stocks.

In administrative proceedings, In the Matter of Kimberly D. Goodman."

the Commission alleged that the respondent, while a registered representative

associated with Refco Securities, Inc., assisted Steven D. Wymer, the

former owner of two investment advisory firms, in concealing Wymer's

23
misappropriation of more than $80 million from his clients' accounts at

Refco. Goodman signed audit confirmation letters that falsely verified the

portfolio balances of Wymer's clients. In addition, she misrepresented

account balances to Wymer's Refco clients and provided Wymer with the

blank Refco forms that he used to forge documents used to report fictitious

trades and portfolio balances to his clients. She received approximately

$313,000 in undisclosed cash and gifts from Wymer in return for her

assistance in his scheme. Goodman consented to the entry of an order by

which she was barred from association with any regulated entity.

Investment Advisers and Investment Companies

The Commission brought a number of significant cases in 1996 involving

investment advisers and investment companies. In addition to the

proceedings arising from its brokerage business (described above), Gruntal

& Co., Incorporated, also was the subject of proceedings based on violative

conduct in its investment advisory business (In the Matter of Gruntal & Co.,

lncorporatedi'y. Between 1993 and 1995, Gruntal executed certain

transactions on a principal basis or by crossing advisory client orders with

orders from other Gruntal clients, contrary to its disclosures in filings with

the Commission and its obligation to obtain customer consent to such

transactions. Gruntal also charged commissions, commission equivalents,

and mark-ups or mark-downs on transactions for customers who had elected

to pay an all-inclusive, asset-based fee. In settling these proceedings,

Gruntal consented to pay a civil penalty of $1 million.

An investment adviser was charged in administrative proceedings with

inadequate disclosure of soft dollar arrangements (In the Matter of S Squared

Technology Corporatiotr'v. Soft dollars are that portion of the

commissions generated by securities trades for an adviser's customers that

are used to pay for research, brokerage, or other products, services, or

expenses of benefit to the customer. Between June 1989 and August 1993,

S Squared used certain soft dollar credits to pay expenses such as its own

rent, salaries of its own employees, legal fees, and accounting fees, but

failed to make any meaningful disclosure of this use of soft dollars in

24
amendments to its Form ADV. S Squared consented to the entry of a cease

and desist order in which it was ordered to disgorge $878,250.31 plus

$275,175 in prejudgment interest to certain advisory clients, and to pay a

civil penalty of $50,000.

In administrative proceedings against Portfolio Management Consultants

(PMC) and Kenneth S. Phillips, PMC's president and one of its directors,

the Commission alleged a failure to obtain the best execution price for trades

on behalf of customers (In the Matter of Portfolio Management

Consultantst"). PMC provided "individualized managed accounts" for

some 800 customers, with over $200 million under management. PMC

represented that a single, all-inclusive wrap fee, equal to a percentage of

assets invested by the client, covered all brokerage, advisory, and custodial

services performed by PMC. Between October 1992 and April 1994, PMC,

acting as principal, routinely executed customer transactions at one price

while seeking and obtaining better prices for itself in contemporaneous

offsetting trades. PMC failed to disclose that prices obtained for customers

were not the most favorable under the circumstances, and failed to disclose

that, in addition to the wrap fee, it was receiving compensation in the form

of profits generated from principal trading. The Commission also instituted

related proceedings, which were pending at the end of the year, against

PMC's chairman and chief executive officer (In the Matter of Marc N.

Gematr').

The Commission instituted proceedings against McKenzie Walker

Investment Management, Inc., an investment adviser, and Richard C.

McKenzie, Jr., its sole director, officer, shareholder, and primary portfolio

manager (In the Matter of McKenzie Walker Investment Management,

Inc. 58). McKenzie Walker charged clients either a performance-based fee

of 20 percent of the gain in their accounts (selected by some 26 clients) or

an asset-based fee of from 1 percent to 3 percent of assets under

management (selected by seven clients). From August 1992 through

September 1993, Richard McKenzie failed to allocate purchases and sales of

securities in an equitable way between its performance-based and asset-based

clients, but instead placed approximately twice as many profitable trades

25
with performance-based clients. As a result, McKenzie Walker's fees were

increased by at least $224,683. In addition, McKenzie Walker allocated a

disproportionate share of securities purchased in hot initial public offerings

to its performance based-clients. During the relevant period, $892,095 in

profits, and no losses, were allocated to performance-based clients, while

only $18,240 in profits and $24,375 in losses (for a net loss of $6,135) were

allocated to asset-based clients. The respondents consented to the entry of a

cease and desist order that required the disgorgement of $224,683 plus

$35,974 in prejudgment interest, and the payment of a civil penalty of

$100,000.

The Commission's cease and desist proceedings, In the Matter of Leeb

Investment Advisors, 59 involved the dissemination of false and misleading

statements in connection with the marketing of investments in the Leeb

Personal Finance Fund. The publisher of newsletters edited by Stephen L.

Leeb distributed advertisements for one of the publications in which it falsely

claimed that an investor using Leeb's Master Key (a market-timing model)

could have turned a $10,000 investment made in 1980 into $39,160,394 by

1992. Advertisements for the Fund that were sent to subscribers to the

publication falsely indicated that investing in the Fund was the equivalent of

following the publication's investment strategies, including use of the Master

Key. The six respondents consented to the entry of a cease and desist order

by which five of them (including Leeb, Leeb Investment Advisers, and

Leeb's publisher) were required to pay civil penalties totaling $300,000.

In SEC v. Seaboard Investment Advisers, Inc., 60 the Commission alleged

that Seaboard and Eugene W. Hansen, its chief executive officer and

controlling shareholder, engaged in a scheme to defraud investment advisory

clients by sending false and misleading advertisements. The advertisements,

in the form of letters reviewing each client's portfolio, falsely represented

that Seaboard's accounts had outperformed various well-known market

indices. The Commission further alleged that dissemination of the false

advertisements violated the terms of an order that had been entered less than

six months earlier in separate proceedings against the same respondents.

The earlier order required that all advertising materials be reviewed and

26
approved by Seaboard's vice president of compliance. This matter was

pending at the end of the year.

Michael C. Robertson, the former investment adviser to the Employees'

Retirement Fund for Fort Worth, Texas and the investment adviser to the

Oklahoma Police Pension Retirement System, and his advisory firm, M.C.

Robertson & Associates, Inc., were charged in administrative proceedings

with making materially false and misleading statements regarding the receipt

of compensation from broker-dealers and mutual funds in connection with

their advisory business (In the Matter of Michael C. Robertsotr').

Robertson and his firm received approximately $721,461 in undisclosed

service fees paid by three mutual funds in the Fort Worth fund's portfolio

and undisclosed commission payments totaling $13,863.72 in a commission

recapture program. The respondents also received undisclosed commission

payments totaling $48,205.12 in connection with the Oklahoma Police

Pension fund commission recapture program. This matter was pending at

the end of the year.

Sources for Further Inquiry

The agency publishes the SEC Docket, which includes announcements

regarding enforcement actions. SEC litigation releases describe civil

injunctive actions and report certain criminal proceedings involving

securities-related violations. These releases typically report the identity of

the defendants, the nature of the alleged violative conduct, and the

disposition or status of the case. The SEC Docket also contains Commission

orders instituting administrative proceedings, making findings, and imposing

sanctions in those proceedings, and initial decisions and significant

procedural rulings issued by Administrative Law Judges. In addition, recent

litigation releases, orders in administrative proceedings, and other

information of interest to investors are posted on the internet at the SEC's

World Wide Web site (http://www.sec.gov). The Commission's

Enforcement Complaint Center may be reached through the Enforcement

Division page of the website and e-mail messages may be sent directly to the

division at enforcement@sec.gov.

27
International Affairs

The Office of International Affairs develops and implements the SEC's

international enforcement and regulatory initiatives. The SEC works

bilaterally and multilaterally in the international arena to promote

cooperation and assistance and to encourage the development and adoption

of high regulatory standards. To further these goals, the office negotiates

and oversees the implementation of information-sharing arrangements for

enforcement and regulatory matters, and conducts a technical assistance

program/or countries with emerging securities markets.

Key 1996 Results

In 1996, the office made 230 requests to foreign governments for

enforcement assistance on behalf of the SEC and responded to 342 requests

for enforcement assistance from foreign governments. The international

affairs staff responded to a record 136 foreign requests for technical

assistance.

The SEC signed understandings to assist in law enforcement and

regulatory matters with securities authorities in Hong Kong, Russia, Egypt,

and Israel. The understanding with Hong Kong also covers the oversight of

investment management activity.

The SEC's leadership role in the Council of Securities Regulators of the

Americas (COSRA) and the International Organization of Securities

Commissions (IOSCO) continued to advance international regulatory and

market oversight issues. During the past year, COSRA approved a report

and resolution combatting illicit payments. COSRA also approved a report

on mechanisms for facilitating capital formation in the Americas and issued

guidelines on market structure.

28
Arrangements for Mutual Information and Assistance Exchange

The SEC needs to obtain foreign-based information to protect the U.S.

markets and investors from cross-border fraud and other violations of the

U.S. federal securities laws. The SEC has entered into over 29

arrangements with foreign counterparts for information sharing and

cooperation in investigating and prosecuting securities law violations. The

SEC uses these arrangements to expand cooperation to include oversight of

investment management activity.

On October 5, 1995, the SEC signed a Memoranda of Understanding

(MOU) and a Declaration on Cooperation and Supervision of Cross-Border

Investment Management Activity with the Hong Kong Securities and Futures

Commission. The MOU and Declaration provide for consultation and

cooperation in administering and enforcing securities laws and establish

procedures for assisting in the oversight of investment advisers and

investment companies in the U.S. and Hong Kong. The MOU and

Declaration were signed after Hong Kong changed its law to permit its

Commission to conduct investigations on behalf of foreign securities

authorities, to provide access to its files, and to take statements and obtain

documents.

In December 1995, the SEC signed an MOU and Protocol with the

Russian Federal Commission on Securities and the Capital Market. The

agreements provide for mutual enforcement assistance relating to activities in

the U.S. and Russian securities markets and a framework for the SEC's

technical assistance.

In February 1996, the SEC signed its first understandings with securities

authorities in the Middle East: the Israel Securities Authority (ISA) and the

Egyptian Capital Market Authority. The MOU with the ISA includes

commitments to consult and cooperate in the administration and enforcement

of U.S. and Israeli securities laws, and to coordinate cross-border offerings

of securities by U.S. and Israeli issuers. The MOU will become effective

when implementing legislation is passed in Israel. The MOU with the

29
Capital Market Authority furthers the U.S.-Egypt Joint Economic

Partnership and creates a framework for technical assistance and enforcement

cooperation.

Enforcement Cooperation

Assistance from foreign authorities helped the SEC to institute

enforcement proceedings. In 1996, the office made 230 requests to foreign

governments for enforcement assistance on behalf of the SEC and responded

to 342 requests for enforcement assistance from foreign governments. The

SEC received substantial assistance from foreign regulators in each of the

cases discussed below.

SEC v. "ye Resources, Inc. and Rehan Malik. 62 The SEC filed a

complaint against Wye Resources, Inc., a Canadian corporation

headquartered in Toronto, Ontario, and Rehan Malik, a resident of

Newfoundland, who was Wye's president. The complaint alleged that

during 1993 and 1994 Wye and Malik used the internet to target U.S.

investors as part of a fraudulent promotional campaign and illegally

distributed Wye stock to those investors. The SEC received assistance from

the Ontario Securities Commission under an MOU signed in 1988.

SEC v. Scorpion Technologies, Inc. 63 The SEC alleged that Scorpion

Technologies falsified disclosures of its business operations and financial

health through sham transactions. Approximately 20 million shares of the

company's stock were issued in purported reliance upon Regulation S, which

addresses offshore offers and sales of stock. This stock was issued to

offshore purchasers at a discount from the market price. It then was sold to

public investors in the U.S. without "coming to rest" in the hands of bonafide offshore purchasers. The SEC received assistance from authorities in

the United Kingdom, Hong Kong, and Guernsey in this case. In addition,

the U.S. Department of Justice obtained an indictment for money laundering

against the participants in this fraud.

30
In the Matter of A.R. Baron & Co. Inc., Andrew Bressman, and Roman

Okin.64 This case represents the first time the SEC obtained an

administrative temporary cease and desist order against a regulated entity,

A.R. Baron & Co. Inc., a broker-dealer registered with the SEC. The SEC

alleged that Baron conducted unauthorized trades in customer accounts;

refused to carry out customer sell orders; and refused to remit, or delayed in

remitting, proceeds of securities sales to customers. Baron also directed its

customer solicitation toward U.K. citizens. The U.K. Securities and

Investments Board assisted the SEC under the MOU signed in 1991.

International Technical Assistance

The SEC's technical assistance program helps regulators of foreign

markets to develop regulatory structures that promote investor confidence.

The international affairs staff responded to a record 136 foreign requests for

technical assistance. The cornerstone of the program is the International

Institute for Securities Market Development, a two-week, management-level

training program covering the development and oversight of securities

markets. Over 100 delegates from 65 countries attended the Market

Development Institute in 1996.

Also in 1996, 98 delegates representing 51 countries attended the oneweek International Institute for Securities Enforcement. The program

included practical training sessions for foreign securities regulators on

enforcement investigations, investment company and adviser inspections,

broker-dealer examinations, and market surveillance. The SEC also

provided technical assistance to the Newly Independent States of the former

Soviet Union (NIS), holding U.S. training programs for more than 60 key

securities officials from six NIS countries and overseas programs for larger

audiences in Russia, Moldova, and the Ukraine.

In July 1996, the SEC, Treasury and the Russian Federal Commission for

the Securities Market (FCSM) created a U.S.-Russia Capital Markets Forum

under the auspices of the Gore-Chernomyrdin Commission. The Forum will

31
provide recommendations to the Russian government on the development and

regulation of Russian capital markets. The Forum is chaired by U.S.

Treasury Secretary Rubin, SEC Chairman Levitt, and senior Russian

administration officials, including FCSM Chairman Vasiliev. Among other

issues, the Forum will address collective investment vehicles, market

infrastructure and enforcement.

International Organizations and Multilateral Initiatives

Through its involvement in international organizations, the SEC promotes

its views on the U.S. securities markets and develops consensus on issues in

international organizations. The SEC's participation in multilateral

organizations provides the agency with a better understanding of foreign

regulations, markets, and practices.

The International Organization of Securities Commissions

With over 130 members, IOSCO promotes cooperation and consultation

among the world's securities regulators. In response to a call by the G-7

Ministers for enhanced cooperation to strengthen supervision of

internationally active financial institutions, in 1996 IOSCO produced a Joint

Statement with the Basle Committee on Banking Supervision. The Joint

Statement promotes arrangements to augment each regulatory authority's

ability to supervise internationally active firms operating from its

jurisdiction.

IOSCO and the International Accounting Standards Committee continued

to make progress in developing international accounting standards for use in

cross-border offerings. IOSCO also adopted a "Resolution on Providing

Certainty of the Enforceability of Netting Arrangements for Over-theCounter Derivative Transactions. "

32
Council of Securities Regulators of the Americas

COSRA enhances the efforts of countries in the Americas and the

Caribbean to develop sound securities markets that are fair to all investors.

COSRA's membership represents both developed and emerging markets. At

its annual meeting, COSRA approved a report and resolution on combatting

illicit payments, a report on facilitating capital formation in the Americas,

and a report and guidelines on market structure. COSRA also agreed on a

future work agenda concerning investor education and auditing oversight.

Combatting Illicit Payments by Public Companies

During 1996, the SEC contributed to international and U.S. government

initiatives to battle corruption and promote practical ways to combat bribery

by publicly held companies. For example, the SEC worked with the

Department of State in the negotiation of the Organization of American

States' (OAS) Convention Against Corruption, which was signed in 1996 by

23 countries in this Hemisphere. The OAS Convention and COSRA's report

on illicit payments calion nations to develop laws that prohibit illicit

payments to foreign officials, emphasize the importance of having

companies' books and records accurately reflect the disposition of assets, and

note the importance of sufficient internal accounting controls. The SEC,

with the Departments of State and Justice, also worked with the Organisation

for Economic Co-operation and Development Working Group on Bribery to

address foreign bribery through accounting and auditing requirements.

Initiatives With United Kingdom Regulators

During 1996, the SEC worked on a joint initiative with the U.K.

Securities and Investments Board (SIB) to conduct studies of the financial,

operational, and management controls used by U.S. and U.K. securities

firms that have significant cross-border derivatives and securities activities.

Through this exchange of information, securities regulators developed

understandings of each other's regulatory approaches. The SEC and the SIB

are reviewing internal controls used by firms with significant international

33
securities activities, including controls relating to market, credit, liquidity,

and funding risks. Since selected firms have significant operations in third

countries, the SEC and SIB are working with other regulators. The SEC

also is working with its U.S. and U.K. regulators on initiatives for

cooperation between securities and banking regulators in the supervision of

the global activities of financial institutions, including work on procedures

for cooperation and information-sharing during market emergencies.

34
Investor Education and Assistance

The Office of Investor Education and Assistance acts as a clearinghouse for

investors by answering questions and examining complaints. The office

educates investors on how to identify, avoid, and report securities fraud and

abuse through the creation and distribution of educational materials.

Key 1996 Results

During the year, the investor education staff analyzed and answered

44,974 complaints and inquiries. The total number of complaints and

inquiries has grown 30 percent since 1993. The majority of the complaints

(55 percent) involved broker-dealers. The remainder involved issuers,

investment companies, investment advisers, banks, transfer and clearing

agents, and various financial and non-financial entities.

Investor Complaints

Complaints by Major Entity Type

for Fiscal 1996

BrokerDe.~r 9,834

Mutual Funda 548

Other 1,598

Investment AdVISers 279

35
The investor education staff alerts the Division of Enforcement if a

complaint contains egregious conduct, otherwise the firm or individual that

is the subject of the complaint is contacted to gain more information and to

determine if a resolution with the investor can be reached. Over 2,000

complaints and inquiries were referred to other SEC divisions and offices or

other regulatory offices for review or action.

Common stocks were cited in 4,778 of the 9,834 broker-dealer

complaints. Of the 9,834 broker-dealer complaints, 58 percent were related

to operational or other sales-related issues (as depicted below).

Broker Dealer Complaints by Major Complaint Type

for Fiscal 1996

3,500 I

3,095

3.000

2.500

2.000

1.500

1,000

500

0 "0 "0

'" '" (ij~ a> a> c: a> g'", a> C>

c: c: m N 0 :0 E 0; c: g.E CD so is s 8~ Ul E

~E a:c 5 r.h iii a> " '" 32e l!! s:

0.0 c " U ~li '" '" '" OU '" E c: a> ::> 8"- Ul 0 ::> C. '"e <pU g; a,

s: ::i s:

6 C>

:f

36

"" ~ ~
Plain English Initiative

The office started a plain English pilot program with the Divisions of

Corporation Finance and Investment Management to encourage companies to

write disclosure documents that investors can understand. In September

1996, the Bell Atlantic Corporation and NYNEX, the first volunteers in the

Division of Corporation Finance's pilot, filed the cover page and the

summary of their merger proxy and prospectus in plain English. The two

companies found that the switch to plain English did not cause delays or

greater costs, and reduced the number of investor inquiries normally

received. Other companies have since joined the pilot program.

Investor Outreach

In 1996, the office organized six investors' town meetings where

investors could meet and talk with Chairman Levitt. These meetings took

place in Columbus, Ohio; Boston, Massachusetts; Washington, D.C.; New

York, New York; Philadelphia, Pennsylvania; and Fairfax, Virginia. Over

6,000 investors attended the town meetings and millions more have viewed

them through television broadcasts and videotapes. The SEC held its first

seminar at the Columbus, Ohio town meeting and expanded the program at

the town meetings that followed. These seminars provide information on

how markets work and are regulated, and how individuals can invest wisely.

The office has recruited state securities regulators, self-regulatory

organizations, and representatives from broad-based industry groups to give

seminars.

In June 1996, the office released a brochure entitled, Investment Fraud

and Abuse Travel to Cyberspace. This brochure warns investors about

investment frauds on the internet. In September 1996, the office released

Ask Questions, Questions You Should Ask About Your Investments. Within

one month of its release, over 6,000 copies were requested and distributed.

37
In June 1996, the Commission opened an investor complaint program on

the internet. Approximately 10 percent of the 600 electronic mail messages

received in 1996 were complaints. The remainder were inquiries. Investors

also may access educational publications, investor alerts, speeches, and

information about enforcement proceedings of particular interest to investors

on the SEC's website (http://www.sec.gov).In1996. the "What Every

Investor Should Know" section of the site received over 186,600 hits from

users across the country.

Toll-Free Phone Line

The Commission's toll-free investor information service (800-SEC-0330)

provides investors with educational materials, investor pre ection messages,

and information on how the Commission can assist them \. ith their

complaints and inquiries. During the year, the office received over 113,900

calls seeking assistance.

38
Regulation of the Securities Markets

The Division of Market Regulation oversees the operations of the nation's

securities markets and market participants. In calendar year 1996, the SEC

supervised approximately 8,500 registered broker-dealers with over 62,000

branch offices and over 530,600 registered representatives. In addition, the

SEC oversaw 8 active registered securities exchanges, the National

Association of Securities Dealers (NASD) and the over-the-counter (OTC)

securities markets, 15 registered clearing agencies, 748 transfer agents, the

Municipal Securities Rulemaking Board (MSRB), and the Securities Investor

Protection Corporation.

Broker-dealers filing FOCUS reports with the Commission had approximately

$1.6 trillion in total assets for fiscal year 1996 and $95.6 billion in total

capital, respectively. At the end of fiscal 1996, equity market capitalization

equalled approximately $9.2 trillion in the United States and $22.4 trillion

worldwide. Average daily trading volume reached 402.6 million shares on

the New York Stock Exchange (NYSE) and 540.9 million shares on the

Nasdaq Stock Market. The fastest growing market segment continues to be

in the area of derivatives activities.

Key 1996 Results

The division's achievements this year reflect its commitment to

streamlining regulation while reinforcing competition and investor

protections in light of recent technological developments in the markets.

Newly adopted order execution obligations will provide enhanced market

transparency, improved access to the best available prices, better interaction

of customer orders, and increased competition. Guidance was provided by

the division to facilitate trading in securities on the internet, subject to

certain conditions designed to protect investors. The Commission proposed

Regulation M to streamline and simplify anti-manipulation rules for offerings

39
and to facilitate the capital raising process. This initiative represents the

most significant change in the Commission's anti-manipulation regulation

since the trading practices rules were adopted over 40 years ago. The

division also played a leading role in international efforts to enhance investor

protection, including conducting joint reviews of select global financial

institutions with significant cross-border securities and derivatives activities.

These reviews provided in-depth analyses of the financial, operational, and

management controls used by these firms.

Securities Markets, Trading, and Significant Regulatory Issues

Derivatives

In 1994, the Derivatives Policy Group (DPG), consisting of the six firms

most active in the OTC derivatives market, was formed to address a broad

range of regulatory issues. Since 1995, five DPG firms have been reporting

to the Commission pursuant to a framework for voluntary oversight. In

1996, the five reporting members of the DPG provided the SEC with

quarterly credit and market risk information. In addition, the staff reviewed

reports prepared by DPG firms' external auditors concerning the firms'

implementation of management controls for OTC derivatives, and

mathematical models used to calculate risk associated with the firms'

portfolios.

The division participated in the preparation of a paper issued jointly by

the International Organization of Securities Commissions and the Basle

Committee on Banking Supervision that surveyed disclosures about trading

and derivatives activities of internationally active banks and securities firms

for the period 1993-1995. The survey provided supervisors with additional

information on derivatives activities disclosed in these firms' annual reports.

The Commission approved several self-regulatory organization (SRO)

proposals that strengthened market stability and integrity while facilitating

40
use of exchange-traded derivatives for risk management purposes, including

the following:

proposals designed to readjust the position and exercise limits for

equity and index options,"

accelerated listing standards for options on securities issued in a

restructuring transaction pursuant to a public offering or a rights

distribution." and

extension of the 2-1/2 point strike price pilot program for one year. 67

In addition, the Commission approved several proposals to trade

derivative products on exchanges, including a proposal by four exchanges to

list and trade warrants based on narrow-based indexes.f and another

involving the listing and trading of options and/or warrants on several new

indexes." The Commission also approved the listing and trading of BuyWrite Option Unitary Derivatives," Flexibly-Structured Exchange Traded

Equity Options," and Country Baskets" and WEBS,73which are units

structured as open-end management investment companies that invest directly

in a portfolio of securities.

As a result of increased interest in international futures products, the

Commission acted on several futures-related matters, including amendments

to Rule 3a12-8 under the Exchange Act to designate the sovereign debt of

Mexico," Brazil, Argentina, and Venezuela" as exempted securities for

the purpose of futures trading. The Commission also issued letters to the

Commodity Futures Trading Commission not objecting to the designation of

contract markets for the following stock (or debt) index futures and futures

options: S&P 500/BARRA Growth Index and S&P 500/BARRA Value

Index," Mexico 30 Index," Nasdaq 100 Index," Mexican Indice de

Precios y Cotizaciones," PSE Technology Index." and Emerging Market

Debt Index".

41

•

•

•
International Activities

The SEC has a leading role in international efforts to improve regulatory

oversight of the global securities industry. The SEC undertook joint reviews

with SIB in furtherance of an August 1995 joint initiative to conduct an indepth analysis of the financial, operational, and management controls used

by select global financial institutions involved in significant cross-border

securities and derivatives activities. United States and United Kingdom

banking supervisors-the Federal Reserve Bank of New York, the Board of

Governors of the Federal Reserve, and the Bank of England--also

participated in the reviews, which were expanded to include the banking

activities of global financial conglomerates.

The joint reviews have improved communication channels between U.S.

and U.K. securities and banking supervisors, and have resulted in additional

discussions on the sharing of information in emergency situations.

Adoption of Order Execution Obligation Rules

On August 28, 1996, the Commission adopted new rules to improve the

handling and execution of customer orders in exchange-traded securities and

securities traded over-the-counter. 82 The rules are the most significant

national market system initiatives in 20 years. First, to the extent that they

deliver better prices to an electronic communications network (ECN), OTC

market makers and exchange specialists must include those prices in their

public quotes or deliver these better priced orders to an EeN that itself

delivers these prices to the public market. Second, OTC market makers and

exchange specialists must immediately display better priced customer limit

orders in their quotes. And third, OTC market makers and exchange

specialists responsible for a substantial trading volume in any security listed

on an exchange must publish firm two-sided quotations. The rules become

effective in January 1997.

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Securities Trading Systems on the Internet

In June 1996, the staff granted no-action relief to Real Goods Trading

Corporation, a Pacific Stock Exchange listed company, permitting it to

operate an internet bulletin board on which investors can post indications of

interest to buy and sell the company's shares. The staff noted in particular

that buyers and sellers would have to execute and settle their transactions

independently of the trading system. Real Goods also represented that its

securities were currently registered with the SEC, but if its stock ever ceased

to be registered it would make available on its website the financial

information required of issuers of registered securities. 83

Government Securities Market

The Government Securities Act Amendments of 1993 reauthorized the

Department of the Treasury's rulemaking authority for the government

securities market and included provisions for transaction recordkeeping,

large position reporting, and the NASD's sales practice rulemaking

authority. The amendments also required the Commission to monitor private

sector efforts to improve the timely public dissemination and availability of

information concerning government securities transactions and quotations.

The Commission is required to report these developments to Congress

annually.

In this regard, the Commission notes that GovPx, an entity formed by

primary and inter-dealer brokers in the U.S. Treasury market, provides 24-

hour, worldwide distribution of securities information as transacted by the

primary dealers through five of the six inter-dealer brokers for all active and

off-the-run Treasury bills, notes, bonds, basis trader, government agency

securities, zero coupon securities, money market instruments and repurchase

transactions. In the absence of a real-time bid or offer, GovPx publishes a

proprietary indicative price.

GovPx extended its market coverage to provide worldwide distribution of

information regarding the interest rate swaps market. This service, known

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as SwapPx, provides real-time, benchmark rates, data and analytics for U.S.

medium term swaps, basic swaps, and spot/forward swaps ranging in term

from 90 days to 30 years. SwapPx is available to all market participants.

With coverage over 23,000 screens, GovPx is distributed worldwide through

all the major vendors of securities information including Bloomberg,

Reuters, and Bridge.

In another development the MSRB began collecting price and volume

information for inter-dealer transactions in municipal securities and made

this available over Bloomberg and other electronic media. Beginning in

January 1998, the MSRB expects to also collect and disseminate transaction

information for retail and institutional trades.

A number of private, on-line data vendors (including Bloomberg, EJV

Partners, Interactive Data, Asset Backed Security Group, Muller Data

Corporation, among others) are offering a wide range of analytical products

and services that provided users with pricing-related information for both

mortgage pass-through securities and collateralized mortgage obligations

(CMOs). Increasingly, vendors are providing access to analytical pricing

models via the internet. These services typically provide basic pricing

information at little or no cost and offer access to systems that formerly

were available only through more costly leased vendor terminals. Most

vendors offer a combination of (1) end-of-day evaluated prices, derived from

a combination of actual transaction data and estimated prices, calculated

using various proprietary pricing techniques; (2) analytical modelling

software that allow users to generate mortgage securities pricing and yield

data, based upon various prepayment, interest rate and other assumptions

input by those users; and (3) historical pricing databases on outstanding

mortgage securities.

In the government mortgage securities market, a variety of pricing and

related information is available from major financial publications and from

on-line data vendors. Financial publications including The Wall Street

Journal, The New York Times, Barrons, and various industry newsletters

published on a daily or weekly basis representative prices for a range of

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current-coupon agency pass-through securities. In addition, such

publications also are providing pricing information for most CMOs, typically

displayed in terms of the current spread of various CMO categories to U.S.

Treasury securities having equivalent maturities.

Automation Initiatives

Rule 17a-23 under the Exchange Act requires brokers and dealers that

operate automated trading systems to maintain participant, volume, and

transaction records, and to report system activity periodically to the

Commission." Ninety-three filings for automated trading systems were

received by the division.

Automation reviews of the exchanges, Nasdaq, and clearing agencies

continued, including 5 on-site reviews which resulted in 10 reports and 50

recommendations for technology Improvements." The Automation Review

Policy program monitored and assessed the SRO' s national market system

electronic data processing facilities. In addition, the staff completed 11

technology updates and performed 8 major special projects such as assessing

systems capacity at broker-dealers and information vendors, year 2000

readiness, and computer security at a major depository.

Two no-action letters were issued for relief from exchange registration to

the Chicago Board Brokerage, Inc., and the Institutional Real Estate

Clearinghouse." Both systems file reports pursuant to Rule 17a-23. The

Commission issued a release permitting the Arizona Stock Exchange to

conduct an additional trading session during normal trading hours. 87 In

addition, a letter was issued exempting inter-dealer systems run by various

Nasdaq dealers from Rule 17a-23.88

Trading Practices Developments

In its most comprehensive reform of trading practices since their

adoption, the Commission proposed replacing the current trading practice

rules, Rules 10b-6, IOb-bA, IOb-7, 10b-8, and IOb-21 under the Exchange

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Act (the trading practices rules), with new Regulation M.89 Reflecting

developments in the securities industry and market globalization, the new

regulation will provide greater flexibility for market participants, enhance

competition in the marketplace, and streamline the regulation of manipulative

conduct during securities offerings, without sacrificing investor protection.

Regulation M will consist of six rules, including a definitional rule,

covering:

the activities of underwriters and other persons participating in a

distribution,

the activities of issuers and selling securityholders conducting a

distribution,

Nasdaq passive market making,

stabilization transactions and certain post-offering activities by

underwriters, and

short selling in anticipation of a public offering.

Odd-Lot Tender Offers by Issuers

On April 19, 1996, the SEC proposed an amendment to Rule 13e-4 that

would eliminate the record date requirement for issuer odd-lot tender offers

and proposed related class exemptions from Exchange Act Rules lOb-6 and

lOb-13.90 These proposals should provide issuers with greater flexibility in

reducing the number of small shareholdings where the costs to issuers of

servicing small shareholders, and the costs to the shareholders of selling

small holdings, are disproportionate to the value of the security holdings.

Municipal Securities

In August 1996, the MSRB proposed to amend its transaction reporting

system to significantly increase price transparency in the municipal securities

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market. The MSRB's proposal would amend Board Rule 6-14 concerning

reports of sales and purchases and Rule 6-14 transaction reporting

procedures. Specifically, the proposal would add retail and institutional

customer transaction information to the inter-dealer transactions currently

included in the MSRB's Transaction Reporting Program, effective January 1,

1998. In the interim period, the MSRB will prepare for this additional price

transparency by testing the ability of firms to provide the required

information in a timely manner.

Rule 15c2-12

A number of interpretive and no-action letters were issued by the division

regarding the application of the November 1994 amendments to Rule 15c2-

12 under the Exchange Act. For example, the division issued no-action

letters regarding parity bond financing by municipal entities that permitted

them to undertake to provide continuing disclosure on behalf of certain

obligated persons, but only to the extent the municipal entities could obtain

the information about those obligated persons. 91 Exemptive relief under

Rule 15c2-12 also was granted that permitted underwriters to purchase and

sell certain offerings of municipal securities made by certain school districts

pursuant to the Rule's small issuer exemption." Due to the existence of a

state guarantee program, without exemptive relief, the school districts would

not have been able to satisfy all the conditions of the small issuer exemption.

Finally, a letter was issued to the American Bar Association addressing

the following issues under Rule 15c2-12:93

disclosure in pooled financing;

application of the amendments to successors or assignees of obligated

persons;

conditioning the obligation to give material event notices on whether

an obligated person has knowledge of an event;

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what outstanding obligations (or portions thereof) should be counted

when considering the application of the $10 million threshold of the

small issuer exemption; and

cross-referencing in an official statement or annual financial statement

to information that is other than "financial information or operating

data," such as demographic information regarding an obligated person.

Broker-Dealer Regulation

Application for Broker-Dealer Registration

Amendments to Form BD, the uniform broker-dealer registration form

under the Exchange Act,94were adopted by the Commission to respond to

design updates to the Central Registration Depository (CRD) system

operated by the NASD. These amendments will ultimately allow for

electronic filing of Form BD, as well as Forms U-4 and U-5 (the uniform

forms used to notify the SEC, the states, and the SROs of the employment

and termination, respectively, of broker-dealers' registered representatives).

Amendments to the disclosure section of Form BD will provide regulators

with better information about an applicant's disciplinary history.

The Commission also proposed amendments to Form BDW, the uniform

request for withdrawal from broker-dealer registration under the Exchange

Act, together with amendments to rules governing withdrawal from

registration under the Exchange Act. 95 These amendments would permit

broker-dealers that are withdrawing from registration to consent to an

extension of the effective date of their withdrawal, and would permit the

Commission to extend the effective date for such period as the Commission

by order may determine. The Commission also proposed revisions to

Exchange Act rules governing the filing of Forms BD and BDW to provide

for electronic filing of these forms and to accommodate the conversion of

existing registration information to the redesigned CRD system.

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Foreign Broker-Dealers

On January 30, 1996, the staff issued a no-action letter" designed to

address concerns that foreign broker-dealers that effect transactions in

foreign securities in foreign markets for their offshore clients may become

subject to U.S. broker-dealer registration if the clients' orders are placed by

U.S. resident fiduciaries. This no-action position conditionally permits these

transactions to be effected without the foreign broker-dealers registering in

the United States.

Telemarketing Rules

The Telemarketing and Consumer Fraud Prevention Act (Telemarketing

Act)97requires the Commission to adopt a rule, or direct the SROs to adopt

a rule, that prohibits certain deceptive and abusive telemarketing practices in

connection with the sale of securities. After working with division staff, on

June 28, 1996, the NASD filed a proposed rule change addressing

telemarketing activities. Other SROs are expected to file comparable rule

changes.

Money Laundering

Work continued with the Financial Crimes Enforcement Network of the

Department of the Treasury on practical approaches to combat money

laundering. The division also participated in the Bank Secrecy Act Advisory

Group and in the United States delegation to the Financial Action Task

Force on Money Laundering.

Arbitration and Mediation

Attempting to strengthen the securities arbitration process, the division

worked closely with the NASD and other members of the Securities Industry

Conference on Arbitration to assess changes to the arbitration process

recommended in a January 1996 report by the NASD Arbitration Policy

Task Force. Recommendations arising out of that report included the

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following: seeking earlier active involvement of arbitrators; using a list

selection method for appointing arbitrators; implementing a less discretionary

system for discovery; and using simplified discovery procedures for cases

involving larger claims.

Extension of Credit

In 1996, the Commission worked with Congress, the industry, and other

regulators to develop a margin proposal that addresses concerns raised about

the current margin scheme while maintaining the safeguards arising from

margin standards. As part of the NSMIA of 1996, Congress enacted a

margin reform bill that should improve the federal margin scheme by

reducing broker-dealers' costs in obtaining financing.

Financial Responsibility Rules

A no-action letter to the Securities Industry Association regarding the net

capital treatment of securities that cannot be publicly offered or sold without

registration under the Securities Act was issued by the staff. The no-action

letter provided that debt securities that cannot be publicly offered or sold

without registration under the Securities Act of 1933 (Securities Act) and

that are not rated investment grade by at least two nationally recognized

statistical rating organizations would be deemed liquid for purposes of

calculating net capital if they meet certain specified factors. 98

Unlisted Trading Privileges

The Joint Industry Plan for Unlisted Trading Privileges in OTC Securities

(OTC/UTP Plan), operating under temporary Commission approval, permits

exchanges to trade Nasdaq/National Market Securities subject to the terms of

the OTC/UTP Plan. Currently, any exchange participant to the plan may

trade up to 500 Nasdaq/National Market Securities. On October 1, 1996,

the Commission extended its temporary approval of the OTC/UTP Plan

through March 30, 1997, and temporarily approved the plan participants'

recently proposed revenue sharing agreement under the Plan. 99

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Transfer Agent Regulation

In an effort to reduce the number of lost securityholders and to address

the associated problems of undeliverable principal, dividend, and interest

distributions, the SEC published a release requesting comment on rules

requiring that transfer agents conduct periodic searches in an effort to locate

such lost securityholders, and requiring transfer agents and broker-dealers to

file with the Commission lists of lost securityholders for which they hold

assets. The release also requests comment on the extent to which further

regulatory or remedial steps are necessary to reduce lost shareholders, such

as whether there should be a national database identifying lost

securityholders.J'"

In December 1994, the SEC published a concept release requesting

comment on a transfer agent-operated direct registration system (DRS) that

would expand investor choice regarding forms of security ownership. !OJ

Since publication of that release, the SEC has worked with industry

representatives to establish a DRS, which began pilot operation in November

1996. Under the DRS, investors are able to have their securities registered

in book-entry form directly on the books of the issuer, to receive a statement

of ownership in lieu of a securities certificate, and to transfer their securities

between issuers' transfer agents and the broker-dealers of their choice.

Investors also have the option to receive a certificate upon request.

Lost and Stolen Securities

Rule 17f-l under the Exchange Act sets forth participation, reporting, and

inquiry requirements for the SEC's Lost and Stolen Securities Program.

Statistics for calendar year 1995 (the most recent data available) reflect the

program's continuing effectiveness. As of December 31, 1995, 24,925

financial institutions were registered in the program, a 2 percent increase

over 1994. The number of securities certificates reported as lost, stolen,

missing, or counterfeit decreased from 2,954,692 in 1994 to 2,171,867 in

1995, a 26 percent decrease, but the dollar value of these reported

certificates increased from $3.8 billion in 1994 to $6.2 billion in 1995, a 63

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percent increase. The aggregate dollar value of the securities contained in

the program's database increased from $96.4 billion in 1994 to $102.5

billion in 1995, a 6.4 percent increase. The total number of certificates

inquired about by institutions participating in the program decreased slightly

from 6,245,375 billion in 1994 to 6,221,425 billion, a decrease of 0.4

percent. In 1995, the dollar value of certificate inquiries that matched

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

increased from $159 million in 1994 to $526 million in 1995, a 231 percent

increase.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1996, there were eight active securities exchanges

registered with the SEC as national securities exchanges: American Stock

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

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

(CHX), NYSE, Philadelphia Stock Exchange, and Pacific Stock Exchange.

The agency granted exchange applications to delist 127 debt and equity

issues, and granted applications by issuers requesting withdrawal from listing

and registration for 191 issues.

The exchanges submitted 328 proposed rule changes during 1996. A

total of 299 pending and new filings were approved by the Commission, and

22 were withdrawn. Rule filings approved by the Commission included:

an amendment of exchange circuit breaker rules to reduce the time

periods for halting trading on the exchanges from one hour to 30

minutes for a 250-point decline in the Dow Jones Industrial Average,

and from two hours to one hour for a 400-point decIine;l02

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permanent approval of the CSE's pilot program relating to the

preferencing of public agency market and marketable limit orders by

approved dealers and proprietary members, and approval of order

handling policies for preferencing dealers.!"

permanent approval of the BSE's pilot program that permits competing

specialists on the floor of the BSE;I04

establishment of continued listing criteria for certain specialized

securities on the NYSE; and

revisions to NYSE customer margin provisions for OTC options

transactions.

National Association of Securities Dealers, Inc.

The NASD is the only national securities association registered with the

SEC and includes more than 5,500 member firms. Through a wholly-owned

subsidiary, the NASD owns and operates the Nasdaq Stock Market, which

trades more than 6,200 securities and is the world's second largest stock

market.

On August 8, 1996, the Commission announced the settlement of an

enforcement action against the NASD, citing various anti-competitive

practices on Nasdaq and various oversight failures by the NASD. As part of

the NASD's settlement with the Commission, the NASD agreed to undertake

a number of initiatives including changes in the NASD's governance

structure, improvements to the NASD's surveillance, enforcement, and

examination functions, and the creation of a comprehensive audit trail. In

cooperation with the Division of Enforcement, the market regulation staff

has worked extensively with the NASD to implement these undertakings.

The NASD submitted 54 proposed rule changes to the Commission

during the year. The Commission approved 49 proposed rule changes,

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including some pending from the previous year. Among the significant

changes approved by the Commission were:

a rule providing for a comprehensive reorganization of the NASD,105

a rule governing the use of rights of first refusal in connection with

underwriting, 106

a NASD rule clarifying a broker-dealer's suitability obligation toward

institutional customers and specifying which NASD Rules of Fair

Practice apply to transactions in government securities, and

a rule defining when unlisted trading can commence consistent with

revised Section 12 of the Exchange Act. 107

Municipal Securities Rulemaking Board

The MSRB is charged with the primary rulemaking authority for

municipal securities dealers. The Commission received 15 new proposed

rule changes from the MSRB. A total of 12 new and pending proposed rule

changes were approved by the Commission. In particular, the Commission

published several interpretations dealing with MSRB Rule G-37, the rule

governing political contributions.!"

Clearing Agencies

Fifteen clearing agencies were registered with the Commission at the end

of 1996. The Commission extended the temporary registration as a clearing

agency of the Participants Trust Company, 109 MBS Clearing

Corporation,"? and the Government Securities Clearing Corporation. III

The Commission also granted an exemption from registration as a clearing

agency to the Clearing Corporation for Options and Securities.!" and

proposed an exemption from clearing agency registration for Cedel

Bank. 113

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Registered clearing agencies submitted 163 proposed rule changes to the

Commission. The Commission approved 132 new and pending proposed

rule changes including the following:

Options Clearing Corporation (OCC) and National Securities Clearing

Corporation (NSCC) Amended and Restated Options Exercise

Settlement Agreement, which establishes a two-way guarantee between

OCC and NSCC with regard to losses incurred upon the suspension of

a common member; 114

Government Securities Clearing Corporation's (GSCC) amendment of

its rules to permit foreign entities to become members of GSCC; 115

and

Depository Trust Company (DTC) implementation of its Initial Public

Offering Tracking System, which permits initial issuances of stock to

be conducted through book entry settlement with tracking of

subsequent sales during the initial period after the offer. 116

Applications for Re-entry

Rule 19h-1 under the Exchange Act prescribes the form and content of,

and is the mechanism by which the Commission reviews, proposals

submitted by SROs to allow persons subject to statutory disqualification, as

defined in Section 3(a)(39) of the Exchange Act, to become or remain

associated with member firms. In 1996, the Commission received 35 filings

from the SROs pursuant to Rule 19h-1: 29 from the NASD, 5 from the

NYSE and 1 from the CBOE. One application was denied in 1996;117one

filing was withdrawn.

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Investment Management Regulation

The Division of Investment Management regulates investment companies

(which znclude mutual funds) and investment advisers under two companion

statutes, the Investment Company Act of 1940 and the Investment Advisers

Act of 1940. The division also administers the Public Utility Holding

Company Act of 1935.

Key 1996 Results

During the year, the Division of Investment Management provided

extensive assistance to Congress in drafting the National Securities Markets

Improvement Act of 1996. The Improvement Act modernizes investment

company and investment adviser regulation. Working with the investment

company industry and state securities regulators, the staff continued to

develop a new disclosure document called the profile, a short document that

provides investors with a summary of key information about a mutual fund.

Also, the Commission proposed and adopted several rule amendments that

are intended to reduce regulatory burdens on investment companies without

impeding investor protection. Finally, numerous interpretive and no-action

letters were issued by the staff to provide investment companies and

registered investment advisers with added flexibility in conducting their

businesses without adversely affecting shareholders and clients.

Significant Investment Company Act and Investment Advisers Act

Initiatives

Legislation

In 1996, Congress passed H.R. 3005, the National Securities Markets

Improvement Act, which incorporates some provisions from earlier

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legislative proposals to revise the securities laws. The President signed the

legislation into law on October 11, 1996.

The Improvement Act amends the federal securities laws to preempt state

regulation of investment companies and larger investment advisers, and

contains significant amendments to the Investment Company Act. Among

other things, the Improvement Act:

gives the Commission enhanced rulemaking and enforcement authority

to guard against the use of deceptive or misleading fund names,

excepts from regulation under the Investment Company Act investment

pools whose participants are all highly sophisticated persons,

gives the Commission broader authority to require funds to maintain

records for Commission inspection and to add additional information

in shareholder reports,

allows the Commission to give funds greater advertising flexibility,

relaxes restrictions on mutual funds that make investments in other

mutual funds in the same fund complex,

simplifies the calculation of registration fees and replaces the severe

penalties imposed on funds for late payment of registration fees with

interest payment provisions,

replaces the specific limits on the amount, type, and timing of charges

that apply to variable insurance contracts with a requirement that

aggregate charges under variable insurance contracts be "reasonable",

and

decreases the regulatory burdens on certain specialized investment

companies that invest in small businesses.

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The Improvement Act fundamentally changes the regulation of investment

advisers by dividing regulatory responsibility for advisers between the

Commission and state securities regulators. When the provisions become

effective, the states will assume a primary role in the regulation of smaller

investment advisers, who will no longer register with the SEC. Only

investment advisers who manage $25 million or more in client assets, who

advise a mutual fund, or whose state does not register investment advisers,

may register with the SEC. These advisers will not be subject to state

registration. However, the Commission and state regulators may bring an

anti-fraud action against any investment adviser regardless of whether the

adviser is registered with the SEC or a particular state.

The Improvement Act gives the Commission new authority to deny or

withdraw the registration of an investment adviser convicted of any felony

within the previous ten years. The Improvement Act requires the

Commission to establish and maintain a toll-free telephone number to enable

investors to learn of an investment adviser's disciplinary history. Finally,

the Improvement Act requires an investment adviser to file with the SEC any

fee, application. report, or notice through any entity designated by the

Commission for that purpose.

Disclosure

Fund Profiles

The investment management staff continued its joint undertaking with the

investment company industry and state securities regulators to develop a new

disclosure document called the profile. The profile contains a brief

summary of a mutual fund's key features in a standardized format designed

to facilitate comparison among funds. The division anticipates that the

Commission will propose for public comment a rule relating to the use of

fund profiles in the first quarter of 1997.

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Amendments to Mutual Fund Registration Form

The Commission continued to pursue initiatives to provide mutual fund

investors with clear and understandable information about their investments

and to improve risk disclosure. Along those lines, the staff began a top to

bottom review of the current disclosure form used by mutual funds. The

anticipated outcome of this review is a revised form that will result in

clearer and more investor friendly mutual fund prospectuses. The division

anticipates submitting a recommendation to the Commission in 1997.

Disclosure Simplification

The division continued to encourage investment companies to improve

their prospectuses by using plain English and eliminating unnecessary legal

terms, jargon, and long and complicated disclosure. The staff has met with

several funds to review new prospectus formats and provide guidance in

meeting disclosure requirements. Interpretive relief provided to the John

Hancock Funds allowed a novel format for prospectuses offering multiple

funds. lIB

Unit Investment Trust Performance

The Commission proposed amendments to Form S-6 and Rule 482 under

the Securities Act of 1933, and to Rule 34b-l under the Investment

Company Act of 1940,119 The proposed amendments would require

certain unit investment trusts (UITs) to use a uniform formula to calculate

yields quoted in their prospectuses, advertisements, and sales literature. Use

of the uniform formula by UITs will let investors assess more accurately the

anticipated yield from a UIT and compare yields among UITs. Comments

received on the proposal are being evaluated.

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Rulemaking

Money Market Funds

To reduce the likelihood that tax-exempt money market funds would be

unable to maintain a stable net asset value, the Commission adopted amendments to Rule 2a-7. 120 The Commission also adopted new Rule 17a-9 to

make it easier and less costly for money market funds to sell portfolio

securities that the fund can no longer hold under Rule 2a-7.

Deferred Sales Loads

In order to allow funds to offer their shareholders more choices in how to

pay sales loads, the Commission adopted amendments to Rule 6c-1O.12I

The Commission also amended the registration form for mutual funds to

tailor prospectus disclosure requirements to the deferred sales load

arrangements made possible by the rule amendments.

Asset-Based Sales Loads

The Commission adopted an amendment to Rule 12b-1, the rule which

permits funds to use fund assets to pay for the distribution of their

shares.!" The amendment eliminates shareholder approval of a

distribution plan if the shareholders are all affiliated with the fund. In that

circumstance, which is common for a fund that has not yet made a public

offering, shareholder approval is a mere formality. The Commission also

proposed amendments to Rule 12b-1 to clarify the application of the rule to a

series fund, which offers a variety of investment portfolios, often with

different investment objectives. 123

Multiple Class Funds

The Commission proposed amendments to Rule 18f-3, the rule which

permits funds to issue multiple classes of shares. 124 Funds generally

establish multiple classes to offer shareholders choices in paying distribution

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costs or to more efficiently distribute shares to different groups of

shareholders. The proposed amendments would clarify and expand the

methods a fund may use to allocate among classes income, gains and losses,

and expenses that are not attributable to a particular class, and also would

clarify the shareholder voting provisions of the rule.

Affiliated Underwriters

The Commission proposed amendments to Rule lOf-3, the rule which

permits a fund affiliated with a member of an underwriting syndicate to

purchase securities underwritten by the syndicate when certain safeguards are

met. 125 The proposed amendments would increase the percentage of an

underwriting that a fund may purchase and expand the scope of the rule to

include foreign securities. The proposed amendments, and a proposed new

companion rule, also would permit funds to acquire municipal securities in

group sales, which are sales that are allocated to members of the

underwriting syndicate in proportion to their respective underwriting

commitments.

Exemptive Orders

The Commission issued 419 exemptive orders to investment companies

(other than insurance company separate accounts). Most of these companies

requested, and ultimately received, exemptions from various provisions of

the Investment Company Act. A description of one of the more significant

types of orders the division reviewed during 1996 follows.

Hybrid Investment Companies

The Commission exempted certain index funds from the requirement that

they issue securities that can be redeemed at net asset value. Each fund's

series invests in a portfolio of equity securities intended to mirror the

performance of a single-country index. The funds issue securities in blocks

of shares that are redeemable, but individual shares are not redeemable. The

individual shares, however, are traded on a national securities exchange at

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prices that approximate net asset value. The funds, which could not operate

without the requested exemptions, will provide a cost-effective way for

shareholders to match the performance of the indexes tracked by the funds

and the ability to buy and sell fund shares throughout the day. 126

Significant Interpretive and No-Action Letters

The division issued 602 interpretive and no-action letters and other types

of correspondence during 1996. Some of the more significant letters are

discussed below.

Closed-End Investment Companies

A letter was issued by the staff expressing concern that some closed-end

funds may not clearly describe the circumstances under which they will take

action to minimize the discount at which their shares trade.!" The letter

noted that the division is closely examining prospectus disclosure about

discounts and has asked the Commission's Office of Compliance Inspections

and Examinations to verify that closed-end funds are complying with

representations made to investors about minimizing a discount.

Foreign Investment Companies

The staff stated that it would not recommend enforcement action under

Section 7(d) of the Investment Company Act if a foreign fund that had

offered or sold its securities privately to fewer than 100 U.S. residents has

more than 100 U.S. resident shareholders because of (1) the relocation of

foreign securityholders to the U. S. or (2) certain offshore secondary market

purchases of securities by U.S. residents.!"

Fund Use of Adviser Performance Information

No-action letters were issued by the staff concluding that neither Section

34(b) of the Investment Company Act nor Section 206 of the Investment

Advisers Act prohibits a fund from including in its prospectus performance

62
information for its adviser's other accounts or for another registered fund

that was previously managed by the fund's portfolio manager.!" The

letters emphasized that a fund including such performance information in its

prospectus is responsible for ensuring that the information is not misleading

and does not obscure or impede an investor's understanding of the fund's

own performance information.

Discounts Offered With Fund Purchases

The staff stated that it would not recommend enforcement action under

Section 22(d) of the Investment Company Act'" if a bank holding

company and its subsidiary banks offered free checking and other privileges

to persons who maintained specified minimum balances in any combination

of bank deposit accounts, brokerage accounts, and the bank's proprietary

mutual funds.

Segregation Requirements

The staff took the position that any liquid asset, whether debt or equity,

could be placed in a segregated account and used to cover a fund's

obligations that result from certain trading practices, including options and

futures trading. 131

Custodial Arrangements

No enforcement action would be recommended by the staff under section

17(f) of the Investment Company Act or rule 17f-5 if U.S. investment

companies hold certain Russian government securities through a centralized

trading, clearance, and depository system operated by the Moscow Interbank

Currency Exchange for the Russian Central Bank. 132 This letter applied

the division's standards for determining if a securities clearing agency or

depository operates a central system for purposes of rule 17f-5 to the

Russian government securities market.

63
Commodity Pool "Funds of Funds"

Enforcement action would not be recommended by the staff if a

commodity pool, in determining whether it is an investment company, treats

the business activities of certain pools in which it has invested as if they had

been engaged in directly by the commodity pool. 133

Model Fees in Performance Results

To make it easier for investment advisers to compute past performance,

the staff permitted an investment adviser to advertise past performance from

which it had deducted a model fee equal to the highest fee actually charged

to an account, rather than actual fees charged. 134

Mutual Fund Internet Sites

Information about advisory services provided to a mutual fund that is

made available through the internet generally should not be considered an

advertisement for the fund's investment adviser for purposes of the

Investment Advisers Act. 135

Employers Providing Investment Advice

An employer that provides investment-related information to employees

about their defined contribution plan generally would not be "in the

business" of providing investment advice, and thus would not be required to

register as an investment adviser. 136 This position should encourage

employers to provide information to their employees about the investment

options in their defined contribution plans.

Insurance Products

The division reviews registration statements, processes exemptive orders,

and issues no-action and interpretive letters relating to insurance company

separate accounts that are registered as investment companies. The

64
following describes some of the more significant issues in this area that the

division addressed this past year.

Disclosure

Several no-action letters intended to improve prospectuses of insurance

products were issued by the staff. For example, the staff extended to

variable annuity issuers the ability to use a profile, similar to the profiles

that have been used by mutual funds in the last year, in conjunction with

their full prospectuses.!" Also, to allow variable annuity registrants to

remove information from their prospectuses that unnecessarily duplicates the

information investors receive in the prospectus for the underlying investment

funds.!" the staff indicated that it would not object if variable annuity

registrants move certain financial information to a location other than that

specified in the registration form or if variable annuity prospectuses contain

only limited information about underlying investment funds. In addition, a

real estate separate account was permitted to include, in its prospectus,

summary financial information for the sponsoring insurance company when

the complete insurance company financial statements were available to an

investor promptly upon request.!"

Protection from Claims

A no-action letter issued by the staff allowed insurance companies to

provide the assets of certain separate accounts protection from third party

claims without registering those separate accounts under the Investment

Company Act. The letter applies to separate accounts that support contracts

that pay a fixed rate of return for a specified period, but are subject to an

adjustment in the event of early withdrawal. Insurance companies had

avoided providing such protection for those assets so that they would not be

required to register the separate accounts under the Investment Company

Act. 140

65
Significant Public Utility Holding Company Act Developments

Developments in Holding Company Regulation

The Commission approved a June 1995 staff report recommending

conditional repeal of the Holding Company Act and, pending repeal or other

legislative action, recommending significant administrative reforms. The

Commission subsequently implemented a number of administrative reforms,

on a case-by-case basis. In order to compete on an equal footing with nonregulated entities, public utility companies are entering into business

combinations and engaging in non-traditional businesses. As a result, the

number and complexity of applications and requests for interpretive advice

and no-action relief has increased dramatically. The Commission expects

these trends to continue in 1997.

Registered Holding Companies

As of September 30, 1996, there were 15 public utility holding companies

registered under the Holding Company Act. The registered systems were

comprised of 98 public utility subsidiaries, 26 exempt wholesale generators,

51 foreign utility companies, 243 non-utility subsidiaries, and 48 inactive

subsidiaries, for a total of 481 companies and systems with utility operations

in 26 states. These holding company systems had aggregate assets of

approximately $139 billion, and operating revenues of approximately $52

billion for the period ended September 30, 1996.

Financing Authorizations

The Commission authorized registered holding company systems to issue

approximately $19.4 billion of securities, a decrease of 15 percent from last

year. The decrease reflects adoption of amendments to Rules 52 and 45

under the Holding Company Act exempting more financing transactions

from Commission approval. The total financing authorizations included, for

example, $1.4 billion for investments in enterprises engaged in energy

66
management, an increase of 714 percent over 1995, and $550 million for

investments in exempt wholesale generators and foreign utility companies.

Examinations

Examinations of ten subsidiary service companies, three parent holding

companies, and three special purpose corporations were conducted. The

examinations focused on the methods of allocation of costs of services and

goods shared by affiliate companies, internal controls, cost determination

procedures, accounting and billing policies, and quarterly and annual reports

of the registered holding company systems. By uncovering misallocated

expenses and inefficiencies through the examination process, the

Commission's activities resulted in savings to consumers of approximately

$11.3 million.

Applications and Interpretations

The Commission issued various orders under the Holding Company Act.

Some of the more significant orders included:

GPU, Inc.

The Commission authorized GPU, Inc., a registered holding company, to

organize a new subsidiary that will include all of the fossil fuel and

hydroelectric generation functions of GPU's operating companies. 141 The

Commission determined that the restructuring could benefit GPU's operating

companies and customers by increasing efficiencies and productivity and

reducing costs of construction, operation, and maintenance of GPU's nonnuclear generating facilities.

Fidelity Management & Research Company

The Commission granted a three-year exemption from the Holding

Company Act, except Section 9(a)(2), to Fidelity Management & Research

Company, a registered investment adviser, and Fidelity Management Trust

67
Company, the trustee or investment manager for various private investment

accounts, in connection with their holdings in El Paso Electric Company, a

public utility company. 142 The Commission noted that Fidelity would be

subject to extensive reporting requirements at the state and federal level.

Southern Company

The Commission authorized The Southern Company, a registered holding

company, to use financing proceeds to invest in exempt wholesale generators

(EWGs) and foreign utility companies (FUCOs), and to guarantee the

obligations of EWGs and FUCOs provided that the total proceeds used for

the purposes plus Southern's investment in EWGs and FUCOs does not

exceed 100 percent of Southern's consolidated retained earnings. 143 The

order requires Southern to provide quarterly information to facilitate the

Commission's monitoring of Southern's investments in EWGs and FUCOs

and their effects on the Southern system.

SEI Holdings, Inc.

The Commission authorized SEI Holdings, Inc., a non-utility subsidiary

of Southern Company, to engage in retail marketing of natural gas and

electric power to customers throughout the United States, subject to

compliance with applicable state law. 144 The Commission noted that

industry trends and competitive pressures make it important for registered

system companies to be poised to compete in new markets without the delays

that result from seeking a release of a reservation of jurisdiction on a stateby-state basis.

Consolidated Natural Gas Company

The Commission authorized Consolidated Natural Gas Company, a

registered gas holding company, to engage in the wholesale marketing and

brokering of energy commodities, including electric power, natural gas, and

other fuels, and to provide related services.'? The Commission

determined that the transaction satisfied the standards of Section 11(b)(1) of

68
the Holding Company Act, noting that the energy industry has evolved

toward an integrated market in which different forms of energy, particularly

gas and electricity, are interchangeable.

MCN Corporation

The Commission authorized MCN Corporation, an exempt holding

company with two gas utility subsidiaries operating almost exclusively in

Michigan, to acquire interests in Southern Missouri Gas Company, L.P., a

limited partnership that will construct, own, and operate a gas pipeline and

distribution system in Missouri. 146 The Commission specifically

determined that the combination of the Michigan and Missouri gas properties

would result in an "integrated gas public utility system," as defined in the

Holding Company Act.

69
Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations, together with

examination stafffrom the regional offices, conducts the SEC's nationwide

program of compliance inspections and examinations. Inspections and

examinations are authorized by the Securities Exchange Act of 1934, the

Investment Company Act of 1940, and the Investment Advisers Act of 1940.

Entities subject to this oversight include brokers, dealers, municipal

securities dealers, self-regulatory organizations, transfer agents, investment

companies, and investment advisers.

Key 1996 Results

During 1996, the inspection staff continued initiatives to enhance

cooperation with foreign, federal, and state regulators, as well as with selfregulatory organizations (SROs). For example, in November 1995, the

office entered into a Memorandum of Understanding with other regulators of

broker-dealers to better coordinate examinations. Regional office examiners

and SRO and state regulators are working to implement the objectives of the

Memorandum and to assure maximum coordination of regulatory programs.

Increased cooperation among SEC examiners responsible for different

types of regulated entities was one of the office's key accomplishments. For

example, when appropriate, SEC examinations of firms with broker-dealer

and investment advisory activities were conducted by multi-disciplinary

examination teams. The objective of these joint and cooperative efforts was

to increase effectiveness and productivity and enhance investor protection.

70
Investment Company and Investment Adviser Inspections

Investment Companies

During the year, examiners inspected 308 investment company complexes

with $708 billion under management, indicating an average frequency of

inspection for the 969 investment company complexes of once every 3.1

years. The complexes inspected managed 2,294 portfolios, which

represented approximately 23 percent of the mutual fund and closed-end

fund portfolios in existence at the beginning of 1996. This indicated an

average inspection frequency for mutual and closed-end funds of once every

4.3 years. The complexes inspected represented a mix of large and smaller

complexes. Twenty-seven of the inspections were done on a "for cause"

basis, which means the staff had some reason to believe that a problem

existed at the firm.

Serious violations found in 14 examinations warranted referrals for

further investigation by the Division of Enforcement. In 50 percent of the

examinations resulting in a referral, the examination staff found misconduct

involving fraud. In addition, of all referrals, 29 percent related to net asset

value calculations, 21 percent related to prohibited transactions, and 14

percent related to internal controls.

Investment Advisers

Advisers that appear to pose a higher risk to clients, such as those that

have actual custody of client funds and securities and those that have

discretionary management authority over clients' cash and securities, were

targeted for examination. Examiners in the regional offices were primarily

responsible for conducting inspections of all discretionary managers and

those non-discretionary managers with $100 million or more under

management.

71
The inspection staff completed 1,446 inspections of investment advisers,

including examinations of 1,204 advisers with discretionary management

authority. The non-investment company assets managed by the advisers

inspected totalled $1.3 trillion. The 1,204 inspections of discretionary

advisers covered 14 percent of all such advisers, indicating an average

inspection cycle for discretionary advisers of once every 7.1 years, which

increased from once every 9.3 years in 1995. The overall inspection cycle

for advisers has increased from once every 20 years in 1995 to once every

15.2 years. Regional office staff inspected 115 investment advisers for

cause.

Serious violations warranting enforcement referrals were uncovered in 78

of the examinations. In 95 percent of the examinations resulting in a

referral, the examination staff found misconduct involving fraud. In

addition, of all referrals, 42 percent involved conflicts of interest, 22 percent

related to custody of client funds or securities, and 18 percent related to

marketing or performance advertising.

Mutual Fund Administrators

Approximately 51 percent of all mutual fund complexes use third party

administrators to perform their accounting and administrative functions.

During 1996, examiners inspected 14 administrators. None of the

examinations resulted in enforcement referrals. As a result of administrator

inspections, two cause examinations of investment company fund complexes

were conducted.

Variable Insurance Products

In response to the rapid growth in variable insurance product assets and

the emergence of new channels of distribution, specialized insurance product

examination teams, consisting of headquarters and regional office staff,

conducted examinations in this area. These teams identified and examined

variable life and annuity contract separate accounts. The teams worked in

conjunction with the Division of Investment Management in planning and

72
executing these examinations. A total of 25 insurance company complexes

were examined. Deficiency letters were issued in 20 examinations.

Bank Advised Mutual Funds

Staff from the Commission and the Office of the Comptroller of the

Currency jointly examined mutual funds advised by national banks. During

the year, the examiners completed one examination started in the prior year,

and began two new examinations. The examiners reviewed key internal

control areas and analyzed portfolio transaction data relating to both mutual

fund and trust department client trading.

Sweep Inspections

Inspection of investment advisers without custody or discretionary

management authority over client funds and securities is the responsibility of

headquarter's staff. In 1996, 242 inspections were completed in six sweeps

in various regions of the country. State examiners participated in many of

these sweeps. A majority of the advisers examined were financial planners.

Typically, financial planners prepare financial plans that are implemented

through sales of mutual funds by the planners in their capacity as registered

representatives of broker-dealers. Many planners also sell insurance

products. Deficiency letters were sent in 98 percent of the sweep

examinations with most of the deficiencies concentrated in books and records

and brochure disclosures.

Broker-Dealer Examinations

During the year, the office continued to improve its broker-dealer

examination program. The broker-dealer program conducted oversight

examinations that tested the quality of SRO examination programs, cause

examinations that focused on activity that may violate the federal securities

laws, and surveillance examinations that assessed broker-dealer compliance

and industry practices and trends. The office is revising its examination

73
procedures to reflect current industry trends, rule amendments and new

product developments. The office is also developing a unified computerized

tracking system that will include a database of examination histories for

every broker dealer registered with the Commission.

The office conducted an examination sweep focusing on the sales

practices of registered representatives with histories of customer complaints,

litigation and disciplinary actions. The sweep also reviewed the hiring,

retention, and supervisory practices of the firms which employed them.

Many of the broker dealers involved in the sweep were small and medium

sized firms. The examination was a collaborative effort by the Commission,

the New York Stock Exchange (NYSE), the National Association of

Securities Dealers, Inc. (NASD), and the North American Securities

Administrators Association, Inc. (state securities regulators). The sweep

consisted of 179 examinations of 101 firms and disclosed that one-third of

the identified registered representatives were able to obtain new employment

during the review period despite their history of disciplinary actions and

customer complaints. The sweep also found that many branch managers

conducted only minimal background checks of potential hires, and

supervisors frequently conducted inadequate or no routine review of

customer transactions to detect sales practice abuses. One-fifth of the sweep

examinations resulted in referrals to the Division of Enforcement.

A total of 645 oversight and cause examinations of broker-dealers,

government securities broker-dealers, and municipal securities dealers were

conducted by the staff. Serious violations in 144 examinations warranted

referrals for further investigation by Division of Enforcement staff.

Findings in an additional 52 examinations were referred to SROs for

appropriate action. In 48 percent of the examinations resulting in a referral,

the examination staff found potential misconduct involving fraud. In

general, examination findings involved the underwriting and trading of

stocks of small capitalization companies, municipal securities, sales of

mutual funds, supervision over independent contractors, and large firms'

internal controls.

74
Self-Regulatory Organization Inspections

Routine SRO inspections were also conducted by the staff. At least one

inspection was completed or begun of each SRO subject to the Commission's

oversight: the American Stock Exchange; the Boston Stock Exchange; the

Chicago Board Options Exchange; the Chicago Stock Exchange; the

Cincinnati Stock Exchange; the NASD; the NYSE; the Pacific Stock

Exchange; and the Philadelphia Stock Exchange. The SRO inspections

focused on:

arbitration programs;

listing and maintenance programs;

financial and operational examination programs;

market surveillance, investigations, and disciplinary programs;

customer complaint review programs;

programs for detecting and sanctioning sales practice abuses; and

program and option trading programs.

The inspections resulted in recommendations to improve the programs'

effectiveness and efficiency. In addition, a cause inspection involving

unlisted trading privileges was also conducted.

Inspections of the regulatory programs administered by the NASD's 14

district offices were also conducted. These inspections included reviews of

nine district offices' broker-dealer examination, financial surveillance, and

formal disciplinary programs. The office also reviewed the district offices'

investigations of customer complaints and terminations of registered

representatives for cause.

Finally. the office conducted three inspections of clearing agencies.

75

•

•

•

•

•

•

•
SRO Final Disciplinary Actions

Section 19(d)(I) of the Securities Exchange Act of 1934 and Rule 19d-l

thereunder require all SROs to file reports with the Commission of all final

disciplinary actions. In 1996, a total of 1,036 reports were filed with the

SEC, as reflected in the following table:

Self-Regulatory Organization Reports

of Final Disciplinary Action

American Stock Exchange . . . . . . . . . . . . . . . . 27

Boston Stock Exchange 0

Chicago Board Options Exchange . . . . . . . . . . . 44

Chicago Stock Exchange . . . . . . . . . . . . . . . . . 1

Cincinnati Stock Exchange 0

National Association of Securities

Securities Dealers . . . . . . . . . . . . . . . . ., 793

National Securities

Clearing Corporation . . . . . . . . . . . . . . . . . . 0

New York Stock Exchange 150

Options Clearing Corporation 0

Philadelphia Stock Exchange . . . . . . . . . . . . . . 7

Pacific Stock Exchange 14

Total Reports 1,036

76
Full Disclosure System

Thefull disclosure system is administered by the Division of Corporation

Finance. The system is designed to ensure investors receive material

information, foster investor confidence, contribute to the maintenance offair

and orderly markets, aid capital formation, and prohibit fraud in the public

offering, trading, voting, and tendering of securities.

Key 1996 Results

A record $1.2 trillion in securities were filed for registration during the

year, a 45 percent increase over the $824 billion in 1995. Common stock

offerings of $691 billion filed for registration in 1996 (compared to $400

billion in 1995), including merger transactions, reflected an increase in

overall market activity. Offerings filed by first time registrants (IPOs),

totaling approximately $185.5 billion, were more than twice the level in

1995 (approximately $82 billion).

REGISTRATION STATEMENTS FILED

DOLLAR VALUE ($BILLIONS)

UNALLOCATED

SHELF

93 1 OTHER EaUITY

12% lBB

2%

1995

TOTAL - $823.6

UNALLOCATED

SHELF

B5 1 OTHER EaUITY

1% 23 B

2%

1996

TOTAL - $1,192.7

77
Foreign companies' participation in the United States public markets

continued to show strong growth in 1996. One hundred and thirty-six

foreign companies from 30 countries, including Ashanti Goldfields (Ghana),

Guangshen Railway (China), Axa (France), Toronto-Dominion Bank

(Canada), SGL Carbon (Germany), and the Bank of Ireland entered the

United States public markets for the first time. At year-end, there were 843

foreign companies from 47 countries filing repons with the Commission.

Foreign companies registered public offerings of $78 billion in 1996.

The Commission is conducting a broad re-examination of the regulatory

framework for the offer and sale of securities under the Securities Act of

1933 (Securities Act). Two studies presented to the Commission in 1996 are

assisting these efforts. In March, the Task Force on Disclosure

Simplification (Task Force) delivered its report identifying ways to

streamline the registration and disclosure processes, including the elimination

of many outdated or duplicative disclosure requirements and forms. 147 In

July, the Commission received the Report of the Advisory Committee on the

Capital Formation and Regulatory Processes. 148 The Task Force and the

Advisory Committee on the Capital Formation and Regulatory Processes

(Advisory Committee) recommendations are the subject of a review by the

Commission and its staff and were the impetus for several rulemaking

initiatives undertaken by the Commission in 1996.

Review of Filings

In 1996, the staff reviewed 26 percent of the reporting issuers and 1,655

Securities Act and Securities Exchange Act of 1934 (Exchange Act)

registration statements of first time filers. The following table summarizes

the principal filings reviewed during the last five years. The levels of

review of new issuer filings, tender offers, contested solicitations, and going

private transactions, all of which are subject to review, reflect the increases

and decreases in the number of filings received.

78
FULL DISCLOSURE REVIEWS

1992 1993 1994 1995 1996

Reporting Issuer Reviews ~I 3,058 3,531 3,400 3,930 3,210

New Issuer Reviews 121 1,147 1,200 1,599 1,150 1,658

Major Filing Reviews

Securities Act Registrations

New Issuers £1 989 1,066 1,384 950 1,412

Repeat Issuers 970 924 863 815 769

PIE Amdts. £1 gl 347 220 204 215 140

Exchange Act Initial Registrations 158 148 215 200 246

Annual Report Reviews

Full 1,041 1,466 1,085 1,345 790

Full Financial 1,126 1,155 1,405 1,585 933

Special ~I 409 360 455 585 656

Tender Offers (14D-1) 27 56 82 140 165

Going Private Schedules 61 61 75 77 100

Contested Proxy Solicitations 58 35 42 59 62

Proxy Statements

Merger/Going Private 141 149 163 225 261

Others wIFinancials 150 149 180 205 199

.wIncludes companies subject to Exchange Act reporting whose financial

statements were reviewed during the year.

Q/Includes non-Exchange Act reporting companies whose Securities Act or

Exchange Act registration statements were reviewed during the year.

£/Reviews of regional office small business filings were transferred to

headquarters at the end of 1996. Some of the small business filings included

in this category were completed in the regional offices during 1996.

g/Includes only post-effective amendments with new financial statements.

~/Forms 10-K, lO-KSB, and 20-F reviewed in connection with the review of

other filings. Special reviews in years prior to 1995 may have been

underrecorded and therefore are not fully comparable to the 1995 and 1996

numbers.

79
Rulemaking, Interpretive, and Related Matters

Securities Act Concept Release and Advisory Committee Recommendation

The Commission issued a concept release!" seeking public comment on

reforms that would streamline the current regulation of the capital formation

process where consistent with the Commission's investor protection mandate.

Various approaches, including a company registration concept recommended

by the Advisory Committee, are being considered.

Disclosure Simplification

In 1995, an internal Task Force initiated a top to bottom review of all

forms and disclosure requirements relating to public companies' securities

offerings and disclosure. The purpose of the review was to streamline and

simplify regulations. In March 1996, the Task Force issued its report, which

recommended that the Commission eliminate 81 rules and 22 forms, and

revise many others in order to simplify the process by which companies

raise capital. In total, the recommendations would eliminate or revise

approximately one-quarter of the rules and one-half of the forms and

schedules reviewed by the Task Force.

The Commission has taken action based on a number of the Task Force's

recommendations. For example, the Commission:

proposed amendments to the rules under Section 13(d) of the

Exchange Act to allow all passive investors (i.e., investors who are

the beneficial owners of between 5 percent and 20 percent of the

outstanding voting shares of one class of securities and do not acquire

or hold these securities with the purpose or effect of changing or

influencing control of the issuer) to file a short form Schedule 13G

instead of a Schedule 13D;150

eliminated 44 rules and 4 forms and adopted a number of minor and

technical amendments;'?' and

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•

•
published proposals to:

eliminate the Form D filing requirement for Regulation D and

Section 4(6) exemptions, although Form D itself would be retained;

eliminate Forms SR and 8-B;

amend the Securities Act registration forms to allow companies to

register, at the same time, a public offering under the Securities

Act and a class of securities under the Exchange Act by filing one

form; and

amend Form 8-A to provide automatic effectiveness for all

securities that are registered on that form and automatic

effectiveness upon filing of post-effective amendments to Securities

Act registration statements filed solely to add exhibits.!"

Electronic Delivery of Documents to Securityholders

In October 1995, the Commission issued a release acknowledging the

benefits that electronic technology gives to the financial markets and urging

the use of electronic media to send out information to shareholders and

investors. In May 1996, the Commission issued a second release mainly

addressing issues associated with the electronic delivery of information by

broker-dealers, transfer agents, and investment advisers under certain

Exchange Act rules and Investment Advisers Act of 1940 rules. 153 This

release included added guidance on Securities Act electronic delivery. At

the same time, the Commission adopted some technical amendments to its

rules and forms intended to facilitate electronic delivery. 154 Most of the

changes relate to rules that require distribution of information by mail, or

presentation of information in a specified type size or font, or in red ink or

bold-face type.

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Small Offering Exemption for Certain California Limited Issues

The Commission adopted a new Securities Act Section 3(b) exemption

intended to aid small business in their capital formarion.!" Under the

exemption, offers and sales of securities in amounts of up to $5 million that

meet the conditions of Section 25102(n) of the California Corporations Code

also are exempt from federal registration. The federal antifraud prohibitions

still apply to all exempt transactions. The exemption provides that

purchasers in the exempt transaction receive restricted securities. No filing

with the Commission is required.

Relief from Section 12(g) Registration for Small Issues

To provide further relief for smaller companies, the Commission adopted

amendments to Rules 12g-1, 12g-4, and 12h-3 under the Exchange Act to

raise the threshold for registration from $5 million to $10 million in total

assers.!" Public companies registered under Section 12 must issue

periodic reports and are subject to other obligations, such as proxy and

tender offer regulation, beneficial ownership reporting, and Section 16

reporting and short-swing profit recovery. Companies with securities traded

on an exchange or on Nasdaq continue to be subject to Exchange Act

registration and reporting, regardless of size.

Section 16

The Commission adopted amendments to the Section 16 rules to improve

further the regulatory scheme governing the reporting of certain insider

holdings and transactions, as well as the recovery of short-swing profit.!"

The principal change is a new approach to Rule 16b-3 to exempt transactions

between an issuer and its officers and directors because these transactions

generally do not present the same opportunities for insider profit on the basis

of nonpublic information as do market transactions. The effective date for

the amendments was August 15, 1996, with new Rule 16b-3 becoming

available on that date subject to a phase-in period ending November I, 1996.

82
Expansion of Short-Term Registration to Include Companies with Nonvoting Common Equity

The Commission proposed amendments to Forms S-3 and F-3 under the

Securities Act to make short-form registration available to more companies.

The amendments propose including non-voting as well as voting common

equity in the computation of the required $75 million aggregate market value

of common equity held by non-affiliates of the registrant. 158 The

Commission also proposed amendments that would permit issuers to use the

aggregate market value of voting and non-voting common equity when

calculating the amount of public float (1) required to use Form F-2, (2) used

to determine when an issuer is a small business issuer, or (3) stated on

Forms lO-K and lO-KSB.

Derivatives Disclosure

The Commission proposed amendments that require issuers to make

information related to derivative financial and certain derivative commodity

instruments more useful to investors.!" The amendments would clarify

and expand upon the existing requirements for financial statement footnote

disclosures for these instruments and require disclosure outside the financial

statements of qualitative and quantitative information about market risk

inherent to these instruments. A related release was issued by the

Commission to propose a safe harbor for the new derivatives disclosure that

constitutes forward-looking information. 160

Reporting of Unregistered Equity Sales

The Commission adopted amendments to several rules and forms

applicable to domestic issuers to require reporting of unregistered sales of

equity securities.!" For Regulation S sales, the amendments require

current reporting on Form 8-K within 15 days of their occurrence. Other

exempt equity sales will be reported quarterly. These amendments were

adopted in response to the concern that the absence of a specific requirement

to report publicly unregistered equity offerings may have encouraged

problematic offering practices under Regulation S, and also may have

83
prevented shareholders from learning about potentially dilutive private

transactions.

Simplifying Disclosure Requirements Related to Significant Business

Acquisitions

The Commission adopted amendments to Rule 3-05 of Regulation S-X to

streamline the requirements for financial statements of significant businesses

acquired or to be acquired. 162 Changes also were made to Item 310 of

Regulation S-B and Form 8-K. The amendments permit companies, other

than blank check companies, to proceed with a registered offering without

the financial statements of a business that they acquired or are likely to

acquire until 75 days after the acquisition is completed. However, the

financial statements of a recent or likely acquisition are still required in

registration statements if the business that was or will be acquired exceeds

the 50 percent level of significance compared to the company acquiring it.

The amendments also:

revise the thresholds for determining the financial statements of

acquired businesses that must be provided under both the Exchange

Act and Securities Act,

eliminate the requirement to provide financial statements for businesses

faIling below the 20 percent significance level, and

require audited financial statements for acquisitions as follows:

Significance Level

20 percent

40 percent

50 percent

Years of Audited

Financial Statements Required

one year

two years

three years

The significance level thresholds were formerly 10 percent, 20 percent, and

40 percent.

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Offshore Press Conferences

The Commission proposed safe harbors designed to facilitate U.S. press

access to offshore press activities.l'" The safe harbors would clarify when

journalists may be given access to offshore press conferences, offshore

meetings, and press materials released offshore, where a present or proposed

offering of securities or tender offer is discussed, without violating the

provisions of Section 5 of the Securities Act, or the procedural requirements

of the tender offer rules issued under the Williams Act.

Conferences

SEC Government-Business Forum on Small Business Capital Formation

The fifteenth annual SEC Government-Business Forum on Small Business

Capital Formation was held in Washington, D.C. on September 26-27,

1996. Approximately 150 small business representatives, accountants,

attorneys, and government officials attended the forum. Numerous

recommendations were formulated with a view to eliminating unnecessary

governmental impediments to small businesses' ability to raise capital. A

final report will be provided to interested persons, including the Congress

and regulatory agencies, setting forth a list of recommendations for

legislative and regulatory changes approved by the forum participants.

SEC/NASAA Conference Under Section 19(c) of the Securities Act

The thirteenth annual federal/state uniformity conference was held in

Washington, D.C. on April 29, 1996. Approximately 60 Commission

officials met with approximately 60 representatives of the North American

Securities Administrators Association to discuss ways of achieving greater

uniformity in federal and state securities matters. After the conference, a

final report summarizing the discussions was prepared and distributed to

interested persons.

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Ombudsman for Small Business

In June 1996, the Commission created an ombudsman position to serve as

the liaison and agency spokesperson for the concerns of small business. The

ombudsman is available to receive general information from small businesses

concerning the impact of any Commission proposal, rule, or regulation and

to help small businesses seeking general information about the Commission.

Small Business Town Hall Meetings

In September 1996, the Commission began holding local town hall

meetings for small businesses. These meetings give owners and investors in

small businesses an opportunity to meet with Commission and other federal

officials to raise concerns and learn about the available governmental

programs and opportunities for small companies under existing laws and

regulations. Meetings have been held in Los Angeles, California,

Minneapolis, Minnesota, Chicago, Illinois, St. Louis, Missouri, Ft.

Lauderdale, Florida, and Boston, Massachusetts. Future sessions will be

held throughout the country.

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Accounting and Auditing Matters

The Chief Accountant is the principal adviser to the Commission on

accounting and auditing matters arising from the administration of the

various securities laws. The primary Commission activities designed to

achieve compliance with the accounting and financial disclosure

requirements of the federal securities laws include:

rulemaking and interpretation that supplements private sector

accounting standards, implements financial disclosure requirements,

and establishes independence criteria for accountants;

reviewing and commenting on filings with the agency directed toward

improving disclosures in filings, identifying emerging accounting issues

(which may result in rulemaldng or private sector standard-setting),

and identifying problems that may warrant enforcement actions;

taking enforcement actions that impose sanctions and serve to deter

improper financial reporting by enhancing the care with which

registrants and their accountants analyze accounting issues; and

oversight of private sector efforts, principally by the Financial

Accounting Standards Board (FASB) and the American Institute of

Certified Public Accountants (AICPA), which establish accounting and

auditing standards designed to improve financial accounting and

reporting and the quality of audit practice.

Key 1996 Results

The Commission proposed rules to require additional disclosures

concerning derivatives and other financial instruments. The Commission

also continued its involvement in initiatives directed toward reducing the

disparities that currently exist between different countries' accounting and

auditing standards. The International Accounting Standards Committee

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(lASC) continued work on an accelerated work plan that would result in a

comprehensive core set of international accounting standards by March

1998.

Accounting-Related Rules and Interpretations

The SEC's accounting-related rules and interpretations supplement private

sector accounting standards, implement financial disclosure requirements,

and establish independence criteria for accountants. The agency's principal

accounting requirements are embodied in Regulation S-X, which governs the

form and content of financial statements filed with the SEC. As part of a

major Commission initiative to streamline reporting requirements, certain

accounting provisions in Regulation S-X were eliminated because they were

outdated or no longer necessary since these standards duplicated generally

accepted accounting principles. 164

Derivatives

During the year, the Commission proposed rules for comment that would

require additional disclosures concerning derivatives and other financial

instruments. 165 The proposed disclosures are designed to help investors

better assess the market risks of registrants involved with these instruments

and better understand how those risks are managed. The proposals clarify

and expand existing requirements for financial statement footnote disclosures

about accounting policies for derivatives and require disclosures outside the

financial statements of qualitative and quantitative information about the

market risks inherent in derivatives and other financial instruments. The

Office of the Chief Accountant assumed a key role in developing these rules.

Business Combinations

The Office of the Chief Accountant issued interpretive guidance regarding

the effect of treasury stock acquisitions following consummation of a

business combination accounted for under the pooling-of-interests

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method.!" This guidance was issued due to SEC concerns that certain

registrants had narrowly interpreted the prohibition against planned

transactions as relating only to transactions that were explicitly agreed to.

The guidance was issued to remind registrants that an intention to reacquire

stock issued to effect a business combination represents a planned transaction

that would preclude accounting for the combination as a pooling of interests.

Also in this area, the office issued guidance to clarify the limited

circumstances in which guidance published in Staff Accounting Bulletin 48

was intended to apply."? Although the accounting staffs earlier published

guidance was intended to address the transfer of nonmonetary assets in

exchange for a company's stock just prior to or at the same time as an initial

public offering, the guidance was inappropriately applied by some registrants

to the combination of two or more businesses.

Oversight of Private Sector Standard-Setting

Financial Accounting Standards Board

The SEC monitors the structure, activity, and decisions of the private

sector standard-setting organizations, which include the FASB. The

Commission and its staff worked closely with the FASB in an ongoing effort

to improve the standard-setting process, including the need to respond to

various regulatory, legislative, and business changes in a timely and

appropriate manner.

During 1996, the FASB continued its joint undertaking with the

Accounting Standards Board of the Canadian Institute of Chartered

Accountants to consider the current reporting requirements under Statement

of Financial Accounting Standards No. 14, "Financial Reporting for

Segments of a Business Enterprise." An exposure draft was issued that

would establish common standards on disaggregated disclosures. 168

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In coordination with a similar project undertaken by the IASC, the FASB

issued an exposure draft that would revise the computation and presentation

of earnings per share and require certain disclosures about capital

structure.I" The approach taken in the FASB exposure draft generally is

consistent with the approach in the IASC exposure draft on this topic.

The FASB continued its efforts on its long-term project to address

financial instruments and off-balance sheet financing issues. For example,

the FASB issued an exposure draft on accounting for derivative instruments

and hedging that is intended to improve the current accounting for these

instruments.'?" The exposure draft would require that an entity recognize

all derivatives as either assets or liabilities on its balance sheet and measure

those instruments at fair value. Under the FASB's proposed approach,

derivatives may be designated as hedges to certain exposures if certain

conditions are met. Recognition of gains and losses from changes in the fair

value of a derivative would depend on the intended use of the derivative and

the resulting designation. In a related action, the FASB issued an exposure

draft that would establish standards for reporting and financial display of

comprehensive income and its components (revenues, expenses, gains, and

losses).!" Finally, the FASB issued a final standard to provide for more

consistent reporting of securitizations and other financial transactions in

which financial assets are transferred in exchange for cash and other

assets. 172

Also in 1996, the FASB issued an exposure draft of a proposed standard

on accounting for obligations related to the closure and removal of longlived assets.!? This project evolved from requests by the SEC and others

to address the issue of the appropriate accounting for nuclear

decommissioning costs.

During the year, the Financial Accounting Foundation (FAF), which

nominates FASB members and provides funding for the FASB, revised its

bylaws to change the composition of its Board of Trustees. The change in

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the composition of the FAP's Board was made in consultation with the SEC

to include a greater representation by those who do not have a special

interest in the outcome of accounting standards setting.

The FASB's Emerging Issues Task Force (EITF) continued to identify

and resolve accounting issues. In particular, the EITF reached consensus on

a number of issues, thereby narrowing divergent reporting practices of

public companies. Those issues included questions relating to accounting for

financial instruments, business combinations, and costs associated with

modifying computer software for the year 2000.

American Institute of Certified Public Accountants

The SEC oversaw various activities of the accounting profession

conducted primarily through the AICPA. These included (1) the Auditing

Standards Board (ASB), which establishes generally accepted auditing

standards; (2) the SEC Practice Section (SECPS), which seeks to improve

the quality of audit practice by member accounting firms that audit the

financial statements of public companies through various requirements,

including peer review; and (3) the Accounting Standards Executive

Committee (AcSEC), which provides guidance through its issuance of

statements of position and practice bulletins and prepares issue papers on

accounting topics for consideration by the FASB.

ASB

The accounting staff continued to work closely with the ASB to enhance

the effectiveness of the audit process. During 1996, the ASB issued a

proposed Statement on Auditing Standards to clarify an auditor's existing

responsibility to plan and perform an audit to search for fraud.!" The

ASB also issued a series of annual Audit Risk Alerts to provide auditors with

an overview of recent economic, professional, and regulatory developments

that may affect 1996 year-end audits.

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SECPS

Two programs administered by the SECPS are designed to ensure that the

financial statements of SEC registrants are audited by accounting firms with

adequate quality control systems. A peer review of member firms by other

accountants is required every three years and the Quality Control Inquiry

Committee (QCIC) reviews on a timely basis the quality control implications

of litigation against member firms that involves public clients. The Office of

the Chief Accountant coordinates closely with the Public Oversight Board

(POB) in performing its oversight of the two programs. The POB, which is

independent of the AICPA (except for funding), also engages in other

activities directed towards improvements in the financial reporting process.

The SEC oversaw the SECPS through frequent contacts with the POB

and members of the executive, peer review and quality control inquiry

committees of the SECPS. The Office of the Chief Accountant selected a

random sample of peer reviews and evaluated selected working papers of the

peer reviewers and the related POB files. As in prior years, this oversight

showed that the peer review process contributes significantly to improving

the quality control systems of member firms and, therefore, enhances the

consistency and quality of practice before the Commission.

Closed case summaries prepared by the QCIC and related POB oversight

files were also reviewed by the SEC. These reviews and discussions with

the POB and QCIC staff provided the accounting staff with enough

information to conclude that the QCIC process provides added assurances, as

a supplement to the peer review process, that major quality control

deficiencies, if any, are identified and addressed on a timely basis.

AcSEC

The AcSEC issued a statement of position to provide guidance on issues

relating to the recognition, measurement, display, and disclosure of

environmental liabilities. 175 During 1996, the AcSEC continued to address

accounting issues involving specialized industries, dedicating resources in

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such areas as accounting for software revenue recognition, motion picture

accounting, and insurance accounting.

International Accounting and Auditing Standards

Significant differences in accounting and auditing standards currently

exist between countries. These differences are an impediment to

multinational offerings of securities. The SEC, in cooperation with other

members of the International Organization of Securities Commissions

(IOSCO), actively participated in initiatives by international bodies of

professional accountants to establish appropriate international standards that

might be considered for use in multinational offerings.

The International Accounting Standards Committee IASC and IOSCO's

Technical Committee have agreed to the development of a work plan that

identifies the projects which, upon successful completion, will comprise a

comprehensive core set of international accounting standards. The objective

of the work plan is the completion of a core set of international accounting

standards that will allow the Technical Committee to recommend

endorsement of the standards for cross-border securities offerings in all

global markets.

In April 1996, the IASC initiated a plan to accelerate its developmental

efforts with a view toward completion of the requisite core set of standards

by March 1998. The Commission is committed to working with its

securities regulatory colleagues, through IOSCO, and with the IASC to

provide necessary input to achieve the goal of establishing a comprehensive

set of international accounting standards as expeditiously as possible. From

the Commission's perspective, there are three key elements to this program

and the ultimate acceptance of its results.

The standards must include a core set of accounting pronouncements

that constitute a comprehensive, generally accepted basis of

accounting.

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The standards must be of high quality--they must result in

comparability and transparency, and they must provide for full

disclosure.

The standards must be rigorously interpreted and applied.

Significant progress was made on the remaining accounting areas

necessary to complete the core set of standards. For example, a final

standard was issued on accounting for income taxes.!" and exposure drafts

on segment reporting.!" earnings per share,'?" presentation of financial

staternents.!" and employee benefits'" were issued for comment.

Outstanding proposals concerning recognition and measurement of financial

statements and accounting for intangible assets (including research and

development and goodwill) are being reconsidered; new proposals are

expected early in 1997. Proposals on the remaining five areas comprising

the core set of standards are expected during 1997.

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Other Litigation and Legal Activities

The Office of General Counsel provides legal services to the Commission

concerning its law enforcement, regulatory, legislative, and adjudicatory

activities. The office represents the Commission in appeals in enforcement

cases and provides technical assistance on legislative initiatives.

Key 1996 Results

The Court of Appeals for the Second Circuit affirmed the Commission's

judgment against Robert E. Brennan and First Jersey Securities Inc. In SEC

v. Fehn,181 the Court of Appeals for the Ninth Circuit upheld a

Commission aiding and abetting action on the ground that a provision of the

Private Securities Litigation Reform Act of 1995 authorizing such actions

applied retroactively. In two criminal cases litigated by the Department of

Justice, United States v. Bryanl82 and United States v. 0 'Hagan, 183 two

courts of appeals rejected the misappropriation theory of insider trading.

The Commission participated in seeking rehearing in both cases. In SEC v.

Life Partners, Inc., 184 the Court of Appeals for the District of Columbia

Circuit held that investments in viatical settlements are not securities. The

Commission's petition for rehearing was denied. The SEC testified and the

staff provided technical and other assistance with respect to the National

Securities Markets Improvement Act of 1996 (Improvement Act), which was

enacted in October 1996.

Significant Litigation Developments

First Jersey Securities

In SEC v. First Jersey Securities, Inc., 185 the Court of Appeals for the

Second Circuit upheld the injunction and an award of $75,000,000 in

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disgorgement and prejudgment interest against Robert E. Brennan and First

Jersey Securities for their perpetration of a massive and continuing

fraudulent scheme on public investors. Still pending in the Court of Appeals

for the Third Circuit is a related appeal, In re First Jersey Securities

Litigation, \86 in which the Commission seeks to have an injunction vacated

that was issued by the United States District Court for the Eastern District of

Pennsylvania on the motion of Brennan and First Jersey in a now settled

class action suit. The injunction bars the Commission's distribution of the

New York court's disgorgement award unless the distribution is approved by

the Pennsylvania court. This appeal was stayed when Brennan filed for

protection under the Bankruptcy Code.

Aiding and Abetting Liability

In SEC v. Fehn, \87 the Court of Appeals for the Ninth Circuit upheld an

injunction obtained by the Commission against an aider and abettor of

securities laws violations on the ground that Section 104 of the Private

Securities Litigation Reform Act of 1995 applied retroactively to the case.

This act was adopted while the appeal was pending and authorizes the

Commission to bring aiding and abetting actions.

"In Connection with" Requirement Under Rule lOb-5

In McGann v. Ernst & Young,l88 the Court of Appeals for the Ninth

Circuit reaffirmed the principle that persons who make false or misleading

statements with the expectation that those statements will reach trading

markets engage in fraud "in connection with the purchase or sale of

securities," and need not have traded themselves in the securities. The court

rejected the argument that this reading of the antifraud provisions is no

longer valid after the Supreme Court's Central Bank decision.

Insider Trading

Two courts of appeals rejected the misappropriation theory of insider

trading liability, which had previously been accepted by all four circuits that

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had considered it. Under this theory, it is a form of securities fraud to trade

while in possession of non-public material information that has been

deceptively misappropriated from its rightful owner. In United States v.

Bryan'" and United States v. O'Hagan I" the Courts of Appeals for the

Fourth and Eighth Circuits struck down the theory on the grounds that such

trading did not involve deception and that the misappropriation of

information was not in connection with the purchase or sale of a security,

both of which are elements of liability under Section 10(b) of the Securities

Exchange Act of 1936 (Exchange Act) and Rule lOb-5. The O'Hagan court

also struck down as beyond the Commission's power to promulgate SEC

Rule 14e-3, which bans trading while in possession of certain non-public

material information in connection with a tender offer. The Commission

filed briefs urging rehearing in both cases. Rehearing was denied in both,

and a petition for certiorari has been filed in the Supreme Court in

O'Hagan.

Definition of a Security

In SEC v. Life Partners, Inc., 191 the Court of Appeals for the District of

Columbia Circuit held that interests in viatical settlements sold as

investments are not investment contracts and therefore are not securities,

because the predominant entrepreneurial or managerial efforts of the sellers

occurred before investors gave the defendants their money. A viatical

settlement is the process through which a terminally ill patient sells at a

discount their life insurance policy to an investor or a group of investors.

The Commission's petition for rehearing was denied.

Statute of Limitations in Commission Proceedings

In Johnson v. SEC,I92the Court of Appeals for the District of Columbia

Circuit reversed a Commission order imposing a censure and six-month

suspension from supervisory activities. The court held that the sanction was

barred by the five-year statute of limitations in 28 U.S.c. 2462, which

applies where a "fine, penalty or forfeiture, pecuniary or otherwise," is

sought.

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Arbitration

In Glennon v. Dean Witter Reynolds, Inc., 193 the Sixth Circuit Court of

Appeals, as urged by the Commission as amicus curiae, rejected a due

process challenge to an arbitral award of punitive damages in a case brought

against a broker-dealer. In deciding the case, the court assumed for the

purpose of deciding the case that the due process clause applies to

arbitrations, but held that the judicial review provided for under the Federal

Arbitration Act met those requirements.

Broker-Dealer Regulation

In Upton v. SEC,I94 the Court of Appeals for the Second Circuit held

that brokerage firms cannot meet their customer protection obligations under

Rule 15c3-3 by paying down obligations just before doing their weekly

computations under the rule, thus lowering the amount that need be set aside

in the customer protection account, and then restoring the obligations just

after doing the computation. The court vacated the sanction against

petitioner, however, because it found there was inadequate notice of this

principle in 1988 and 1989, when the firm engaged in the practice.

Regulation of Municipal Securities

In Blount v. SEC,195 the Supreme Court declined to review the decision

of the Court of Appeals for the District of Columbia Circuit upholding as

constitutional the Commission's approval of Municipal Securities

Rulemaking Board Rule G-37, the rule prohibiting pay-to-play practices.

Commission Quorum Rule

In Falcon Trading Group Ltd. v. SEC,I96 the Court of Appeals for the

District of Columbia Circuit upheld the Commission's quorum rule, which

provides that when the number of commissioners in office is only two, then

two commissioners constitute a quorum. The case was brought about in

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response to a disciplinary ruling against Falcon Trading Group Ltd. and is

awaiting decision.

Forum Selection and Choice of Law Agreements

The Commission filed a brief as amicus curiae in the Court of Appeals

for the Ninth Circuit in Richards v. Lloyd's of London. 197 In the brief, the

Commission argues that contractual forum selection and choice of law

clauses, that require the Lloyd's Names to bring claims arising from their

investments in Lloyd's in British courts and provide that British law governs

resolution of the disputes violate the antiwaiver provisions of the federal

securities laws because British courts will not entertain claims under those

laws. The case is awaiting decision.

Requests for Access to Commission Records

The Commission received 110 subpoenas for documents and testimony in

1996. In some of these cases, the Commission declined to produce the

requested documents or testimony because the information sought was

privileged. The Commission's assertions of privilege were upheld in every

instance when the party issuing the subpoena challenged the assertion in

court.

The Commission received 2,443 requests under the Freedom of

Information Act (FOIA) for access to agency records. There were 62

appeals to the General Counsel from initial denials by the FOIA Officer.

Three actions were brought in federal court challenging Commission

decisions under the FOIA. The first case was withdrawn by the plaintiff and

the second is pending. 198 In the third, Parsons v. SEC,I99 the court

granted the Commission's motion to dismiss, upholding the Commission's

decision to withhold staff reports of routine examinations of a broker-dealer

and of an self-regulatory organization (SRO) pursuant to FOIA Exemption 8.

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Motions to Vacate Permanent Injunctions

In SEC v. Worthen,zoo John Worthen moved to vacate a permanent

injunction entered against him by default in 1974. Worthen, a twiceconvicted securities law violator, argued that his injunction should be

vacated primarily because it was improper to enter a default judgment

against him while he was incarcerated for securities fraud. The Commission

opposed Worthen's motion, arguing that Worthen's injunction was valid and

noted that Worthen pled guilty to criminal contempt of the injunction in

1989. Worthen's motion was denied without opinion. The court of appeals

affirmed, rejecting Worthen's challenge to the validity of the default

judgment.

Actions Against the Commission and Staff

Numerous court actions, seeking millions of dollars in the aggregate,

were brought against the Commission and its staff alleging constitutional,

statutory, and common law tort violations in connection with the conduct of

various enforcement investigations. Decisions in all such actions were

favorable to the Commission. Of particular note, in Colello and Romano v.

SEC., plaintiffs sought equitable and monetary relief from the Commission,

present and former Commission employees, and the Department of Justice,

among others, based on the government's freeze of plaintiffs' Swiss assets

pursuant to the Swiss-United States Treaty on Mutual Assistance. In a prior

ruling, the court had held that the freeze violated the Fourth and Fifth

Amendments to the United States Constitution. 201 The court, however,

ruled that the doctrines of sovereign, absolute, and qualified immunity'"

bar plaintiffs from obtaining any relief against the defendants.

Also, in Hunter v, SEC,203the court dismissed claims against the

Commission and granted summary judgment on behalf of a Commission

employee. The court held that there was no evidence to support plaintiff's

claim that a Commission investigator improperly disclosed financial records

relating to the subject of an ongoing Commission investigation to a witness

for personal purposes.

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Actions Under the Right to Financial Privacy Act

In 1996, 14 actions were filed against the Commission in federal district

courts pursuant to the Right to Financial Privacy Act (RFPA) seeking to

quash Commission subpoenas to financial institutions for bank account

records. In each of the cases decided, the court enforced the subpoena,

finding that the Commission had established that the subpoenaed records

were relevant to a law enforcement inquiry and that the staff had complied

with the procedural requirements of the RFPA.

Stays Pending Appeal In Subpoena Enforcement Actions

In three separate actions.P' persons ordered by a district court to

produce documents or testify in Commission investigations filed motions in

appeals courts to stay the orders pending appeal. In each case, the

Commission successfully opposed the motions by demonstrating that:

arguments as to why the subpoenas should not be enforced were not

likely to succeed on appeal,

producing documents or testimony in a Commission investigation does

not constitute irreparable harm because a person may still challenge

the Commission's use of such evidence in any subsequent enforcement

action, and

the public interest is served by requiring those who may possess

evidence of securities law violations to produce that information in a

timely manner.

Asset Freezes

In Law Practice of J.B. Grossman, P.A. v. SEC,205 petitioner

Grossman, counsel for the defendants in a Commission enforcement case,

sought a writ of certiorari urging the court to review the decision of the

Court of Appeals for the Eleventh Circuit affirming a finding of civil

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contempt against his firm for violating a temporary restraining order (TRO)

and asset freeze. Grossman had transferred defendants' funds that were held

in a firm account while those funds were frozen by the TRO. Grossman

argued to the Supreme Court that his firm was entitled to treat the TRO and

asset freeze as having expired because they were extended beyond the 20-

day limit in Fed. R. Civ. P. 65(b). The Supreme Court denied the petition.

Significant Adjudication Developments

The staff submitted 81 draft opinions and orders resolving substantive

motions to the Commission. The Commission issued 46 opinions and 17

related orders, and the staff resolved by delegated authority an additional 98

motions. Appeals from decisions of administrative law ju .ges continue to

make up a high percentage of the Commission's docket.

Sales Practice Abuses and Deficient Supervision

As in previous years, the Commission reviewed several cases in this area.

For example, in Consolidated Investment Services, Inc., 206 the Commission

concluded that a broker-dealer and two of its officers failed reasonably to

supervise a registered representative who conducted a Ponzi-type scheme out

of the firm's one-person satellite office. The registered representative

defrauded more than 50 customers of $5 million. The Commission found

that the firm and its officers failed to inspect the satellite office during the

salesman's five-year tenure and ignored numerous red flags indicating his

failure to comply with established firm procedures. Noting that the firm and

its officers had been disciplined previously for similar misconduct, the

Commission suspended the firm for 30 days, barred the officers for one

year, and imposed a $50,000 penalty on each officer.

In Franklin N. Wolf, James H. Petrantis, and Richard T. Sullivan?"

the Commission determined that in six months three principals of a brokerdealer formerly registered with the National Association of Securities

Dealers (NASD) effected more than 2,400 retail sales in violation of an

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Exchange Act rule governing the sale of low-priced securities. The

Commission rejected their claim that the rule was vague and observed that

before the period at issue, two of the three had reviewed an NASD Notice to

Members explaining the rule. The Commission also found that Sullivan,

who served as the firm's compliance director, was responsible for the firm's

failure to implement sufficient procedures to ensure compliance with the

rule. The Commission sustained the censures, fines, and suspensions

imposed on the respondents.

Fraud in the Offer/Sale of Securities; Manipulative Activity

The Commission considered several appeals involving fraudulent and

manipulative conduct. In Ivan D. Jones, Jr.,'lJJ8the Commission

determined that Jones, president of both a brokerage firm and a registered

investment adviser, misappropriated proceeds from two offerings. Jones

used the proceeds to benefit businesses in which he was an officer or part

owner. Jones claimed that one of the offerings involved the sale of real

estate partnerships and thus was not subject to the securities laws; however,

he was charged only with violation of the Investment Advisers Act of 1940

in connection with that offering. The antifraud provisions of that Act cover

all fraudulent conduct by investment advisers affecting clients or prospective

clients, whether or not the conduct involves securities.

In Thomas C. Kocherhans, 209 the Commission found that in six months

a registered representative effected 47 purchases of a particular common

stock within 15 minutes of the market close. Of the 47 purchases, 35 caused

the market to close at a price higher than the previously reported trade.

Kocherhans admitted that he made the purchases to assist his customers in

avoiding margin calls by increasing the equity in their margin accounts. The

Commission determined that Kocherhans had a second motive for marking

the close. The stock comprised more than 90 percent of Kocherhans'

personal holdings, and he was having substantial difficulty in meeting

margin calls. Given the seriousness of Kocherhans' misconduct, the

Commission sustained the censure, $50,500 fine, and one-year suspension

the NASD had imposed.

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Effecting Transactions Based on Material, Non-public Information

In Ralph Joseph Presuui?" the Commission concluded that a registered

representative violated New York Stock Exchange (NYSE) rules by carrying

out securities transactions for customers acting on the basis of stock tips

featured in Business Week. The customers obtained the magazine before its

release to the public. Presutti learned several months into the scheme that

his customer was not obtaining the magazine from a newsstand, as Presutti

originally had been told, but from an employee of the printer. The

Commission found that, although Presutti knew the Business Week

information was market sensitive, he failed to investigate his customer's

claim that the advance copies were a perk given to the printer's employees

and continued for another year to effect the securities transactions.

Presutti's customer had paid the printer's employee for the advance copies.

The Commission sustained the censure and two-month suspension imposed

by the NYSE.

Excessive and Fraudulent Markups

The Commission further clarified the law governing excessive and

fraudulent markups. In Strategic Resource Management, Inc. ,211 the

Commission set aside the NASD's findings of excessive markups, rejecting

the NASD's treatment of the firm as a non-market maker for certain trades.

The Commission found that where a broker-dealer holds itself out as a

market maker and regularly conducts inter-dealer trades on both the buy and

sell sides of the market, it should be treated as a market maker for all

transactions, not just those involving other dealers. Further, the

Commission stated that the principal set forth in Kevin B. Waide212--in

riskless principle transactions, markups should be based upon the dealer's

contemporaneous cost--normally does not apply to market-making activity.

The Commission explained that a market maker's purchase or sale of a

security may occur when it holds the opposite order from a customer, thus

offsetting that customer's order. Although the transaction could be viewed

as happening on a riskless principal basis, it is part of a market maker's

normal function.

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In Frank L. Palumbo, Salvatore A. Venezia and Sandra Solomon

Yenezia i" the Conunission determined that three officers of a brokerdealer formerly registered with the NASD recklessly overcharged customers.

These officers imposed markups ranging from 5.14 to 83.77 percent of the

prevailing market price in sales of three securities underwritten by the firm.

In a earlier disciplinary proceeding, respondents had been put on notice that

the firm's practice of basing its markups on unvalidated ask quotations was

improper. The Commission agreed with the NASD that the firm's markups

should have been based on the prices it paid to other dealers concurrently

with its retail sales, where available, and otherwise on the basis of its

contemporaneous purchases from retail customers, adjusted for a five

percent markdown.

Counseling and Regulatory Policy Services

The General Counsel provided technical assistance to Congress and others

on legislative proposals, including the Improvement Act, and to the

Conunission on regulatory issues. Regulatory issues included reorganization

of the NASD, adoption of the SEC's rules governing order handling by

broker-dealers, and implementation issues arising from the Small Business

Regulatory Enforcement Fairness Act of 1996. In addition, the General

Counsel prepared a report to Congress regarding protections for senior

citizens and qualified retirement plans required by the Private Securities

Litigation Reform Act of 1995.

Significant Legislative Developments

Charitable Giving Protection

On October 31, 1995, the SEC testified before the House Conunerce

Committee's Subconunittee on Teleconununications and Finance in support

of the Philanthropy Protection Act of 1995 (H.R. 2519). In December

1995, President Clinton signed H.R. 2519 into law (Pub. L. No. 104-62).

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Charitable organizations and the securities issued by them generally are

exempt from registration and reporting requirements under the federal

securities laws. The Protection Act is intended to address interpretive

questions that arose with respect to pooled accounts maintained by charitable

organizations that contain donated property in which the donor retains a

remainder or annuity interest (charitable income funds). Provided the

charitable income fund qualifies to receive tax deductible contributions under

the Internal Revenue Code, the Act exempts:

such funds from registration under the federal securities laws,

securities issued by these funds,

persons soliciting on behalf of the funds,

charitable organizations sponsoring the funds, and

persons associated with the funds.

Charitable income funds and persons soliciting on their behalf remain

subject to the antifraud provisions of the securities laws. The Act also

requires certain disclosures to donors, prohibits incentive-based

commissions, and preempts state regulation of charitable income funds with

a three-year opt-out period.

Securities Litigation Reform

In December 1995, the House and Senate voted to override President

Clinton's veto of the Private Securities Litigation Reform Act of 1995 (Pub.

L. No. 104-67), concluding a long legislative effort to bring about a revision

of both substantive and procedural law governing private actions under the

federal securities laws. For the most part, the Litigation Reform Act applies

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only to private actions. Among the most significant measures instituted by

the Litigation Reform Act are:

a statutory safe harbor for forward-looking statements;

a system of proportionate, as opposed to joint and several, liability for

defendants in private actions who are not found to have knowingly

committed a violation of the securities laws;

mandatory sanctions for violations of Rule 11(b) of the Federal Rules

of Civil Procedure; and

a requirement that courts choose a lead plaintiff in securities class

actions to represent the class, with the presumption that the most

capable representative is the person or group with the largest financial

interest in the case.

Regulation of Public Utility Holding Companies

On February 8, 1996, the President signed into law the Telecommunications Act of 1996 (Pub. L. No. 104-104), a comprehensive

reform of federal telecommunications law. The Telecommunications Act

amends the Public Utility Holding Company Act of 1935 to permit

registered public utility holding companies to invest in telecommunications

activities through separate subsidiaries, to issue or sell securities to finance

the acquisition of telecommunications subsidiaries, and to guarantee

securities of these subsidiaries without prior SEC approval. The Act

authorizes the SEC to announce rules concerning additional reporting by

registered holding companies or their subsidiaries that own securities of

telecommunications subsidiaries.

SEC Appropriation

In September 1996, the House and the Senate passed an omnibus

appropriations bill for 1997, which the President signed into law on

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September 30, 1996 (Pub. L. No. 104-208). The appropriations bill

provides funding authority for the SEC for 1997 at $305 million, which

includes $222 million in offsetting fee collections from an increase in the

securities registration fees from 1I50th to 1I33rd of one percent and new

transaction fees of 1I300th of one percent on sales of certain over-thecounter (Nasdaq) market securities. This funding level represents an

increase over the $297 million proposed in the House bill and a decrease

from the $306 million proposed in the Senate-reported bill. The SEC had

requested appropriations of $308 million.

Securities Deregulation

In 1996, Congress debated significant revisions to the federal securities

laws. The SEC testified on the following bills: (1) H.R. 1495, the

Investment Company Act Amendments of 1995 (before the House

Commerce Committee's Subcommittee on Telecommunications and Finance

in October 1995); (2) H.R. 2131, the Capital Markets Deregulation and

Liberalization Act of 1995 (before the House Commerce Committee's

Subcommittee on Telecommunications and Finance in November 1995); and

(3) S. 1815, the Securities Investment Promotion Act of 1996 (before the

Senate Banking Committee in June 1996).

The House and Senate both passed H.R. 3005, the Improvement Act,

which incorporated some provisions from earlier legislative proposals to

revise the securities laws (including H.R. 1495, H.R. 2131, and S. 1815).

The President signed the legislation into law on October 11, 1996 (Pub. L.

No. 104-290). The most significant provisions of the legislation are outlined

below.

Securities Registration

The Improvement Act for the most part preempts state blue-sky

registration of covered securities, which includes securities listed on the

NYSE, the American Stock Exchange (AMEX), and the National

Association of Securities Dealers Automated Quotation/National Market

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System (Nasdaq/NMS), exchanges with substantially similar listing standards

as NYSE, AMEX, Nasdaq/NMS (as determined by the SEC), registered

investment companies, securities sold to qualified purchasers (to be defined

by the SEC), and securities sold in certain offerings exempt from federal

legislation. The Act also prohibits states from limiting or imposing

conditions on the sales of such securities. States retain securities registration

(and review) of small-cap Nasdaq offerings, regional exchange offerings,

offerings listed on the pink sheets, and certain offerings that are exempt

under the federal securities laws. In addition, states retain state law

authority to investigate and bring enforcement actions with respect to fraud

in connection with securities transactions.

Broker-Dealer Regulation

The Improvement Act preempts state regulation of broker-dealers in the

areas of financial responsibility, recordkeeping, reporting, margin, and

custody requirements to the extent that state requirements in these areas are

inconsistent with or exceed requirements established under the Exchange

Act. The Act also removes legislative restrictions on the sources from

which broker-dealers may obtain financing and encourages the SEC and

SROs to eliminate duplication in the examination process.

Exemptive Authority

The Improvement Act grants the SEC general exemptive authority under

the Securities Act of 1933 (Securities Act) and the Exchange Act.

Investment Companies

The Improvement Act makes significant amendments to the Investment

Company Act of 1940. These amendments:

lift restrictions on mutual funds making investments in other mutual

funds in the same fund complex;

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simplify the system under which mutual funds pay registration fees;

give funds greater advertising flexibility;

permit greater flexibility in regulating variable insurance products;

give the SEC authority to prohibit misleading and deceptive fund

names;

permit investment advisers to qualified purchaser pools and foreign

persons to obtain fees based on investment performance;

exempt from regulation under the Investment Company Act funds

whose securities are held only by qualified purchasers; and

streamline the existing exception for private investment companies. In

addition, the Act exempts from most federal securities regulations

church employee pension plans if the assets are held for the exclusive

benefit of employees.

Investment Advisers

The Improvement Act prohibits investment advisers that manage less than

$25 million in assets from registering with the SEC, makes the states

responsible for regulating them, and preempts most state investment adviser

laws with respect to advisers registered with the SEC. The SEC retains

authority to regulate foreign advisers and advisers who are not regulated by

their home state. In certain circumstances, the SEC also has exemptive

authority to continue regulating advisers with assets under management of

less than $25 million. The SEC and the states each retain authority to

investigate allegations of fraud involving any investment adviser, whether

registered with the SEC or with a state regulator. In addition, the Act (1)

facilitates the creation of a one-stop filing depository for investment adviser

registrations; (2) prohibits regulation of books, records, and capital and

bonding requirements of investment advisers by states other than the

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adviser's home state; (3) prohibits states from requiring registration or

licensing of investment advisers that do not have their principal place of

business or have less than six clients in the state; (4) allows the SEC to

prohibit registration of any person convicted of any felony; and (5) maintains

state authority to require filings made with the SEC and certain remedies to

assure fee payments and filings. The Act also authorizes appropriation of

$20 million to the SEC for enforcement of the Investment Advisers Act.

SEC Authorization

The Improvement Act authorizes the SEC to receive funding in the

amount of $300 million (plus $20 million in additional funds for enforcement

of the Investment Advisers Act) in 1997. The Act provides for a gradual

reduction over 10 years in fees for filings of registration statements under

Section 6(b) of the Securities Act. The securities registration fee is

authorized at $295 per $1 million (1I34th of one percent) in 1998 and

declines to $67 per $1 million (1I150th of one percent) in 2007. The Act

also extends transaction fees under Section 31 of the Exchange Act to sales

of securities in the over-the-counter markets. The transaction fee is

authorized at 1I300th of one percent beginning in 1997 through 2006 (the

same rate currently imposed on sales of exchange-registered securities) and

is scheduled to decline to 1I800th of one percent in 2007.

SEC Reports

The Improvement Act requires the SEC to prepare reports on a variety of

topics not later than October 11, 1997. These reports include (1) the extent

to which the states have acted to achieve uniform regulatory requirements

for securities that are not preempted by the Improvement Act, (2) the impact

of technological advances on the securities markets, (3) the market practice

known as preferencing (due April 9, 1997), (4) the impact of disparate state

licensing requirements on associated persons of registered broker-dealers, (5)

proposals to privatize EDGAR (due April 11, 1997), and (6) progress in the

development of international accounting standards and the outlook for

completion of a set of such standards acceptable to the SEC.

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Regulatory Reform

In March 1996, the l04th Congress passed the Small Business Regulatory

Enforcement Fairness Act of 1996 (Pub. L. No. 104-121). Among other

things, the legislation (1) imposes certain obligations on all federal agencies

to assist small businesses in complying with agency rules; (2) expands the

class of litigants eligible for awards under the Equal Access to Justice Act

and makes such awards available if an agency's demand was unreasonable

when measured against the final outcome; (3) amends the Regulatory

Flexibility Act, among other things, permit small entities to challenge agencj

compliance with that Act; and (4) provides for congressional review of all

final agency rules. The SEC is implementing new requirements under these

laws.

SEC Testimony

In other areas, the SEC testified before Congress regarding mutual funds

and mutual fund investors (before the House Banking Committee's

Subcommittee on Capital Markets, Securities and Government Sponsored

Enterprises in June 1996), and frauds involving fictitious financial

instruments (before the Senate Banking Committee in July 1996).

Corporate Reorganizations

The Commission, as a statutory adviser in cases under Chapter 11 of the

Bankruptcy Code, seeks to assure that the interests of public investors are

protected. During the year, there were 109 active Chapter 11 cases

involving public companies. The Commission entered a formal appearance

in 14 cases with significant public investor interest. The Commission also

was actively involved in the Orange County214 bankruptcy, the largest

municipal bankruptcy ever filed under Chapter 9 of the Bankruptcy Code, in

order to protect the holders of the county's public debt securities and the

municipal bond market generally.

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Committees

Official committees negotiate with debtors on the formulation of

reorganization plans and participate generally in all aspects of a Chapter 11

case. The Bankruptcy Code provides for the appointment of an official

committee for stockholders where necessary to assure adequate

representation of their interests.

During 1996, the Commission successfully supported a motion for an

equity committee in In re Hamburger Hamlet.215 The Commission was

unsuccessful in supporting the formation of an equity committee in In re

Edison Brothers Stores, Inc. ,216 in which the district court, on appeal,

sustained the bankruptcy judge's determination that management could

adequately represent shareholders because of its substantial stock ownership.

The U.S. Trustee, however, later appointed an official committee in In re

Edison Brothers Stores, Inc. Committees also were appointed in three cases

as a result of informal discussions with U.S. Trustees and the Case

Administrator for the District of North Carolina."?

The Commission reiterated its position that insider trading prohibitions

apply to members of official committees, who frequently receive confidential

information on a company's operations and prospects. In In re WRT

Energy218 and In re Baldwin Builders, 219 the Commission supported the

adoption of court orders permitting trading in the debtor's securities only by

committee members engaged in securities trading in the regular course of

their business and that implement procedures designed to prevent the misuse

of inside information.

Disclosure Statements/Reorganization Plans

A disclosure statement is a combination proxy and offering statement used

to solicit acceptances for a reorganization plan. Such plans often provide for

the issuance of large quantities of new unregistered securities pursuant to an

exemption from Securities Act registration contained in the Bankruptcy

Code. During 1996, the Office of General Counsel commented on 66 of the

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68 plans and disclosure statements it reviewed. In addition, the office

commented on 44 of the 52 amended disclosure statements it reviewed.

Recurring problems with disclosure statements included inadequate financial

information, lack of disclosure on the issuance of unregistered securities and

insider transactions, and plan provisions that contravene the Bankruptcy

Code. Most of the office's comments were adopted by the debtors without

the need for formal Commission intervention.

In In re NVF Corp. ,220 the Commission successfully objected to the

debtor's attempt to obtain a release from liability for Victor Posner, NVF's

principal shareholder, officer, and director. The release of third parties

from liability is significant to investors because in many cases debtors seek

to use the Chapter 11 process to protect officers and directors from personal

liability for various kinds of claims, including liability under the federal

securities laws. As a result of the Commission's comment process for plan

disclosure statements, improper third party release provisions were

abandoned in five cases.?"

In In re Americare Intemational/" and In re Micro Security P" the

Commission successfully objected to attempts to discharge claims of

creditors and sell the remaining asset-less public shell corporations.

Enforcement Matters

Bankruptcy issues frequently arise in Commission enforcement actions.

In In re Bilzerian P" the district court overruled a bankruptcy court order

that had refused to give collateral estoppel effect (i.e., to accept the factual

findings of the district court) to the Commission's $33 million securities

fraud disgorgement judgment. The district court directed the bankruptcy

judge to enter summary judgment for the Commission that its disgorgement

judgment is nondischargeable.

In In re ACI-HDT Supply,225 the Commission objected to the method of

calculating the claims of victims of a fraudulent Ponzi scheme. Relying on

Ninth Circuit precedent.i" the Commission argued that the claims of

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defrauded investors should be based on out-of-pocket loss rather than benefit

of the bargain damages. The matter is pending.

In In re Hibbard Brown,227 a Chapter 11 case involving a penny stock

broker-dealer, the Commission objected to the fairness of a proposed

settlement with certain former registered representatives and employees who

are alleged to have defrauded investors of more than $115 million. The

Commission argued that the proposed contributions by these third parties

were inadequate to support a general release of all claims arising from their

fraudulent activity. After the Commission raised its objections, the

bankruptcy court appointed an examiner to evaluate the fairness of the

proposed settlement. The Commission is prepared to seek conversion of this

Chapter 11 case to a liquidation under Chapter 7 unless the proposed amount

of contributions by the third parties is increased substantially.

Ethical Conduct Program

In 1996, the staff responded to 1,135 counseling inquiries. The staff

continued to provide training, prepare memoranda on ethics issues, and

revise the Commission's Conduct Regulation.

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Municipal Securities Initiatives

The Office of Municipal Securities provides expertise to the Commission and

staff, assists on municipal securities enforcement cases, coordinates

disclosure rules and other ongoing municipal regulatory initiatives, and

addresses new issues that arise in the municipal area. In addition, the office

provides assistance on legislative matters and works directly with issuers,

investors, brokers, municipal securities dealers, and other professionals on

issues relating to municipal securities.

Key 1996 Results

Together with the Office of the General Counsel, the Office of Municipal

Securities continued its efforts on the Orange County, California municipal

bankruptcy and related issues. The office also (1) provided the Division of

Enforcement and the regional and district offices with technical assistance in

municipal securities investigations and enforcement proceedings; (2)

provided guidance to participants in the municipal markets regarding the

secondary market disclosure required by amended Rule 15c2-12 of the

Securitfes Exchange Act of 1934; and (3) worked with the Division of

Market Regulation on the interpretation and implementation of Municipal

Securities Rulemaking Board (MSRB) Rule G-37, relating to restrictions on

political contributions, and Rule G-38, which requires disclosure of

consulting arrangements.

Municipal Securities Disclosure

The municipal securities office participated in a number of seminars and

conferences designed to assist municipal market participants. The office

used these forums, among other things, to explain to issuers, financial

advisers, dealers, and counsel how to implement and comply with

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amendments to Rule 15c2-12, concerning secondary market disclosure.

These forums also were used to provide guidance on recent SEC

enforcement decisions that apply the antifraud provisions of the federal

securities laws to municipal securities. The office also prepared educational

materials to foster compliance with the federal securities laws.

Technical Assistance

In this area, the municipal securities office provided support to Chairman

Levitt's and Secretary of the Treasury Rubin's joint efforts to increase local

government finance officers' awareness of the need for the prudent

management of public funds in today's markets. In this regard, the

municipal securities office worked alongside the Office of Legislative Affairs

to provide technical assistance to Congress on issues, such as the investment

of public funds, suitability requirements, and the municipal bankruptcy in

Orange County, California.

In conjunction with the Division of Market Regulation, the municipal

securities staff assisted in implementing, amending, and interpreting of

MSRB Rules G-37 and G-38. MSRB Rule G-37 prohibits brokers, dealers,

and municipal securities dealers from engaging in municipal securities

business with issuers if certain political contributions have been made to

officials of such issuers. MSRB Rule G-38 requires disclosure of consulting

arrangements. The staff also worked with the Divisions of Market

Regulation and Corporation Finance to implement amendments to Rule

15c2-12.

The municipal securities staff worked with the Office of the General

Counsel on municipal bankruptcy and other municipal securities matters,

provided technical assistance to the Division of Enforcement and regional

and district offices on several municipal securities enforcement actions,

assisted the Office of Compliance Inspections and Examinations in oversight

matters concerning municipal securities regulations, provided expertise for

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various compliance training programs, and assisted the Office of Investor

Education and Assistance on issues pertaining to individual investors and

municipal securities price transparency.

Outreach

As part of its outreach efforts, the municipal securities staff met

periodically with numerous organizations representing participants involved

in the municipal finance industry. Among the organizations represented

were the Government Finance Officers Association, National League of

Cities, National Association of Counties, U.S. Conference of Mayors,

Council of Infrastructure Financing Authorities. Public Securities

Association, California Debt Advisory Commission, and the National

Association of Bond Lawyers. The primary focus of these meetings was

methods of improving compliance with existing regulations. The recent

pamphlet prepared by several issuer groups Questions to Ask Before You

Approve A Bond Issue is a product of these meetings.

An ombudsman within the office acted as a point of contact and provided

municipal bond issuers ready access to the Commission. The ombudsman

also provided municipal bond issuers a means of obtaining general

information about the Commission and its initiatives.

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Economic Analysis

The Office of Economic Analysis provides expertise in financial economics to

the Commission and the operating divisions, evaluates the economic impact

of proposed rules, conducts studies that are designed to expand the

Commission's understanding of capital markets, and plays a major role in

the Commission's enforcement effort by applying economic and statistical

tools to issues such as materiality and disgorgement. The office analyzes

rule proposals to assess (1) their potential effects on small entities, as

required by the Regulatory Flexibility Act and Section 502 of the Small

Business Investment Incentive Act, both enacted in 1980, and (2) their impact

on competition within the securities industry and among competing securities

markets, as required by the 1975 amendments to the Securities Exchange Act

of 1934.

Key 1996 Results

In 1996, the office participated in the Commission's investigation

regarding the National Association of Securities Dealers (NASD) and the

Nasdaq Market. The office also analyzed the economic impact of the

Commission's recently adopted Display Rule and amendments to the Quote

Rule (collectively Order Handling Rules), provided economic analysis for

the Advisory Committee on Capital Formation and the Regulatory Process,

and produced a report summarizing the results of the Commission's survey

of the financial literacy of mutual fund purchasers.

Economic Analysis and Technical Assistance

The office analyzed 65 Commission and self-regulatory organization rules

to assess the costs and benefits, the Paperwork Reduction Act compliance

burdens, and the potential effects on small entities as required by the

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Regulatory Flexibility Act of 1980. In general, increased staff resources

were devoted to rule reviews following passage of the Small Business

Regulatory Enforcement Act of 1996.

On August 29, 1996, the SEC adopted the Display Rule, which requires

the display of customer limit orders, and amended the Quote Rule, which

directs publication of quotations to improve both the quality of published

quorations and pricing efficiency in markets.

In the enforcement area, the office assisted the Division of Enforcement

in several cases involving insider trading, market manipulation, fraudulent

financial reporting, and other violations of securities laws. The economic

analysis staff applied financial economics and statistical techniques to

determine whether the elements of fraud were present and to estimate, where

appropriate, the amount of disgorgement to be sought. The office also

assisted in evaluating the testimony of experts hired by opposing parties.

The office also actively participated in the Commission's investigation

regarding the NASD and the Nasdaq Market by conducting extensive

statistical analyses of audit trail data on securities transactions and

quotations. The statistical analyses confirmed testimony on the existence and

functioning of a pricing convention and demonstrated the breadth and

magnitude of its impact.

In conjunction with the Office of the Comptroller of the Currency, the

office produced a report for a jointly sponsored study of the financial

literacy and knowledge of mutual fund purchasers. This study was based on

a survey of 2,000 randomly selected mutual fund investors and collected

information on the demographic, financial, and fund ownership

characteristics of the respondents. It paid particular attention to the

distribution channel (bank, broker, direct sales, etc.) through which

respondents bought mutual fund shares and the respondents' level of

financial literacy. The study included a number of important findings. For

example, although the survey respondents consulted the prospectus more

than any other source for information, it was rated as only the fifth best

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source of information, regardless of the distribution channel used to purchase

shares. However, the likelihood that an investor who bought a fund actually

consulted the prospectus depended on the distribution channel used to buy

the fund. Finally, approximately one-third of all fund owners still believe

that money market funds are insured.

In July 1996, the Commission's Advisory Committee on Capital

Formation and Regulatory Processes issued its final report which

recommended a shift to a system of company registration versus the

registration of individual securities offerings. The economic analysis staff

provided extensive statistical analysis for the report, addressing the costs of

new issues, the volume of offerings, the effects of various thresholds for

issuer participation in a pilot program of company registration, and the value

added by SEC review of prospectuses.

As part of an evaluation of the Nasdaq OTC Bulletin Board, the office

analyzed the U.S. over-the-counter market for unregistered foreign equities.

The Nasdaq OTC Bulletin Board is a proprietary electronic quotation

medium on which broker-dealers post quotations and indications of interest

for unlisted domestic stocks and foreign equities. The office analyzed the

adequacy of price transparency as well as the potential harm to retail

investors from the lack of U.S. Generally Accepted Accounting Principles

financial disclosure by issuers of unregistered foreign equities. The size of

this market relative to worldwide trading in the same foreign equities, dealer

concentration, and the degree of retail participation also were evaluated.

During the year, the Commission proposed Regulation M to replace its

trading practice rules, which govern potentially manipulative trading during

a securities distribution. To facilitate the Commission's efforts, the office

analyzed data on potential manipulations and provided estimates of the

impacts of proposed changes to the existing rules.

The economic analysis staff analyzed the accuracy of transaction fees

collected by the Commission, certain applications by exchanges to trade

options and swaps contracts, certain applications for exemptions filed by

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public utilities, and the extent of price improvement for certain stock

exchange transactions.

During the year, the office pursued a variety of projects designed to

expand the Commission's understanding of the capital markets. These

projects are long-term in nature and focus on the use and economics of soft

dollar commissions, the extent of price pressure resulting from the sale of

unregistered securities, price stabilization in the initial public offering

aftermarket, and the demand for proprietary trading systems.

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Policy Management and Administrative Support

Policy management and administrative support provide the Commission and

operating divisions with the necessary services to accomplish the agency's

mission. Policy management is provided by the executive staff and Offices of

Legislative Affairs; the Secretary; Public Affairs, Policy Evaluation and

Research; the Executive Director; and Equal Employment Opportunity. The

responsibilities and activities of policy management include developing and

executing management policies, formulating and communicating program

policy, overseeing the allocation and expenditure of agency funds,

maintaining liaison with the Congress, disseminating information to the

press, andfacilitating Commission meetings.

Administrative support includes services such as accounting, financial

management, fee collection, information technology management, data

processing, space and facilities management, and human resources

management. Under the direction of the Office of the Executive Director,

these services are provided by the Offices of the Comptroller, Information

Technology, Administrative and Personnel Management, and Filings and

Information Services.

Key 1996 Results

In 1996, the Commission held 30 meetings at which it considered 104

matters. Major activities of the Commission included the adoption of a wide

variety of rule amendments designed to simplify the disclosure process,

amendments to rules governing money market funds, and rules concerning

broker-dealers' order execution obligations designed to enhance the quality

of published quotations for securities and to enhance competition and pricing

efficiency in our markets.

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The agency collected fees for the United States Treasury in excess of its

appropriation for the fourteenth consecutive year. In 1996, total SEC fees

collected as revenue were $774 million and the net gain to the Treasury was

$429 million.

Policy Management

Commission Activities

During the 30 Commission meetings held in 1996, the Commission

considered 104 matters, including the proposal and adoption of Commission

rules, enforcement actions, and other items that affect the stability of the

nation's capital markets and the economy. The Commission also acted on

1,101 staff recommendations by seriatim vote. Significant regulatory actions

taken by the Commission included:

elimination of numerous disclosure rules and forms and adoption of

minor and technical amendments, in response to recommendations of

the Commission's Task Force on Disclosure Simplification (Task

Force);

publication of proposals to implement additional recommendations

made by the Task Force to eliminate unnecessary requirements and

streamline the disclosure process;

adoption of amendments to rules governing money market funds; and

adoption of rules on order execution obligations of broker-dealers.

Congressional interest in the agency's activities and initiatives remained

high. The Commission and staff members testified at 10 congressional

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hearings during the year. In addition, the Congress actively considered a

number of important issues under the Commission's jurisdiction, including:

the omnibus securities reform bill, the National Securities Markets

Improvement Act of 1996, which subsequently was enacted into law

(Pub. L. No. 104-290);

bank sales of mutual funds;

possible reform of the regulation of public utility holding companies;

and

the SEC's appropriation.

Public Affairs

The Office of Public Affairs, Policy Evaluation and Research

communicated information on Commission activities to those interested in or

affected by Commission actions, including the press, regulated entities, the

general public, and SEC employees. The office published the SEC News

Digest daily, which provides information on rule changes, enforcement

actions against individuals or corporate entities, administrative actions,

decisions on requests for exemptions, upcoming Commission meetings, and

other events of interest and The SEC Employee News, a regular newsletter.

The public affairs staff also prepared a daily summary of news clips for

agency employees. In addition, the office provided support for activities

related to the Chairman's investor education initiatives, the further

development of the SEC's internet website, and the agency's International

Institute for Securities Markets Development.

Many of the agency's actions are of national and international interest.

When appropriate, these actions are brought to the attention of regional,

national, and international press. The public affairs office issued 182 press

releases on upcoming events, SEC programs, enforcement actions, and

special projects. The office also responded to approximately 50,000 requests

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for specific information on the SEC or its activities and coordinated visits of

domestic and foreign officials to the SEC. In total, programs for 952

foreign visitors were coordinated during the year.

Management Activities

The Office of the Executive Director continued to promote management

controls and financial integrity and to manage the agency's audit follow-up

system. The office continued to analyze the efficiency and effectiveness of

operating divisions and support offices and to coordinate and implement the

agency's compliance with and response to actions under the National

Performance Review (NPR) and the Government Performance and Results

Act of 1993, including development of the agency's strategic plan. Working

closely with other senior officials, the office formulated the agency's budget

submissions to the Office of Management and Budget and the Congress.

Equal Employment Opportunity

The Office of Equal Employment Opportunity provided the agency with

support for compliance with Title VII of the Civil Rights Act of 1964, as

amended; the Age Discrimination in Employment Act of 1967; the

Rehabilitation Act of 1973; and the Equal Pay Act of 1963. This support

included counseling, mediation, dispute resolution, administrative factfinding investigations, final agency decisions on formal complaints of

employment discrimination, EEO orientation programs for new employees,

and EEO training for managers and supervisors in various divisions.

Through the Securities and Exchange Commission-Securities Industry

Committee on Equal Opportunity, the office functioned as the industry

liaison for the agency on EEO issues. The office also administered the

Federal Women's Program, the Hispanic Employment Program, and the

Black Employment Program and sponsored, along with the Office of

Administrative and Personnel Management, the SEC's Disability Issues

Advisory Committee.

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Freedom of Information Act and Privacy Act

The Office of Freedom of Information Act (FOIA) and Privacy Act

Operations responded to requests for access to information under FOIA, the

Privacy Act, and the Government in the Sunshine Act, and processed

requests under the agency's confidential treatment rules. Confidential

treatment requests were generally made in connection with proprietary

corporate information and evaluated in conjunction with access requests to

prevent the unwarranted disclosure of information exempt under the FOIA.

All responses to FOIA, Privacy Act, and Government in the Sunshine Act

requests were made within the statutory time frame.

Administrative Support

Commission Operations

For the fourteenth consecutive year the SEC collected revenue in excess

of its appropriation. The SEC's total revenue was $774 million, 260 percent

of the agency's appropriated spending authority of $297.4 million. The

$774 million in total fees collected as revenue, minus the SEC's current year

spending authority of $287 million ($297.4 million less $10 million from

prior year offsetting fee collections) and $58 million in excess offsetting

collections, resulted in a net gain of $429 million to the United States

Treasury. Fee revenue was collected from four basic sources: securities

registered under Section 6(b) of the Securities Act of 1933 (75 percent of the

total 1996 fee revenue), transactions of covered exchange-listed securities

(17 percent), tender offer and merger filings (7 percent), and miscellaneous

filings (1 percent). Offsetting fee collections were generated from an

increase in the fee rate under Section 6(b) of the Securities Act from onefiftieth of one percent to one-twenty-ninth of one percent.

127
Financial Management

In this area, the Office of the Comptroller updated the agency's FiveYear Financial Management Plan. This plan responds to current financial

system issues, recognizes new legislative and NPR requirements, and is

consistent with the agency's information technology plan. To further

strengthen financial management, the office also began full-scale

implementation of a LAN-based travel management system in headquarters,

implemented a new budget system to increase agency-wide availability of

financial data, and installed a new on-line system to facilitate the transmittal

of budget allowances and preparation of budget estimates.

Information Resources Management

The Office of Information Technology continued to develop and enhance

SEC information resources. Notably, phase-in of all domestic filers to the

agency's Electronic Data Gathering, Analysis and Retrieval (EDGAR)

system was completed in May 1996.

On September 10, 1996, the EDGAR recompetition notice was released

in the Commerce Business Daily. This will be a fully competitive,

two-phase acquisition for replacement of the existing SEC EDGAR contract.

The requirements consist of two elements in phase 1. The first element of

phase 1 is a conceptual plan to modernize and privatize the EDGAR system.

The second is the capability to operate and maintain the governmentfurnished equipment and software of the existing system, and to provide

those portions of the existing system which will not be transferred by the

government at the conclusion of the current contract, e.g., the Dissemination

subsystem, a full text document storage and retrieval capability, and a means

for notifying filers of filing success or failure. Offerors must include both

elements in their proposals in order to be considered for award. All offerors

determined to be within the competitive range upon completion of phase 1

will be included in phase 2. The SEC in phase 2 will require those offerors

in the competitive range to bid a detailed modernization and privatization

plan. Competitive range offerors must have offered both a comprehensive

128
modernization and privatization conceptual plan and have demonstrated

within their proposals their capability to implement and transition to a new

system while maintaining the current system during transition. The Request

for Proposals was issued on October 30, 1996.

Continued emphasis was placed on the agency's strategic automation

initiative. For example, the office:

developed new desktop querying systems to support reporting on the

agency's enforcement actions and to provide powerful tools to analyze

certain market data,

developed replacements and/or enhancements for aging mainframe

software applications, and

upgraded the SEC's personnel and payroll systems to enhance

administrative functions.

The agency's website provided basic access to the EDGAR database of

electronic filings on a 24-hour delayed basis, and served as a forum for

litigation releases, news digests, press releases, Commission rulemaking

activities, and a wide range of other information of interest to the investing

public. During the first full year of operation the system was heavily

accessed, serving over 44,453,180 files and 1,768,567,980,000 bytes of

data. This amounts to 75,450,000 pages of text. Average daily connections

exceeded 267,000 and daily data volume downloaded averaged over

10,500,000 bytes. The SEC's website address is http://www.sec.gov.

129

•

•

•
Substantial resources also were directed toward critical new initiatives,

including the Year 2000 and the Data Center Consolidation (Office of

Management and Budget (OMB) Bulletin 96-02) directives.

Year 2000 Initiative. The Year 2000 initiative will ensure that all SEC

databases, applications, systems and user interfaces that are dependent

upon dates will be checked to ensure that the advent of the century

mark, the year 2000, does not adversely affect the SEC. To achieve

this, the information technology staff began inventorying all systems

(applications and databases) to certify that the change in the century

date will be accommodated.

Data Center Consolidation. During the year, OMB issued a directive

mandating that all agencies with data centers below a certain minimum

level of processing power consolidate their data centers. As a result,

the information technology staff initiated a complete analysis/inventory

of data, applications, hardware, and software.

Administrative and Personnel Management

The Office of Administrative and Personnel Management provided a wide

range of personnel and office support functions. For example, the office:

modified the agency's policies on alternate work schedules and

flexiplace to better assist employees in balancing work and family

demands while still meeting agency mission needs;

initiated a project to "reinvent" the Personnel Operating Policies and

Procedures Manual to better meet customer needs, demonstrate support

for the agency's plain English initiative, and comply with NPR

streamlining initiatives;

continued streamlining and automating internal processes by

implementing a second phase of the automated Personnel Resource

System;

130

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•

•

•

•
continued to participate actively in a consortium of federal agencies in

sponsoring Phase Two of the in-depth study by the National Academy

of Public Administration of innovative human resources practices and

implementing change;

participated in job fairs, on-campus recruitment interviews at law

schools, and used various hiring programs and authorities available to

increase diversity in the agency (a total of 24.3 percent of new hires

were minorities during 1996, including 22.6 percent of new attorneys

and law clerks, 4.3 percent of new accountants, and 34.0 percent of

new securities compliance examiners);

successfully passed the Office of Personnel Management's (OPM)

review and recertification of the delegated examining authority so that

it now handles hiring for the full range of competitive service positions

without OPM involvement; and

coordinated training programs for 1,647 employees, who attended

5,408 varied training events.

The administrative and personnel management staff also acquired

additional space in the Operations Center in Alexandria, Virginia to

accommodate SEC employees being relocated from offices in the Judiciary

Plaza building in connection with the building renovation. Continued

security enhancements for headquarters and field offices were completed,

such as the relocation and expansion of the Judiciary Plaza Visitor's Center

and the establishment of a new Central Monitoring Station for a

comprehensive security camera system.

Finally, a new three-phase program was developed to provide litigation

copying support for the agency's Division of Enforcement. During 1996,

the first two phases were implemented and work on phase three was

initiated.

131

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•

•
Public Reference

The SEC maintains public reference rooms in its Washington, D.C., New

York, and Chicago offices. Modifications were made to the headquarters

public reference room to better utilize the space. During the year, 36,682

visitors used the Commission's public reference rooms. At these facilities,

the public can examine and review Commission rules, orders, studies,

reports, and speeches made by SEC officials. A total of 815,655 microfiche

records were added to the existing collections of information made available

to the public.

132
Endnotes

ISEC v. Robert L. Citron, Litigation Release No. 14792 (Jan. 24, 1996),

61 SEC Docket 574.

2In the Matter of County of Orange, Release No. 34-36760 (Jan. 24,

1996), 61 SEC Docket 574.

3Report of Investigation in the Matter of County of Orange, California,

Release No. 34-36761 (Jan. 24, 1996), 61 SEC Docket 487.

4In the Matter of Maricopa County, Release No. 34-37748 (Sept. 30,

1996), 62 SEC Docket 2797.

5In the Matter of Peacock, Hislop, Staley & Given, Inc., Release No.

34-37777 (Oct. 2, 1996), 62 SEC Docket 2830.

6In the Matter of First Fidelity Securities Group, Release No. 34-36694

(Jan. 9, 1996), 61 SEC Docket 68.

7In the Matter of FAIC Securities, Inc., Release No. 34-36937 (Mar. 7,

1996), 61 SEC Docket 1256.

SIn the Matter of Lazard Freres & Co. [LC, Release No. 34-36419 (Oct.

26, 1995), 60 SEC Docket 1698.

9SEC v. Octagon Technology Group, Inc., Litigation Release No. 14942

(June 11, 1996), 62 SEC Docket 377.

!OSEC v. Scott A. Frye, Litigation Release No. 14702 (Oct. 30, 1995),

60 SEC Docket 1882.

USEC v. Donald B. Spencer, Litigation Release No. 14856 (Mar. 29,

1996), 61 SEC Docket 1960.

12SEC v. Wye Resources, Litigation Release No. 15073 (Sept. 26, 1996),

62 SEC Docket 2762.

133
I3SEC v. Comparator Systems Corporation, Litigation Release No. 14927

(May 31, 1996), 62 SEC Docket 236.

14Inthe Matter of Eli Buchalter, CPA, Release No. 34-37702 (Sept. 19,

1996), 62 SEC Docket 2495.

15SEC v. The Bennett Funding Group, Inc., Litigation Release No. 14991

(Apr. 15, 1996), 62 SEC Docket 1291.

16SEC v. Douglas Frankel, Litigation Release No. 14820 (Feb. 22,

1996), 61 SEC Docket 1043.

17SEC v. Axiom Security Solutions, Inc., Litigation Release No. 15096

(Sept. 30, 1996), 62 SEC Docket 2969.

18Inthe Matter of Republic International Corporation, Release No. 34-

37741 (Sept. 27, 1996), 62 SEC Docket 2846.

19Inthe Matter of Norman L. Sirak, Release No. 34-37740 (Sept. 27,

1996), 62 SEC Docket 2776.

WIn the Matter of Candie's, Inc., Release No. 34-36865 (Feb. 21, 1996),

61 SEC Docket 966.

21SEC v. Giancarlo Parretti, Litigation Release No. 14770, (Jan. 3,

1996), 60 SEC Docket 3336.

22In the Matter of Florio Fiorini, Release No. 34-36669, (Jan. 3, 1996),

60 SEC Docket 3240.

13In the Matter of Fernando Cappuccio, Release No. 34-36670 (Jan. 3,

1996), 60 SEC Docket 3246.

24In the Matter of Cypress Bioscience, Inc., Release No. 34-37701 (Sept.

19, 1996), 62 SEC Docket 2495.

25In the Matter of Bank of Boston Corp., Initial Decision No. 81 (Dec.

22, 1995), 62 SEC Docket 2495.

134
26SEC v. Christopher Kent Bagdasarian, Litigation Release No. 15075

(Sept. 26, 1996), 62 SEC Docket 2765.

27Inthe Matter of Platinum Software Corporation, Release No. 34-37185

(May 9, 1996), 61 SEC Docket 2615.

USEC v. Gerald R. Blackie, Litigation Release No. 14905 (May 9,

1996), 61 SEC Docket 2680.

29Inthe Matter of Jon R. Erickson, CPA, Release No. 34-37269 (June 3,

1996), 62 SEC Docket 159.

30Inthe Matter of Mark S. Tague, CPA, Release No. 34-37270 (June 3,

1996), 62 SEC Docket 162.

31SEC v. McDonnell Douglas Corporation, Litigation Release No. 14958

(June 24, 1996), 62 SEC Docket 676.

32SEC v. Kendall Square Research Corporation, Litigation Release No.

14895 (Apr. 29, 1996), 61 SEC Docket 2517.

33Inthe Matter of Thomas J. MacCormack, Release No. 34-37147 (Apr.

29, 1996), 61 SEC Docket 2427.

34SEC v. Automated Telephone Management Systems, Inc., Litigation

Release No. 14710 (Nov. 2, 1995), 60 SEC Docket 1893.

3SSEC v. Earl V. Young, Litigation Release No. 14981 (July 16, 1996),

62 SEC Docket 1043.

36SEC v. Certain Purchasers of the Common Stock of CBI Industries,

Inc., Litigation Release No. 14721 (Nov. 16, 1995), 60 SEC Docket 2124.

37SEC v. Certain Purchasers of Call Options of Duracell International,

Inc., Litigation Release No. 15045 (Sept. 16, 1996), 62 SEC Docket 2581.

38SEC v. Kathleen Lane, Litigation Release No. 14906 (May 9, 1996),

61 SEC Docket 2682.

135
39SEC v. Mervyn Cooper, Litigation Release No. 14878 (Apr. 16, 1996),

61 SEC Docket 2298.

40SEC v. Donald John Tyson, Litigation Release No. 15062 (Sept. 23,

1996), 62 SEC Docket 2747.

41SEC v. Hugo Aldo Sallustro, Litigation Release No. 14982 (July 18,

1996), 62 SEC Docket 1045.

42In the Matter of National Association of Securities Dealers, Inc.,

Release No. 34-37538 (Aug. 8, 1996), 62 SEC Docket 1363.

43Report Pursuant to Section 21(a) of the Securities Exchange Act of

1934 Regarding the NASD and the Nasdaq Market, Release No. 34-37542

(Aug. 8, 1996), 62 SEC Docket 1375.

44In the Matter of PaineWebber Incorporated, Release No. 34-36724

(Jan. 17, 1996), 61 SEC Docket 248.

4SSEC v. PaineWebber Incorporated, Litigation Release No. 14787 (Jan.

18, 1996), 61 SEC Docket 338.

%In the Matter of Gruntal & Co., Incorporated, Release No. 34-37085

(Apr. 9, 1996), 61 SEC Docket 2110.

47SEC v. Gruntal & Co., Incorporated, Litigation Release No. 14865

(Apr. 9, 1996), 61 SEC Docket 2171.

48In the Matter of A.R. Baron & Co., Inc., Release No. 34-37240 (May

23, 1996), 61 SEC Docket 2869.

49In the Matter of A.R. Baron & Co., Inc., Release No. 34-37831 (Oct.

17, 1996), 63 SEC Docket 57.

SOInthe Matter of Jeffrey Weissman, Release No. 34-37661 (Sept. 9,

1996), 62 SEC Docket 2272.

SIIn the Matter of Fahnestock and Co., Inc., Release No. 34-37754

. , (Sept. 30, 1996), 62 SEC Docket 2859.

-.'

136
52In the Matter of Wendell Jeffrey Lee, Release No. 34-37247 (May 28,

1996), 62 SEC Docket 10.

53In the Matter of Kimberly D. Goodman, Release No. 34-37710 (Sept.

23, 1996), 62 SEC Docket 2638.

54In the Matter of Gruntal & Co., Incorporated, Release No. 34-37084

(Apr. 9, 1996), 61 SEC Docket 2110.

55In the Matter of S Squared Technology Corporation, Release No. IA1575 (Aug. 7, 1996), 62 SEC Docket 1560.

56In the Matter of Portfolio Management Consultants, Release No. 34-

37376 (June 27, 1996), 62 SEC Docket 511.

57In the Matter of Marc N. Geman, Release No. 34-37375 (June 27,

1996), 62 SEC Docket 510.

58In the Matter of McKenzie Walker Investment Management, Release

No. IA-1571 (July 16, 1996), 62 SEC Docket 1016.

59In the Matter of Leeb Investment Advisors, Release No. 34-21671 (Jan.

16, 1996),61 SEC Docket 311.

fiJSEC v. Seaboard Investment Advisers, Inc., Litigation Release No.

15092 (Sept. 30, 1996), 62 SEC Docket 2965.

61In the Matter of Michael C. Robertson, Release No. 34-37729 (Sept.

26, 1996), 62 SEC Docket 2670.

62SEC v. Wye Resources, Inc. and Rehan Malik, Civil Act. No. 96-2223

(D.D.C. Sept. 26, 1996).

63SEC v. Scorpion Technologies, Inc., Civil Act. No. 95-1005 (LMM)

(S.D.N.Y. Feb. 9, 1996).

64In the Matter of A.R. Baron & Co. Inc., Andrew Bressman, and Roman

Okin, Administrative Proceedings File No. 3-9010.

137
65Release Nos. 34-36371 (Oct. 13, 1995), 60 FR 54269 (Oct. 20, 1995);

34-36409 (Oct. 23, 1995), 60 FR 55399 (Oct. 31, 1995); and 34-36757

(Jan. 22, 1996), 61 FR 2854 (Jan. 29, 1996). Release Nos. 34-36858 and

34-37196 (Feb. 16, 1996 and May 10, 1996), 61 FR 7295 (Feb. 27, 1996)

and 61 FR 24979 (May 17, 1996). Release No. 34-37676 (Sept. 13, 1996),

61 FR 49508 (Sept. 10, 1996).

66Release No. 34-37011 (Mar. 22, 1996),61 FR 14177 (Mar. 29, 1996).

67Release No. 34-37441 (July 15, 1996), 61 FR 38234 (July 23, 1996).

68Release Nos. 34-37007 and 34-37445 (Mar. 21, 1996 and July 16,

1996), 61 FR 14165 (Mar. 29, 1996) and 61 FR 38494 (July 24, 1996).

69Release No. 34-37189 (May 9, 1996), 61 FR 24982 (May 17, 1996).

Release Nos. 34-37693 and 34-37696 (Sept. 17, 1996), 61 FR 50358 and

50362 (Sept. 25, 1996). Release No. 34-36848 (Feb. 14, 1996), 61 FR 6872

(Feb. 22, 1996). Release No. 34-37195 (May 10, 1996), 61 FR 24976

(May 17, 1996). Release No. 34-37312 (June 14, 1996),61 FR 31573

(June 20, 1996). Release No. 34-36369 (Oct. 13, 1995), 60 FR 54274 (Oct.

20, 1995). Release No. 34-36935 (Mar. 6, 1996),61 FR 10417 (Mar. 13,

1996).

7°Release No. 34-36710 (Jan. 11, 1996),61 FR 1791 (Jan. 18, 1996).

"Release Nos. 34-36841 and 34-37336 (Feb. 14, 1996 and June 19,

1996), 61 FR 6666 (Feb. 21, 1996) and 61 FR 33558 (June 27, 1996).

72Release No. 34-36923 (Mar. 5, 1996), 61 FR 10410 (Mar. 13, 1996).

73Release No. 34-36947 (Mar. 8, 1996), 61 FR 10606 (Mar. 14, 1996).

74Release No. 34-36530 (Nov. 30, 1996), 60 FR 62323 (Dec. 6, 1995).

"Release No. 34-36940 (Mar. 7, 1996), 61 FR 10271 (Mar. 13, 1996).

76Letter from Brandon Becker, Director, Division of Market Regulation,

SEC, to Blake Imel, Deputy Director, Division of Economic Analysis,

. ; CFTC (Oct. 3, 1995).

.,

;,

138
77Letter from Brandon Becker, Director, Division of Market Regulation,

SEC, to Elisse Walter, General Counsel, CFTC (Nov. 7, 1995).

78Letter from Robert L.D. Colby, Deputy Director, Division of Market

Regulation, SEC, to Blake Imel, Deputy Director, Division of Economic

Analysis, CFTC (Mar. 20, 1996).

"Letter from Richard R. Lindsey, Director, Division of Market

Regulation, SEC, to Stephen A. Sherrod, Chief, Financial Instruments Unit,

CFTC (May 7, 1996).

80Letter from Robert L.D. Colby, Deputy Director, Division of Market

Regulation, SEC, to Blake Imel, Deputy Director, Division of Economic

Analysis, CFTC (Feb. 1, 1996).

81Letter from Jonathan G. Katz, Secretary, SEC, to Elisse Walter,

General Counsel, CFTC (Oct. 10, 1995).

82Release No. 34-37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12,

1996).

83Letter regarding Real Goods Trading Corporation (June 24,1996). The

staff subsequently issued a second letter, substantially similar to Real Goods

Trading Corporation, letter regarding PerfectData Corp. (Aug. 5, 1996).

84Release No. 34-35124 (Dec. 20, 1994), 59 FR 66702 (Dec. 28, 1994).

8SRelease Nos. 34-27445 and 34-29185 (Nov. 16, 1989 and May 9, 1991),

54 FR 48703 (Nov. 24, 1989) and 56 FR 22490 (May 15, 1991).

86Letter regarding Chicago Board Brokerage, Inc. (Dec. 12, 1995) and

letter regarding Institutional Real Estate Clearinghouse (May 28, 1996).

87Release No. 34-37271 (June 3, 1996), 61 FR 29145 (June 7, 1996).

88Letter regarding Merrill Lynch, Pierce, Fenner and Smith (Nov. 20,

1995).

89Release No. 34-37094 (Apri111,1996), 61 FR 17108 (Apr. 18, 1996).

139
.;

90ReleaseNo. 34-37132 (Apr. 19, 1996) 61 FR 18306 (Apr. 25, 1996).

"Lerters regarding North Carolina Power Agency Number 1 (Oct. 23,

1995); Wisconsin Public Power Incorporated System (Apr. 17, 1996).

92Letterregarding The Bond Guarantee Program of the Texas Permanent

School Fund (Feb. 9, 1996).

93Letterregarding Rule 15c2-12 (Mar. 15, 1996).

94ReleaseNo. 34-37431 (July 12, 1996),61 FR 37357 (July 18, 1996). See

also Release No. 34-37632 (Sept. 4, 1996), 61 FR 47412 (Sept. 9, 1996)

(suspending the compliance date for the amendments to Form BD pending the

implementation of the redesigned CRD system).

95ReleaseNo. 34-37432 (July 12, 1996), 61 FR 37701 (July 19, 1996).

96Letterregarding Transactions in Foreign Securities by Foreign Brokers

or Dealers with Accounts of Certain Foreign Persons Managed or Advised by

U.S. Resident Fiduciaries (Jan. 30, 1996).

9715 U.S.C. 6101-08 (1996).

98Letter from Michael A. Macchiaroli, Associate Director, SEC, to

Rochelle Pullman, Chairman, SIA, (March 15, 1996).

99ReleaseNo. 34-37772 (Oct. 1, 1996), 61 FR 52980 (Oct. 9, 1996).

looReleaseNo. 34-37595 (Aug. 22, 1996), 61 FR 44249 (Aug. 28, 1996).

IOIReleaseNo. 34-35038 (Dec. 1, 1994), 59 FR 63652 (Dec. 8, 1994).

102ReleaseNos. 34-37457 (July 19, 1996), 61 FR 39176 (July 26, 1996)

(NYSE); 34-37458 (July 19, 1996), 61 FR 39167 (July 26, 1996) (AMEX);

and 34-37459 (July 19, 1996), 61 FR 39172 (July 26, 1996) (BSE, CBOE,

CHX, and Phlx).

103ReleaseNo. 34-37046 (Mar. 29, 1996), 61 FR 15322 (Apr. 5, 1996).

I04ReleaseNo. 34-37045 (Mar. 29, 1996), 61 FR 15318 (Apr. 5, 1996).

140

~~
105ReleaseNo. 34-37425 (July 11, 1996), 61 FR 37518 (July 18, 1996).

I06Release No. 34-36303 (Sept. 29, 1995), 60 FR 52232 (Oct. 5, 1995).

107ReleaseNo. 34-36612 (Dec. 20, 1995), 61 FR 204 (Jan. 3, 1996).

108Release Nos. 34-36857 (Feb. 16, 1996), 61 FR 7034 (Feb. 23, 1996);

34-37675 (Sept. 12, 1996),61 FR 49368 (Sept. 19, 1996); and 34-37591 (Aug.

21, 1996), 61 FR 44098 (Aug. 27, 1996).

I09Release No. 34-37024 (Mar. 26, 1996), 61 FR 14357 (Apr. 1, 1996).

1lOReleaseNo. 34-37372 (Mar. 26, 1996), 61 FR 35281 (July 5, 1996).

lllRelease No. 34-36508 (Nov. 27, 1995), 60 FR 61719 (Dec. 1, 1995).

l12Release No. 34-36573 (Dec. 12, 1995), 60 FR 65076 (Dec. 18, 1995).

113ReleaseNo. 34-37309 (June 12, 1996), 61 FR 31201 (June 19, 1996)

114ReleaseNo. 34-37731 (Sept. 26, 1996),61 FR 51731 (Oct. 3, 1996).

115ReleaseNo. 34-36788 (Jan. 30, 1996), 61 FR 4500 (Feb. 6, 1996).

116ReleaseNo. 34-37208 (May 13, 1996), 61 FR 25253 (May 20, 1996).

l17Inthe Matter of Dennis T. Palmeri, Sr., Release No. 34-36487 (Nov. 16,

1995), 60 SEC Docket 2098; this filing was made by the CHX in 1995.

118JoOOHancock Funds, Inc. (pub. avail. June 28, 1996).

119ReleaseNo. IC-21538 (Nov. 22, 1995), 60 SEC Docket 2142.

120Release No. IC-21837 (Mar. 21, 1996), 61 SEC Docket 1494. The

Commission later suspended the compliance date for these amendments pending

the adoption of certain technical changes. Release No. IC-22135 (Aug. 13,

1996), 62 SEC Docket 1632.

121ReleaseNo. IC-22202 (Sept. 9, 1996), 62 SEC Docket 2199.

122ReleaseNo. IC-22201 (Sept. 9, 1996), 62 SEC Docket 2365.

141
123ReleaseNo. IC-22203 (Sept. 9, 1996), 62 SEC Docket 2367.

125ReleaseNo. IC-21838 (Mar. 21, 1996), 61 SEC Docket 1710.

l26'fheCountryBasket Index Fund, Inc., Release Nos. IC-21736 (Feb. 6,

1996), 61 SEC Docket 824 (Notice), and IC-21802 (Mar. 5, 1996), 61 SEC

Docket 1306 (Order); The Foreign Fund, Inc., Release Nos. IC-21737 (Feb.

6, 1996), 61 SEC Docket 828 (Notice), and IC-21803 (Mar. 5, 1996), 61 SEC

Docket 1307 (Order).

127InvestmentCompany Institute (pub. avail. Feb. 15, 1996).

128InvestmentFunds Institute of Canada (pub. avail. Mar. 4, 1996).

129Nicholas-ApplegateMutual Funds (pub. avail. Aug. 6, 1996); Bramwell

Growth Fund (pub. avail. Aug. 7, 1996).

13oporticoFunds, Inc. (pub. avail. Apr. 11, 1996).

131MerrillLynch Asset Management, L.P. (pub. avail. July 2, 1996).

132UnitedExport-Import Bank of Russia (pub. avail. May 13, 1996).

133ManagedFutures Association (pub. avail. July 15, 1996).

134J.p.Morgan Investment Management Inc. (pub. avail. May 7, 1996).

13SMunderCapital Management (pub. avail. May 17, 1996).

136UnitedStates Department of Labor (pub. avail. Feb. 22, 1996 and Dec.

5, 1995).

137Letterfrom Heidi Starn, Associate Director, SEC, to Mark J. Mackey,

President & Chief Executive Officer, National Association for Variable

Annuities (June 4, 1996).

138CovaFinancial Services Life Insurance Company, et al. (pub. avail. Apr.

15, 1996).

142
I39'fIAA Real Estate Account (pub. avail. May 1, 1996).

14OJ'heEquitable Life Assurance Society of the United States (pub. avail.

Dec. 22, 1995).

141General Public Utilities Corporation, Release No. 35-26463 (Jan. 26,

1996), 61 SEC Docket 661.

142FidelityManagement & Research Company, Release No. 35-26448 (Jan.

5, 1996), 61 SEC Docket 115.

143Southem Company, Release No. 35-26501 (Apr. 1, 1996), 61 SEC

Docket 1909.

144SEIHoldings, Inc., Release No. 35-026581 (Sept. 26, 1996).

145Consolidated Natural Gas Company, Release No. 35-26512 (Apr. 30,

1996), 61 SEC Docket 2473.

146MCN Corporation, Release No. 35-26576 (Sept. 17, 1996), 62 SEC

Docket 2530.

147Report of the Task Force on Disclosure Simplification (Mar. 1996).

148Report of the Advisory Committee on the Capital Formation and

Regulatory Processes (July 24, 1996).

149ReleaseNo. 33-7314 (July 25, 1996), 62 SEC Docket 9.

15~elease No. 34-37403 (July 3, 1996), 62 SEC Docket 6.

151ReleaseNo. 33-7301 (May 31, 1996), 62 SEC Docket 2.

152ReleaseNo. 33-7301 (May 31, 1996), 62 SEC Docket 2.

153ReleaseNo. 33-7288 (May 9, 1996), 61 SEC Docket 18, and the first

interpretive release, Release No. 33-7233, (Oct. 6, 1995), 60 SEC Docket 8.

154ReleaseNo. 33-7289 (May 9, 1996),61 SEC Docket 18.

155ReleaseNo. 33-7285 (May 9, 1996), 61 SEC Docket 17.

143
..,

156ReleaseNo. 34-37157 (May 9, 1996), 61 SEC Docket 17.

157ReleaseNo. 34-37260 (May 31, 1996), 62 SEC Docket 2.

158ReleaseNo. 33-7326 (Aug. 30, 1996), 62 SEC Docket 15.

159ReleaseNo. 33-7250 (Dec. 28, 1995), 60 SEC Docket 19.

160ReleaseNo. 33-7280 (Apr. 9, 1996), 61 SEC Docket 14.

161ReleaseNo. 34-37801 (Oct. 10, 1996), 62 SEC Docket 20.

162ReleaseNo. 33-7355 (Oct. 8, 1996), 62 SEC Docket 20.

163Release No. 33-7356 (Oct. 10, 1996), 62 SEC Docket 20.

164ReleaseNo. 33-7300 (May 31, 1996), 62 SEC Docket 0096.

165ReleaseNo. 33-7250 (Dec. 28, 1995),60 SEC Docket 3011.

I66StaffAccounting Bulletin No. 96 (Mar. 19, 1996),61 SEC Docket 1731.

167StaffAccounting Bulletin No. 97 (July 31, 1996),62 SEC Docket 1299.

168Proposed Statement of Financial Accounting Standards. "Reporting

Disaggregated Information About a Business Enterprise" (Jan. 19, 1996).

169Proposed Statement of Financial Accounting Standards, "Earnings Per

Share and Disclosure of Information About Capital Structure" (Jan. 19,

1996).

170Proposed Statement of Financial Accounting Standards, "Accounting

for Derivative and Similar Financial Instruments and for Hedging Activities"

(June 20, 1996).

17IProposed Statement of Financial Accounting Standards, "Reporting

Comprehensive Income" (June 20, 1996).

172Statement of Financial Accounting Standards No. 125, "Accounting

for Transfers and Servicing of Financial Assets and Extinguishments of

Liabilities" (June 1996).

144
173Proposed Statement of Financial Accounting Standards, "Accounting

for Certain Liabilities Relating to Closure or Removal of Long-lived Assets"

(Feb. 1996).

174Proposed Statement on Auditing Standards, "Consideration of Fraud in

a Financial Statement of Audit" (May 1, 1996).

175Statement of Position 96-1, "Environmental Remediation Liabilities"

(Oct. 10, 1996).

176IAS12 (revised 1996), Income Taxes (Oct. 1996).

177International Accounting Standards Committee, Exposure Draft E51,

Reporting Financial Information by Segment (Dec. 1995).

178International Accounting Standards Committee, Exposure Draft E52,

Earnings Per Share (Jan. 1996)

179International Accounting Standards Committee, Exposure Draft E53,

Presentation of Financial Statements (July 1996).

180International Accounting Standards Committee, Exposure Draft E54,

Employee Benefits (Oct. 1996).

181No.94-16136 (9th Cir. 1996).

18258 F.3d 933 (4th Cir. 1995).

18392F.3d 612 (8th Cir. 1996).

18487F.3d 536 (D.C. Cir. 1996).

185Nos. 95-6192 and 95-6194 (2d Cir.).

186Nos. 94-1844 and 94-1845 (3d Cir.).

187No.94-16136 (9th Cir. 1996).

18895F.3d 821 (9th Cir. 1996).

18958F.3d 484 (D.C. Cir. 1996).

145
19092F.3d 612 (8th Cir. 1996).

19187F.3d 536 (D.C. Cir. 1996).

19287F.3d 484 (D.C. Cir. 1996).

19383F.3d 132 (6th Cir. 1996).

19475F.3d 92 (2d Cir. 1996).

195116S. Ct. 1351 (1996).

196No.96-1052 (D.C. Cir.).

197Nos.95-55747 and 95-56467 (9th Cir.).

198BerlinerZisser Walter & Gallegos v. SEC, No. 95-D-94 (D. Colo.).

199Parsonsv. SEC, No. C-2-96-0001, Slip Op. (S.D. Ohio Sept. 6,

1996).

2°OSECv. Worthen, 1996 WL 593538 (9th Cir. Oct. 17, 1996).

201Coiello and Romano v. SEC, 908 F. Supp. 738 (C.D. Cal. 1995).

202Colello and Romano v. SEC, No. 94-6022, Slip Op. (C.D. Cal. Oct.

24, 1996).

203Hunter v. SEC, No. 94-5340, Slip Op. (E.D. Pa. Sept. 26, 1996).

204SECv. Krause, No. 96-15810 (9th Cir. May 20, 1996); SEC v. RNR

Enterprises, Inc., No. 96-6237 (2d Cir. Sept. 23, 1996); SEC v. B.M. C.

Enterprises, Inc., No. 96-55464 (9th Cir. Apr. 12, 1996).

205Law Practice of J.B. Grossman, P.A. v. SEC, 117 S. Ct. 53 (1996).

206Consolidated Investment Services, Inc., Release No. 34-36687 (Jan. 5,

1996), 61 SEC Docket 20.

.' 207Pranklin N. Wolf, James H. Petrantis, and Richard T. Sullivan,

Release No. 34-36523 (Nov. 29, 1995),60 SEC Docket 2417.

146
2JJ8IvanD. Jones, Jr., Release No. 34-36355 (Oct. 10, 1995), 60 SEC

Docket 1377, appealjiled, No. 95-3119 (4th Cir.).

209Thomas C. Kocherhans, Release No. 34-36556 (Dec. 6, 1995), 60

SEC Docket 2589.

210Raiph Joseph Presutti, Release No. 34-37351 (June 24, 1996), 62 SEC

Docket 527.

211Strategic Resource Management, Inc., Release No. 34-36618 (Dec.

21, 1995). 60 SEC Docket 2902.

212KevinB. Waide, 50 S.E.C. 932 (1992).

213FrankL. Palumbo, Salvatore A. Venezia and Sandra Solomon

Venezia, Release No. 34-36427 (Oct. 26, 1995), 60 SEC Docket 1736.

214InCounty of Orange, No. 94-22272-JR (Bankr. C.D. CA).

215Inre Hamburger Hamlet Restaurants, Inc., Case No. SV 95-19654-

GM (Bankr. C.D. CA).

216Inre Edison Brothers Stores, Inc., No. 96-177 (SLR) (D DE).

2I7In re Sizzler Restaurants International, Inc., Case No. SV 96-16076-

AG (Bankr. C.D. CA); In re Neostar Retail Group, Inc., Case No. 396-

36648-SAF-11 (Bankr. N.D. TX); In re Brendle's Inc., Case No. 96-50495-

C-11W (Bankr. M.D. N.C.).

218Inre "WRTEnergy Corp., Case No. 96BK-50212 (Bankr. W.D. LA).

219Inre Baldwin Builders, Nos. ND 95-13057 RR and ND 95-13058 RR

(Bankr. C.D. CA).

22JJInre NVF Company, Case No. 93-1020 (Bankr. D. DE).

221Inre Automotive Credit Finance, Inc., Case No. 395-34981 RCM-11

(Bankr. N.D. TX); In re North Atlantic Technologies, Inc., Case No. 96-

30526 (Bankr. D. MN); In re St. Louis Leasing Corp. No. 96-40001-293

(Bankr. E.D. MO); In re Sybaris Clubs Int'l, Inc., Case No. 94-B-16498

147
(Bankr. N.D. IL); In re Rexon, Inc., Case No. 95-19439 CEM (Bankr. D.

CO).

222Inre Americare International, Inc., Case No. 95-00787-881 (Bankr.

M.D. FL)

WIn re Micro Security Systems, Inc., Case No. 94B-23643 (Bankr. D.

Utah).

224Inre Bilzerian, No. 96-513-CIV-T-23B (M.D. FL).

225Inre ACI-HDT Supply Company, Case No. 95-08253-A11 (Bankr.

S.D. CA).

226Inre Tedlock Cattle Company, 552 F.2d 1351 (9th Cir. 1977).

227Inre Hibbard Brown & Co., Inc., Case No. 94 B 44809 (CB) (Bankr.

S.D. N.Y.).

148
I

149
............ --- -- ~

Table 1

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1996 IN VARIOUS PROGRAM AREAS

(Each case initiated has been included in only one category listed below, even though

many cases involve multiple allegations and may fall under more than one category.

The number of defendants and respondents is noted parenthetically.)

Program Area In Which a % of

Civil Acuon or Adrnrustranve CIvil Admlnlstrabve Total

Proceeding Was Initiated Acnons 1/ Proceedings Total Cases

securmes Offenng Cases

(a) Non-regulated Entity 51 (201) 17 ( 26) 68 (227)

(b) Regulated Enbty 25 ( 87) 34 ( 55) 59 (142)

Total Secunbes Offenng Cases 76 (288) 51 ( 81) 127 (369) 28%

Broker-dealer Cases

(a) Fraud Against Customer 18 ( 60) 43 ( 60) 61 (120)

(b) Failure to Supervise a ( 0) 17 ( 22) 17 ( 22)

(c) Govemment secunnes 2 ( 2) 3 ( 4) 5 ( 6)

(d) Books & Records 2 ( 2) 8 ( 11) 10 ( 13)

(e) Other a ( 0) 7 ( 8) 7 ( 8)

Total Broker-dealer Cases 22 ( 64) 78 (105) 100 (169) 22%

Issuer Financial Statement

and Reporung Cases

(a) Issuer Financial

Disclosure 23 ( 76) 49 ( 71) 72 (147)

(b) Issuer Reporung Other 3 ( 4) 1 ( 1) 4 ( 5)

Total Issuer Financial Statement

and Reporung Cases 26 ( 80) 50 ( 72) 76 (152) 17%

Other Regulated Enbty Cases

(a) Investment Advisers 8 ( 21) 34 ( 47) 42 ( 68)

(b) Investment Compames 2 ( 4) 4 ( 5) 6 ( 9)

(c) Transfer Agent a ( 0) 1 ( 1) 1 ( 1)

(d) SROs o ( 0) 2 ( 2) 2 ( 2)

Total Other RegUlated Entrty Cases 10 ( 25) 41 ( 55) 51 ( 80) 11%

Contempt Proceedings 32 ( 47) o ( 0) 32 ( 47) 7%

lnsider Trading Cases 29 ( 92) a ( 0) 29 ( 92) 6%

Delinquent FIlings

(a) Issuer Reporung 5 ( 4) 1 ( 1) 6 ( 5)

(b) Forms 3/4/5 2 ( 5) 7 ( 11) 9 ( 16)

Total Delinquent Filings Cases 7 ( 9) 8 ( 12) 15 ( 21) 3%

Market Mampulalion Cases 4 ( 13) 7 ( 15) 11 ( 28) 2%

Fraud Against Regulated Enbbes 3 ( 10) 1 ( 1) 4 ( 11) 1%

.. Corporate Control Cases a ( 0) 3 ( 3) 3 ( 3) 1%

. Miscellaneous Disclosure/

Reporung 3 ( 7) 2 ( 2) 5 ( 9) 1%

GRAND TOTAL 212 (635) 241 (346) 453 (981) 100%

11 Ilus category Includes ruuncnve actions and CIVil and cnrrmal contempt proceedings

- - -- - - -~ - --~---

'
Name of Case

Table 2

FISCAL 1996 ENFORCEMENT CASES

LISTED BY PROGRAM AREA

Release

Number Date Filed

Broker-Dealer: Books & Records

In the Matter of Orlando Joseph Jett

In the Matter of James S. Small

In the Matter of Robert J. Dantone

SEC v. Linda M. King

In the Matter of Moors & Cabot, Inc.

SEC v. James W. Adams

In the Matter of Robert O. Glau

In the Matter of Monte S. Colbert,

CPA

In the Matter of Philip Greifeld, CPA

In the Matter of Flagship Securities.,

Inc.

In the Matter of The O.N. Equities

Sales Co.

In the Matter of William V. Giordano

In the Matter of The Robinson-Humphrey

Co., Inc.

In the Matter of F. Otto Busot

In the Matter of Lehman Brothers Inc.

In the Matter of Edward A. Cerullo

In the Matter of Michael 'Zaccaro

In the Matter of Westcap Securities, L.P.

In the Matter of Dickinson & Co.

In the Matter of James Warren

In the Matter of Fahnestock & Co.,

Inc.

In the Matter of James Thornton

In the Matter of Howe Barnes

Investments Inc.

In the Matter of Patricia Ann Bellows

In the Matter of Philadelphia Inv. Ltd.

In the Matter of Sandra Logay

In the Matter of Quest Capital Strategies,

Inc.

34-36696 01109/96

34-36829 02/12/96

34-3753 08/06/96

LR-15054 09/09/96

34-37720 09/24/96

LR-15118 09/30/96

34-36438 10/31195

AAER 835 09/30/96

AAER 836 09/30/96

34-37065 04/04/96

34-37755 09/30/96

34-36742 01/19/96

34-36773 01125/96

34-37660 09/09/96

34-37673 09/12/96

34-36695 01109/96

34-36703 01111196

34-36845 02/14/96

34-36338 10/05/95

34-37715 09/24/96

34-37754 09/30/96

34-37477 07/25/96

34-37707 09/23/96

34-36854 02/16/96

34-37743 09/27/96

34-36929 03/06/96

34-36909 02/29/96

151
Release

Name of Case Number Date Filed

In the Matter of Stanley L. Swoyer 34-37709 09123/96

In the Matter of Richardt-Alyn & Co. 34-37727 09/26/96

SEC v. Atlantic Capital Corp. LR-15082 09127/96

SEC v. Robert C. Wilson LR-14761 12/20/95

In the Matter of James M. Hatfield 34-36502 11122/95

In the Matter of Stephen J. Kandel 34-37483 07/26/96

In the Matter of Frank Duca 34-37544 08/08/96

SEC v. Gruntal & Co., Inc. LR-14865 04/09/96

In the Matter of A.R. Baron & Co.,

Inc. 34-37240 OS/23/96

In the Matter of Al Rizek 34-37422 07/11196

SEC v. Kimberly D. Goodman LR-15005 08/06/96

In the Matter of Robert Gilbert 34-37662 09/09/96

In the Matter of Painewebber, Inc. 34-36724 01117/96

SEC v. Wayne T. Drinkwine LR-14781 01116/96

SEC v. James Zimmerman LR-15029 08128/96

In the Matter of David Arnold 34-36870 02/22/96

In the Matter of Frederick C. Gartz 34-37556 08/12/96

In the Matter of David G. Batu 34-37722 09125/96

In the Matter of Jeffrey L. Dunn 34-37723 09/25/96

SEC v. Peter Tosto 34-37734 09126/96

In the Matter of Seth R. Roberts 34-36978 03/15/96

In the Matter of Bernard Zelenka 34-37760 09/30/96

In the Matter of George R. Johnston 34-36614 12/20/95

In the Matter of John L. Fauls, III 34-36838 02/13/96

SEC v. Richard J. Line LR-14994 07/30/96

In the Matter of Kenneth J. Schulte 34-37494 07/30/96

In the Matter of Mitchell A. Vazquez AAER 766 02/29/96

SEC v. Peter M. Harrington LR-14812 02/02/96

In the Matter of Robert M. Simpson 34-36928 03/06/96

In the Matter of Gruntal & Co., Inc. AAER 771 04/09/96

SEC v. Michael Anthony Pierce LR-14855 03121196

In the Matter of Michael G. Cohen 34-37742 09/27/96

In the Matter of Monness, Crespi, Hardt

& Co., Inc. 34-37712 09/23/96

In the Matter of Alfred M. Bauer 34-37386 06/28/96

SEC v. Stanley J. Feminella LR-14786 01/18/96

152
Release

Name of Case Number Date Filed

In the Matter of Richard J. Line 34-37764 09/30/96

In the Matter of Craig I. Deitchman 34-37325 06/19/96

SEC v. Craig I. Deitchman LR-14879 04/16/96

SEC v. James Russell Cleveland LR-14919 05/22/96

In the Matter of Kimberly D. Goodman 34-37710 09123/96

SEC v. Joseph Brooks LR-14971 06127/96

In the Matter of Robert E. Lindley 34-36599 12/18/95

In the Matter of Valerie Jensen 34-36600 12/18/95

In the Matter of Gary S. Missner AAER 791 06/11196

In the Matter of P. Michael Goodman 34-37111 01118/96

In the Matter of John S. Griffin 34-36872 02/22/96

SEC v. Penn Capital Financial Services,

Inc. LR-14676 10/02/95

SEC v. Edward F. Bao LR-14865 04/09/96

In the Matter of Michael J. Randy 34-36735 01118/96

In the Matter of Linda J. Bustin 34-37129 04/19/96

In the Matter of Kevin Bartholomew 34-37153 04/30/96

In the Matter of George J. Conway 34-37063 01118/96

SEC v. Frank Duca LR-14709 11102/95

In the Matter of William F. Lincoln 34-37168 05106/96

In the Matter of Michael J. Eberle 34-37340 06120/96

In the Matter of Daniel L. Osborn 34-36642 12127/95

SEC v. Selheimer & Co. LR-15070 09/24/96

In the Matter of Wendell Jeffrey Lee 34-37247 05128/96

SEC v. Thomas J. Fox LR-15067 09/24/96

In the Matter of Benjamin Rex Moses 34-37286 06/07/96

In the Matter of Fu-sung Peter Wu 34-37300 06/11196

In the Matter of First Fidelity

Securities Group 34-36694 01109/96

SEC v. Richard T. Taylor LR-15077 09/26/96

SEC v. Fenchurch Capital

Management Corp. LR-14977 07/10/96

In the Matter of Lazard Freres & Co.,

UC 34-36419 10/26/95

153
Release

Name of Case Number Date Filed

In the Matter of FAIC Securities Inc. 34-36937 03/07/96

In the Matter of Bradford P. Gillingham 34-36679 01104/96

In the Matter of Greenway Capital

Corp. 34-37254 05/30/96

In the Matter of Jon Edelman 34-36847 02/14/96

In the Matter of Bankers Pension

Services Inc. 34-37567 08/14/96

In the Matter of Patrick J. Doherty 34-36839 02/13/96

In the Matter of Lewco Securities Corp. 34-36334 10/04/95

Contempt-Civil

In the Matter of Transcorp Pensions

Services Inc. 34-37278 06/04/96

SEC v. Pamela Woods NONE 08/19/96

SEC v. Philip Snyder NONE 08/19/96

SEC v. Oscar Olson NONE 05/08/96

SEC v. Gene Block NONE 10/23/95

SEC v. Jerry J. Fraschilla NONE 10/18/95

SEC v. Yaska Ginsberg NONE 04/24/96

SEC v. Vision Communications, Inc. NONE 06/07/96

SEC v. Sarah Delaney NONE 01108/96

SEC v. Eugene Konev 34-37137 03/25/96

SEC v. Geoffrey Paul Adams NONE 04/29/96

SEC v. Michael J. Randy LR-15050 08/29/96

SEC v. Alexander C. Fuentes NONE OS/20/96

SEC v. Michael Schouman NONE 10/02/95

SEC v. Sarah Delaney LR-14871 04/05/96

SEC v. Carroll E. Siemens LR-14824 02/16/96

SEC v. Michael J. Colello LR-14728 11/20/95

SEC v. Michael J. Colello LR-14887 04/12/96

SEC v. Renate Haag LR-14828 12/11/95

SEC v. 0 'Neill, Lysaght & Sun LR-14763 12/13/95

; SEC v. Jeffrey L. Casperson NONE 01/12/96 -' SEC v. Raymond C. Gross LR-14968 06/28/96

.'

154

-

d
Release

Name of Case Number Date Filed

SEC v. Gateways to Space, Inc. NONE 08/16/96

SEC v. Gerard A. Spataro LR-15086 08/16/96

SEC v. Kupchinsky NONE 12/01/96

SEC v. Harvey P. Tabb LR-14974 06/28/96

SEC v. Owen R. Fox LR-14715 11/08/95

SEC v. Henry Don Jeffries NONE 09/19/96

SEC v. Melvin H. Cox NONE 08/13/96

SEC v. Hochman NONE 12/01/96

SEC v. Vista Communications Inc. NONE 06107/96

SEC v. Danny Sterk LR-15089 08106/96

SEC v. H. Ralph Sylvester LR-15050 08/29/96

Corporate Control

In the Matter of Michael N. Karp,

Esquire 34-36664 12/29/95

In the Matter of Edward F. Duffy,

Esquire 34-36663 12/29/95

In the Matter of Carolyn Safer Kenner AAER 829 09/27/96

Delinquent Filings: FOnDS 3, 4 & 5

In the Matter of Stephen 1. Sogin 34-37766 09/30/96

In the Matter of Neil 1. Colvin 34-37408 07/08/96

In the Matter of Robert D. Carl, III 34..36678 01/04/96

In the Matter of Food Research Corp. 34-37641 09/05/96

In the Matter of Montgomery Medical

Ventures, L.P. 34-37352 06/24/96

In the Matter of Richard D. Propper 34-37354 06/24/96

SEC v. Robert D. Carl, III LR-14774 01/04/96

SEC v. Montgomery Medical Ventures

L.P. LR-14959 06/24/96

In the Matter of Jack Olshasky 34-37353 06/24/96
Release

Name of Case Number Date Filed

Delinquent Filings: Issuer Reporting

SEC v. Wincanton Corp. LR-15052 09/17/96

SEC v. American Cascade Energy Inc. LR-14857 03/29/96

SEC v. Equity AU Inc. LR-14993 07/30/96

In the Matter of Republic International

Corp. 34-37741 09/27/96

SEC v. Parallel Technologies Inc. LR-14848 03/19/96

SEC v. Cayman Resources Corp. LR-14894 04/26/96

Fraud Against Regulated Entities

SEC v. William P. Dillon LR-14950 06/19/96

In the Matter of David Lee Printy 34-37468 07/23/96

SEC v. Ronald C. Black LR-14691 10/16/95

SEC v. Jury Matt Hansen LR-14699 10/25/95

Insider Trading

SEC v. Roger D. Wyatt LR-15002 08/05/96

SEC v. Kathleen Lane LR-14906 05/09/96

SEC v. Edward Warren Eizman LR-14891 04/25/96

SEC v. Nir Kantor LR-14923 OS/29/96

SEC v. Joseph J. Evans LR-14767 12/27/95

SEC v. Roseann Martucci LR-14890 04/25/96

SEC v. Andrea Fiabane LR-1501O 08/12/96

SEC v. John P. O'Grady LR-14870 04/11/96

SEC v. Charles Brumfield LR-14706 10/31/95

SEC v. Michael P. Angelos LR-14850 03/20/96 ,

SEC v. Casey Abe LR-15100 09/30/96

SEC v. Donald John Tyson LR-15062 09/23/96

SEC v. Duracell International Inc. LR-15045 09/16/96

SEC v. Abul Bhuiyan LR-15033 09/05/96

SEC v. The Hallwood Group LR-14986 07/22/96 0-
Release

Name of Case Number Date Filed

SEC v. Mary Ann Shank LR-15040 09/12/96

SEC v. William J. Rauwerdink LR-14731 11/27/95

SEC v. Harold Fitzgerald Lenfest LR-14747 12/06/95

SEC v. Linda Lou Taylor LR-14775 01/04/96

SEC v. Mervyn Cooper LR-14754 12/11/95

SEC v. Richard G. Marcus LR-14843 02/27/96

SEC v. Donald C. Ferguson LR-14843 03/12/96

SEC v. Michael G. Sargent LR-14854 03/25/96

SEC v. Nabeeh I. Totah LR-14752 12/11/95

SEC v. CBI Industries Inc. LR-14721 11/14/95

SEC v. John A. Prevost LR-14989 07/19/96

SEC v. Hugo Aldo Sallustro LR-14982 07/18/96

SEC v. Timothy J. Moriarty LR-14933 06/06/96

SEC v. James M. League, Jr. LR-14932 06/06/96

Investment Adviser

In the Matter of Robert K. Williams 34-37231 OS/21/96

In the Matter of Mckenzie Walker

Investment Management, Inc. IA-1571 07/16/96

In the Matter of Jay DeForest Moore IA-1548 01/19/96

In the Matter of Ronald M. Zook IA-1576 08/08/96

SEC v. Gary L. Hamby LR-15030 08/30/96

In the Matter of IMS/CPAs &

Associates APR-520 07/11/96

In the Matter of Portfolio Management

Consultants Inc. 34-37376 06/27/96

In the Matter of James A. Pearce 34-36608 12/20/95

In the Matter of Michael C. Robertson 34-37729 09/26/96

In the Matter of Steen Ronlov IA-1544 12/28/95

In the Matter of Frederick V. Dona, Jr. 34-37758 09/30/96

In the Matter of Tudor Investment Corp. 34-37669 09/12/96

In the Matter of Leroy S. Brenna IA-I553 02/22/96

SEC v. Seaboard Investment Advisers,

Inc. LR-15092 09/30/96

1"7
Release

Name of Case Number Date Filed

SEC v. Benjamin Franklin Bush, III LR-15101 09/25/96

In the Matter of Douglas L. Blair lA-1574 08/06/96

In the Matter of Refco Securities Inc. 34-37531 08/06/96

In the Matter of Wayne A. Maki lA-1572 07/26/96

In the Matter of John Francis D 'Acquisto lA-1541 12/18/95

SEC v. William Barney Thomas LR-15080 09/26/96

In the Matter of Ira William Scott lA-1582 09/27/96

In the Matter of Charles Russell Williams lA-1551 02/14/96

In the Matter of S Squared Technology

Corporation lA-1575 08/07/96

In the Matter of Joseph Edwin

Giewartowski lA-1546 01/16/96

SEC v. Tudor Investment Corp. LR-15038 09/12/96

SEC v. Randall E. Bradbury LR-14908 05/13/96

In the Matter of Gerald Johnson 34-37737 09/27/96

In the Matter of C&G Asset

Management Inc. lA-1536 11/09/95

In the Matter of Patricia Owen-Michel lA-1584 09/27/96

In the Matter of The Feldman Investment

Group, Inc. lA-1538 11/27/95

In the Matter of John J. Kaweske 34-36518 11/27/95

In the Matter of Concord Investment Co. lA-1585 09/27/96

SEC v. Donald Malcolm Johnson LR-14807 01/18/96

In the Matter of Cabot Money

Management Inc. 34-37573 08/15/96

In the Matter of Keypoint Financial

Corp. lA-1534 11/06/95

In the Matter of Gruntal & Co., Inc. 34-37084 04/09/96

In the Matter of Marc N. Geman 34-37375 06/27/96

SEC v. Tandem Management Inc. LR-14670 10/02/95

In the Matter of Brian Jeffrey Sheen lA-1533 10/31/95

In the Matter of Investors Income

Systems of Florida Inc. lA-1547 01/16/96

In the Matter of Vigil Asset

Management Corp .. Inc. IA-1588 09/30/96

In the Matter of Domenic P. Ferrante 34-37763 09/30/96

In the Matter of Anthony J. Negus 34-36749 01/22/96

158
Release

Name of Case Number Date Filed

Investment Company

SEC v. Duane V. Midgley AAER 815 09/16/96

SEC v. Geoffrey Paul Adams LR-14806 01130/96

In the Matter of Vector Index IA-1569 07/08/96

In the Matter of David F. Smith 34-37018 03/25/96

In the Matter of Becky A. Swantson 34-37019 03/25/96

Issuer Financial Disclosure

In the Matter of Maricopa County

Arizona 34-37748 09/30/96

In the Matter of Calvin Shenkir, Jr. AAER 734 10/31195

SEC v. Americare International Inc. LR-14964 06/24/96

In the Matter of Gerald M. Kudler AAER 740 12/18/95

In the Matter of 3Net Systems Inc. AAER 833 09/30/96

In the Matter of Advanced Medical

Products, Inc. AAER 812 09/05/96

In the Matter of M. Susan Soltis,

CPA AAER 782 05/10/96

SEC v. Edmund J. Lopinski, Jr. LR-14773 12/22/95

In the Matter of Atlantis Group Inc. 34-37749 09/30/96

SEC v. Kendall Square Research Corp. AAER 777 04/29/96

In the Matter of Milton Mermelstein AAER 783 05/16/96

SEC v. International Communications &

Technologies Corp. AAER 800 07/03/96

In the Matter of Thomas J. MacCormack AAER 776 04/29/96

SEC v. Michael W. Crow LR-15071 09/24/96

SEC v. Jerald Beagelman AAER 807 08/06/96

In the Matter of The County of Orange

California 34-36761 01124/96

SEC v. Healthcare Services Group,

Inc. AAER 823 09/24/96

In the Matter of Wilshire Technologies,

Inc. AAER 821 09/24/96

159
Release

Name of Case Number Date Filed

SEC v. Pierce Lowrey, Jr. AAER 738 12/05/95

SEC v. Surendra Gupta LR-15097 09/30/96

In the Matter of Urohealth System, Inc. 34-36560 12/07/95

SEC v. Robert L. "Bob" Citron LR-14792 01124/96

SEC v. Bollinger Industries Inc. AAER 834 09/30/96

In the Matter of William W. Krueger,

CPA AAER 748 01103/96

In the Matter of Russell Ponce AAER 759 02/13/96

In the Matter of Fernando Cappuccio AAER 745 01103/96

In the Matter of Florio Fiorini AAER 744 01103/96

SEC v. Ronald A. Romito AAER 750 12/19/95

In the Matter of Advanced Micro

Devices, Inc. 34-37730 09/26/96

In the Matter of Octagon, Inc. 34-37762 09/30/96

In the Matter of Morris F. Baughman,

CPA AAER 784 OS/23/96

In the Matter of William E. Moody, Jr. AAER 751 01111196

In the Matter of American Aircraft Corp. AAER 752 01111196

In the Matter of the County of Orange

California 34-36760 01124/96

SEC v. The AppleTree Companies,

Inc. AAER 840 09/30/96

In the Matter of Cypress Bioscience

Inc. AAER 817 09/19/96

SEC v. Gordon L. Hall AAER 830 09/26/96

In the Matter of Robert McClernon,

CPA AAER 820 09/24/96

In the Matter of Gary E. Stern,

CPA AAER 732 10/17/95

In the Matter of Stanley Goodman 34-36591 12/14/95

In the Matter of Eli Buchalter,

CPA AAER 818 09/19/96

In the Matter of Everlast Filtration

Corp. AAER 736 11106/95

In the Matter of Frederick W. Smith,

CPA AAER 828 09/27/96

160
Release

Name of Case Number Date Filed

In the Matter of Gibson Greetings,

Inc. AAER 730 10/11/95

In the Matter of Peter C. Ferraro,

CPA AAER 804 07/24/96

In the Matter of Louis R. Weiss AAER 768 03/11/96

In the Matter of John M. Goldberger AAER 767 03/05/96

In the Matter Rom N. DeGuzman,

CPA AAER 831 09/30/96

In the Matter of Lawrence M. Gress AAER 832 09/30/96

In the Matter of Diagnostek Inc. AAER 762 02/23/96

In the Matter of Ronald A. Romito,

CPA AAER 757 02/01/96

In the Matter of Mark S. Tague,

CPA AAER 788 06/03/96

In the Matter of Jon R. Erickson,

CPA AAER 787 06/03/96

In the Matter of David Sims AAER 741 12/27/95

In the Matter of Bernard H. Levy,

CPA AAER 770 03/29/96

In the Matter of Sulcus Computer

Corp. AAER 778 05/02/96

In the Matter of Platinum Software

Corp. AAER 781 05/09/96

In the Matter of Centuri Inc. AAER 775 04/19/96

In the Matter of Charles W Wallin,

CPA AAER 774 04/19/96

SEC v. Earl V. Young LR-14981 07/16/96

SEC v. Comparator Systems Corp. AAER 786 05/31/96

SEC v. McDonnell Douglas Corp. AAER 797 06/24/96

SEC v. Gerald R. Blackie AAER 780 05/09/96

SEC v. Stephen R. B. Bingham AAER 773 04/16/96

SEC v. Automated Telephone Management

Systems Inc. AAER 735 11/01/95

SEC v. Giancarlo Parretti AAER 746 01/06/96

In the Matter of Richard A. Knight,

CPA AAER 764 02/27/96

161
Release

Name of Case Number Date Filed

SEC v. Sage Technology Inc. LR-14818 02/15/96

SEC v. Anthony Sarivola LR-14704 10/31/95

In the Matter of Anthony Sarivola 34-37768 09/30/96

In the Matter of Hein & Associates 34-37396 07/02/96

In the Matter of Salomon Inc. AAER 808 08/26/96

Issuer Reporting: Other

SEC v. Victor R. Gomez LR-14851 03/21/96

In the Matter of Edmund C. Lipinski AAER 749 01/03/96

SEC v. Jerry B. Silver LR-15000 08/06/96

SEC v. Tellus Industries Inc. LR-14877 04/16/96

Market Manipulation

In the Matter of Jeffrey Weissman 34-37661 09/09/96

SEC v. Allan G. Kern LR-15000 08/06/96

In the Matter of David Anderson 34-37207 05/13/96

In the Matter of Paul Stansberry 34-37698 09/18/96

In the Matter of John Silseth 34--3720 05/13/96

SEC v. Michael Zaman LR-14947 06/12/96

In the Matter of Robert Sayegh 34-37272 06/04/96

SEC v. John Fiebelkorn LR-15026 08/14/96

In the Matter of Alexander

Sheshunoff, Sr. 34-37419 07/11/96

SEC v. Steven McMichael LR-14900 05/02/96

In the Matter of Michael J. Eberle 34-37674 06/20/96

Miscellaneous DisclosurelReporting

SEC v. James S. Faller II LR-15117 09/30/96

SEC v. Royce Laboratories, Inc. LR-14902 05/07/96

SEC v. Thomas S. Mackie, Jr. LR-14732 11/27/95

In the Matter of French American

Banking Corp. 34-36333 10/04/95

In the Matter of Continental Capital

& Equity Corp. 34-36886 02/26/96

162
Release

Name of Case Number Date Filed

Offering Violations (By

Non-Regulated Entities)

SEC v. Christopher Kent Bagdasarian AAER 825 09126/96

In the Matter Douglas W. Osborne 34-37232 05121196

SEC v. Gary J. Divali NONE 08/02/96

SEC v. Henry Don Jeffries NONE 09/12/96

SEC v. Citi Financial Services LR-14789 01118/96

SEC v. James G. Freeman LR-14970 06/25/96

SEC v. Mary S. Pate LR-14915 05/15/96

SEC v. Melvin H. Cox LR-14880 04/01196

SEC v. American Telecom Interconnect

Inc. LR-14892 04/24/96

SEC v. Dennis Lindsay Helliwell LR-14816 02/13/96

SEC v. Raejean S. Bonham LR-14899 04/26/96

SEC v. Thaddeus E. Watley LR-14896 05/01196

In the Matter of Raul N. Rodriguez 34-37682 09/16/96

SEC v. Futrex Inc. LR-15061 09/23/96

SEC v. Smartbox Systems Group, Inc. LR-14733 11/16/95

SEC v. Express Communications Inc. LR-14753 12/13/95

SEC v. Gregory Lee Miller LR-14791 01123/96

SEC v. Douglas Frankel LR-14820 02/21196

SEC v. Lazare Industries Inc. LR-14893 04/22/96

In the Matter of Carl E. Lovell 34-37108 04/12/96

SEC v. Carl E. Lovell LR-14873 02/28/96

SEC v. Jetlease/Finance Corp. LR-14867 04/02/96

SEC v. KS Resources LR-14766 12/19/95

SEC v. Alexander Charles Fuentes LR-14860 03/25/96

SEC v. Future Vision Direct

Marketing Inc. LR-14903 05/07/96

SEC v. Investors Dynamics Corp. LR-14844 03/12/96

163
Release

Name of Case Number Date Filed

In the Matter of Joseph M. Aaron 34-36768 01/25/96

In the Matter of Philip Forma, Sr. 34-37637 09/04/96

SEC v. Aym Financial Corp. LR-14837 03/06/96

SEC v. Joseph M. Aaron LR-14796 01/18/96

SEC v. Scorpion Technologies Inc. AAER 758 02/09/96

SEC v. Robert D. Gersh LR-14742 11/19/95

SEC v. Douglas R. Damon LR-14782 12/22/95

In the Matter of Henry P. Becker 34-37299 06/11/96

In the Matter of Melvin H. Takaki 33-7302 05/31/96

SEC v. The Bennett Funding Group,

Inc. AAER 772 03/28/96

In the Matter of Anthony Escobar 34-37584 08/19/96

SEC v. Michael Rosoff AAER 816 07/19/96

SEC v. Offshore Financial Corp. LR-15064 09120/96

SEC v. Daniel R. Morris LR-14826 12/18/95

SEC v. Robert E. Polansky AAER 810 09/04/96

In the Matter of Voucher Investment

Fund Russ-Invest IC 21966 OS/21/96

In the Matter of William Scott

Smun 34-37683 09/16/96

SEC v. Dan Stuart LR-14909 04/22/96

SEC v. Kathy S. Kingsmore LR-15078 09/16/96

SEC v. Direct Participation Services

Inc. LR-15060 09/19/96

SEC v. Ted E. Mong LR-15094 09/30/96

In the Matter of Candie's Inc. 34-36865 02/21/96

SEC v Wye Resources Inc. LR-15073 09/26/96

SEC v. Russell S. Smith LR-15083 09/27/96

In the Matter of Stuart D. Cooper,

CPA AAER 743 12/28/95

SEC v. Nu-Life International of Georgia

Inc. LR-15099 09/20/96

SEC v. Robert D. Poirier LR-15091 09/30/96

SEC v. The Home Link Corp. LR-15017 07/29/96

SEC v. MTL International Finance

Inc. LR-15090 09/30/96

164
Release

Name of Case Number Date Filed

In the Matter of M. Charles Zanaty 33-7346 09/30/96

SEC v. William B. Sellin II LR-15012 07/24/96

In the Matter of Broad Capital

Associates, Inc. 33-7338 09/26/96

SEC v. Axiom Security Solutions, Inc. LR-15096 09/27/96

SEC v. Americomm Properties, Inc. LR-15006 08/07/96

SEC v. Brent Molovinsky LR-15088 09/27/96

In the Matter of Norman L. Sirak 34-37740 09/27/96

In the Matter of George C.

Bergleitner, Jr. 34-37708 09/23/96

In the Matter of Rhema Foundation 33-7239 11/02/95

In the Matter of Charles E.

Michael, Jr. 34-36561 12/07/95

SEC v. Scott A. Frye LR-14702 10/27/95

SEC v. Donald B. Spencer LR-14856 03/29/96

SEC v. Octagon Technology Group,

Inc. LR-14942 06/11/96

SEC v. Boston Acceptance Corp. LR-15059 09/19/96

In the Matter of James McCurry 34-36654 12/29/95

SEC v. W. Ralph Wills, III LR-15152 09/23/96

In the Matter of Vytas Jonusas 34-37362 06/25/96

SEC v. Larry R. Ryan LR-15044 07/18/96

In the Matter of Eugene Konev 34-37137 02/22/96

In the Matter of Kevin P. Sisti 34-37266 06/03/96

In the Matter of Robert Yecchioni 34-36779 01126/96

In the Matter of William E.

Powdrill, III 34-36695 12/29/96

In the Matter of Stephen R. Parker 34-37664 09/10/96

SEC v. David Edward Freitag LR-15098 09/30/96

In the Matter of Michael D. Gibson 34-37756 09/30/96

In the Matter of Curtis Lynch 34-37751 09/30/96

SEC v. Painewebber, Inc. LR-14787 01/18/96

In the Matter of William Cho 34-36787 01130/96

In the Matter of Domenick M. Schina 34-37685 09/16/96

In the Matter of Nicholas P. Howard 34-36433 10/30/95

In the Matter of Vincent P. Laban 34-37700 09/19/96

165
Release

Name of Case Number Date Filed

In the Matter of Larry R. Earp 34-37665 09/11196

In the Matter of Roc G. Hatfield 34-36846 02/14/96

In the Matter of Stephen M. Jordan 34-37671 09/12/96

SEC v. John Dankovich LR-14847 03120/96

SEC v. John S. Griffin LR-14802 01/30/96

In the Matter of Ralph E. McKittrick 34-36878 02/23/96

SEC v. William R. Palmer LR-15034 09/05/96

SEC v. David M. Carmichael LR-1481O 02/01196

SEC v. John Acord LR-14739 11115/95

SEC v. Tixmax I General Partnership LR-14898 03/20/96

SEC v. Ronald A. Monzione LR-15107 09/30/96

SEC v. Gary W Berus LR-15105 09/30/96

SEC v. Joseph P. Medsker LR-15104 09/30/96

SEC v. Internet Broadcast Group LR-150 09/26/96

In the Matter of Stires & Co., Inc. 34-37750 09/30/96

In the Matter of Wayne J. Conners 34-37757 09/30/96

In the Matter of American Financial

Partners Ltd. 34-37759 09/30/96

SEC v. CNC Trading Co., Inc. LR-15085 09/24/96

SEC v. Daniel E. Goodman LR-15079 09/18/96

In the Matter of David C. Connolly 34-37410 07/08/96

In the Matter of H. Ralph Sylvester 34-37733 09/26/96

SEC v. Empower Telecommunications

Corp. LR-15081 09/26/96

SEC v. Kenneth E. Edwards LR-15111 09/27/96

In the Matter of Michael W. Adams 34-36454 11/03/95

SEC v. Tina M. Applegate LR-15044 05/15/96

In the Matter of Roswitha

Klement-Frances 34-36520 11/28/95

In the Matter of Jerry Revalee 34-36519 11/28/95

SEC v. Richard Jenkins LR-15009 07/10/96

SEC v. Technology International Ltd. AAER 754 01/17/96

In the Matter of Churchill Securities,

Inc. 34-37246 OS/24/96

In the Matter of Lawrence R. Hartz 34-37167 05/03/96

In the Matter of Richard Jenkins 34-37545 08/08/96

166

~
Release

Name of Case Number Date Filed

SEC v. The Windgate Fund, UC LR-14864 04/09/96

SEC v. Trans-American Ostrich Traders,

Inc. LR-14835 03/05/96

In the Matter of Gary Steven Williky 34-36986 03/18/96

SEC v. Thomas W Collins LR-14757 12/11/95

SEC v. Michael Tropiano LR-14778 01111/95

In the Matter of Daniel D. Dietrich 34-37486 07/26/96

In the Matter of Victor L. Kashner 34-37485 07/26/96

In the Matter of Michael J. Clark 34-37566 08/14/96

In the Matter of Kenneth A. Zak 34-36879 03/23/96

Self-Regulatory Organization

The NASD and the Nasdaq Market 34-37542 08/08/96

In the Matter of National Association

of Securities Dealers, Inc. 34-37538 08/08/96

Transfer Agent

In the Matter of Richard S. Berger 34-37705 09/20/96

167

Fiscal Year

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Right to Financial Privacy

Table 5

INJUNCTIVE ACTIONS

Actions Initiated

144

125

140

186

171

156

172

197

171

180

Defendants Named

373

401

422

557

503

487

571

620

549

588

Section 21(h) of the Securities Exchange Act of 1934 [15 U.s.c.

78u(h)(6)] requires that the Commission "compile an annual tabulation

of the occasions on which the Commission used each separate

subparagraph or clause of [Section 21(h)(2)] or the provisions of the

Right to Financial Privacy Act of 1978 [12 U.S.c. 3401-22 (the RFPA)] to

obtain access to financial records of a customer and include it in its

annual report to the Congress." During the fiscal year, the Commission

made one application for judicial orders pursuant to Section 21(h)(2).

Set forth below are the number of occasions on which the Commission

obtained customer records pursuant to the provisions of the RFPA:

Section 1104 (Customer Authorizations) 11

Section 1105 (Administrative Subpoenas) 426

Section 1107 (Judicial Subpoenas) 5

169
Table 6

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Violation of the federal secunnss laws.

Broker-dealer, municipal securities dealer,

government securities dealer, transfer

agent, investment adviser or associated

person

Willful violation of securities laws or rules;

aiding or abetting such violation; failure

reasonably to supervise others; willful

misstatement or omission In filing with the

Commission; conviction of or injunction

against certain crimes or conduct.

Registered securities association

Violation of or Inability to comply with the

Exchange Act, rules thereunder, or Its own

rules; unjustified failure to enforce

compliance with the foregoing or with rules

of the Municipal Secuntres Rulemaklng

Board by a member or person associated

with a member

170

Sanction

Cease-and-desist order, which may also

require a person to comply or take steps to

effect compliance with federal securities

laws; accounting and disgorgement of Illegal

profits. (Securities Act, Section 8A;

Exchange Act, Section 21C(a); Investment

Company Act, Section 9(t); Investment

Advisers Act, section 203(k)).

Censure or limitation on activities;

revocation, suspension or denial of

registration; bar or suspension from

association (Exchange Act, Sections

15(b)(4)-(6), 158(c)(2)-(5), 15(C)(c) (1)-(2),

17A(c)(3)-(4); Investment Advisers Act,

Section 203(e)-(t)).

Civil penalty up to $100,000 for a natural

person or $500,000 for any other person;

accounting and disgorgement of illegal

profits. Penalties are subject to other

limitations depending on the nature of the

violation. (Exchange Act, Section 21B;

Investment Company Act, Section 9;

Investment Advisers Act, Section 203).

Temporary cease-and-desist order, which

may, in appropriate cases, be issued ex

parte. (Exchange Act, Section 21C).

Suspension or revocation of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section

19(h)(1»).
Member of registered securities

association, or associated person

Entry of Cornrrusslon order against person

pursuant to Exchange Act, Section 15(b),

willful violation of securities laws or rules

thereunder or rules of MunicIpal Secuntres

Rulemaklng Board; effecting transaction for

other person with reason to believe that

person was comrruttmq violations of

secuntres laws.

National securities exchange

Vrolanon of or Inability to comply with

Exchange Act, rules thereunder or ItS own

rules; unjustifled failure to enforce

compliance wrth the foregoing by a member

or person associated with a member

Member of national securities exchange,

or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of securities laws or rules

thereunder, effecting transaction for other

person with reason to believe that person

was committing violation of securities laws

Registered clearing agency

VIolation of or Inability to comply with

Exchange Act, rules thereunder, or its own

rules; failure to enforce compliance with its

own rules by participants.

Participant In registered clearing agency

Entry of Commission order against

participant pursuant to Exchange Act,

Section 15(b)(4); willful vrolatron of clearing

agency rules, effecting transaction for other

person with reason to believe that person

was committing violations of securities laws.

Securities information processor

Violation of or inability to comply with

provisrons of Exchange Act or rules

thereunder.

Suspension or expulsion from the

association; bar or suspension from

association with member of association

(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration,

censure or hrnrtatron of activrtres, functions,

or operations (Exchange Act, Section 19(h)

(1»

Suspension or expulsion from exchange; bar

or suspension from association with member

(Exchange Act, Section 19(h)(2)-(3)).

Suspsnsion or revocatron of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section

19(h)(1 ».

Suspension or expulsion from cleanng

agency (Exchange Act, Section 19(h)(2)).

Censure or lirrntatron of activities; suspension

or revocation of registration (Exchange Act,

Section 11A(b)(6»

171
Any person

Willful violation of Securities Act, Exchange

Act, Investment Company Act or rules

thereunder; aiding or abetting such violation,

willful misstatement in filing with

Commission.

Officer or director of self-regulatory

organization

Willful violation of Exchange Act, rules

thereunder or the organization's own rules;

willful abuse of authority or unjustified failure

to enforce compliance.

Principal of broker-dealer

Officer, director, general partner, ten-percent

owner or controlling person of a brokerdealer for which a SIPC trustee has been

appomtsd.

Securities Act registration statement

Statement materially Inaccurate or

Incomplete.

Person subject to Sections 12, 13, 14 or

15(d) of the Exchange Act or associated

person

Failure to comply With such provisrons or

havmq caused such failure by an act or

orrussion that person knew or should have

known would contribute thereto.

Securities registered pursuant to Section

12 of the Exchange Act

Noncompliance by Issuer With Exchange Act

or rules thereunder.

Public Interest requires trading suspension.

Registered investment company

Failure to file Investment Company Act

reqistratron statement or required report;

filing materially Incomplete or rT'!sleading

statement or report

Company has not attained $100,000 net

worth 90 days after Securities Act

registration statement became effective

172

Temporary or permanent prohibition against

serving in certain capacities with registered

investment company (Investment Company

Act, Section 9(b».

Removal from office or censure (Exchange

Act, Section 19(h)(4».

Bar or suspension from being or becoming

associated with a broker-dealer (SIPA,

Section 14(b».

Stop order refusing to permit or suspending

effectiveness (Securities Act, Section 8(d».

Order directing compliance or steps

effecting compliance (Exchange Act, Section

15(c)(4».

Denial, suspension of effective date,

suspension or revocation of reqistranon

(Exchange Act, Section 12@.

Summary suspension of over-the-counter or

exchange trading (Exchange Act, Section

12(k».

Suspension or revocation of registration

(Investment Company Act, Section 8(e».

Stop order under Securities Act; suspension

or revocation of registration (Investment

Company Act, Section 14(a».
Attorney, accountant, or other

professional or expert

Lack of requisite qualifications to represent

others; lacking in character or Integrity,

unethical or Improper professional conduct;

willful violation of secunties laws or rules, or

aiding and abetting such violation.

Attorney suspended or disbarred by court;

expert's license revoked or suspended;

conviction of a felony or of a misdemeanor

Involving moral turpitude.

Securities violation In Commission-instituted

action; finding of securities Violation by

Commission In administrative proceedings.

Member or employee of Municipal

Securities Rulemaking Board

Willful Violation of Exchange Act, rules

thereunder, or rules of the Board; abuse of

authority.

Permanent or temporary denial of privilege of

appearing or practicing before the

Commission (17 CFR Section 201.1 02 (e)(1 »

Automatic suspension from appearance or

practice before the Cornmlssron (17 CFR

Section 201.1 02 (e)(2».

Temporary suspension from practicing

before the Commission; censure; permanent

or temporary disqualification from practicing

before the Commission (17 CFR Section

201 102(e)(3».

Censure or removal from office (Exchange

Act, Section 15B(c)(8».

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Engaging In or about to engage In acts or

practices Violating securities laws, rules or

orders thereunder (including rules of a

registered self-regulatory organization).

Noncompliance With provisions of the laws,

rules, or requlanons under Securities Act,

Exchange Act, or Holding Company Act,

orders Issued by Comrrussron, rules of a

registered self-regulatory organization, or

undertaking in a registration statement

Sanction

Injunction against acts or practices

constituting Violations (plus other equitable

relief under court's general equity powers)

(Securities Act, Section 20(b), Exchange Act,

Section 21 (d); Holding Company Act,

Section 18(e); Investment Company Act,

Section 42(d), Investment Advisers Act,

Section 209(d), Trust Indenture Act, Section

321)

Writ of mandamus, mjunctron, or order

directing compliance (Securities Act, Section

20(c), Exchange Act, Section 21 (e), Holding

Company Act, Section 18(f»)

173
Violating the secunties laws or a cease-anddesist order (other than through insider

trading).

Trading while In possession of material nonpublic information in a transaction on an

exchange or from or through a broker-dealer

(and transaction not part of a public

offenng); aiding and abetting or directly or

indirectly controlling the person who

engages in such trading.

Violating Securities Act Section 17(a)(1) or

Exchange Act section 10(b), when conduct

demonstrates substantial unfitness to serve

as an officer or director.

Issuer subject to Section 12 or 15(d) of

the Exchange Act; oHlcer, director,

employee or agent of Issuer; stockholder

acting on behalf of Issuer

Payment to foreign official, foreign political

party or official, or candidate for foreign

political office, for purposes of seeking the

use of influence in order to assist issuer in

obtaining or retaining business for or with, or

directing business to, any person.

Securities Investor Protection Corporation

Refusal to commit funds or act for the

protection of customers.

National securities exchange or registered

securities association

Failure to enforce compliance by members

or persons associated With its members With

the Exchange Act, rules or orders

thereunder, or rules of the exchange or

association.

Registered clearing agency

Failure to enforce compliance by its

participants With ItS own rules.

174

Civil penalty up to $100,000 for a natural

person or $500,000 for any other person QI,

If greater, the gross gain to the defendant.

Penalties are SUbject to other limitations

dependent on nature of Violation. (Securities

Act, Section 20(d); Exchange Act, Section

21 (d) (3); Investment Company Act, Section

42(e); Investment Advisers Act, Section

209(e».

Maximum Civil penalty: three times profit

gained or loss avoided as a result of

transaction (Exchange «ct. Section 21A(a)-

(b)).

Prohrbrtion from acting as an officer or

director of any public company. (Secunties

Act, Section 20(e); Exchange Act, Section

21 (d)(2».

Maximum civil penalty: $10,000 (Exchange

Act, Section 32(c)).

Order directing discharge of obligations and

other appropriate relief (SIPA, Section 11 (b)).

Writ of mandamus, injunction or order

directing such exchange or assoclanon to

enforce compliance (Exchange Act, Section

21 (e».

Wnt of mandamus, injunction or order

directing c1eanng agency to enforce

compliance (Exchange Act, Section 21 (e».
Issuer subject to Section 15(d) of 1934

Act

Failure to file required information,

documents or reports.

Registered investment company

Name of company or of security Issued by It

deceptive or misleading.

Officer, director, member of advisory

board, adviser, depositor, or underwriter

of investment company

Engage in act or practice constituting breach

of fiduciary duty mvolvmq personal

misconduct.

Forfeiture of $100 per day (Exchange Act,

Section 32(b».

Injunction against use of name (Investment

Company Act, Section 35(d»

Injunction against actmq In certain capacities

for Investment company and other

appropriate relief (Investment Company Act,

Section 36(a».

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons Subject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Willful violation of securities laws or rules

thereunder; willful misstatement in any

document required to be filed by securities

laws or rules; willful misstatement in any

document required to be filed by selfregulatory organization in connection with an

application for membership or association

with member.

Issuer SUbject to Section 12 or 15(d) of

the Exchange Act; officer or director of

Issuer; stockholder acting on behalf of

Issuer; employee or agent subject to the

Jurisdiction of the United States

Payment to foreign official, foreign political

party or official, or candidate for foreign

political office for purposes of seeking the

use of influence in order to assist issuer In

obtaining or retaining business for or with, or

directing business to, any person.

Sanction

Maximum penalties: $1,000,000 fine and ten

years imprisonment for Individuals,

$2,500,000 fine for non-natural persons

(Exchange Act, Sections 21 (d), 32(a));

$10,000 fine and five years imprisonment (or

$200,000 if a public utility holding company

for violations of the Holding Company Act)

(Securities Act, Sections 20(b), 24;

Investment Company Act, Sections 42(e),

49; Investment Advisers Act, Sections

209(e), 217; Trust Indenture Act, Sections

321, 325; Holding Company Act, Sections

18(f),29).

Issuer $2,000,000; officer, director,

employee, agent or stockholder. $100,000

and five years imprisonment (issuer may not

pay fine for others) (Exchange Act, Section

32(c)).

175

-
Self-Regulatory Organizations: Expenses, Pre-Tax Income, and Balance

Sheet Structure)

In 1995, the total revenues of all self-regulatory organizations (SROs)

with marketplace jurisdiction rose approximately $151 million, an increase

of approximately 13% from 1994. The New York Stock Exchange (NYSE),

the National Association of Securities Dealers (NASD), the American Stock

Exchange (AMEX), and the Chicago Board Options Exchange (CBOE)

accounted for 89% of total SRO revenues, up from 86% in 1994. Revenues

were earned primarily from listing or issuer fees, trading fees, and market

data fees. For example:

The NYSE reported total revenue of $501 million, an increase of

11% from 1994, of which 39% consisted of listing fees, 20%

consisted of trading fees, and 15% consisted of market data fees.

The NASD reported total revenue of $438 million, an increase of

18% from 1994, of which 21 % consisted of issuer fees and 39%

consisted of trading and market data fees.

The AMEX reported total revenue of $153 million, an increase of

7% from 1994, of which 9% consisted of listing fees.

The remaining SROs also reported increases in revenues as follows:

The Boston Stock Exchange (BSE) reported a $796,000 increase

(5%) to $15.7 million.

1After the close of its fiscal year ending December 31, 1993, the

Cincinnati Stock Exchange (CSE) adopted a fiscal year ending June 30. As

a result, the amounts set forth in this report representing total revenues, total

expenses, and total pre-tax income for all SROs include financial information

based on CSE's statements of revenues, expenses and members' equity for

the year ended June 30, 1995 and for the six months ended June 30, 1994.

Similarly, the amounts set forth in this report representing total liabilities,

total assets, and total net worth for all SROs include financial information

based on CSE's balance sheets as of June 30, 1995 and 1994.

176

•

•

•

•
The CBOE reported a $9.7 million increase (10%) to $107.3

million.

The Pacific Stock Exchange (PSE) reported a $9.9 million increase,

(21%) to $56.7 million.

The Philadelphia Stock Exchange (PHLX) reported a $2.2 million

increase (5%) to $42.8 million.

The CHX2 reported a $351,000 increase (1%) to $30 million.

The CSE reported total revenues of $7.9 million for the year ended June

30, 1995, as compared to its reported revenues of $3.6 million for the six

months ended June 30, 1994.

Of the SROs reporting financial information for a 12-month period in

both 1994 and 1995, the CSE experienced the largest percentage increase in

total revenues, 120%, while the NASD reported the largest dollar volume

increase in total revenues, $4.3 million (11%).

The total expenses of all marketplace SROs were $1.2 billion in 1995, an

increase of $141 million, or 13%, over 1994. The NASD incurred the

largest dollar volume increase in expenses, $69.6 million (20%). Seven

SROs incurred the following increases in expenses:

The AMEX incurred a $14.8 million increase (12%).

The BSE incurred a $775,000 increase (6%).

The NYSE incurred $31.7 million increase (9%).

The PHLX incurred a $2.2 million increase (5%).

2The CHX adopted its current name in 1993. Previously, it was know as

the Midwest Stock Exchange.

177

•

•

•

•

•

•

•

•
The PSE incurred a $4.7 million increase (11)%.

The CBOE incurred a $9.5 million increase (12%).

The CHX incurred a $5.2 million increase (17)%.

The CSE reported expenses of $4.2 million for the fiscal year ended June

30, 1995, as compared to its reported expenses of $2.0 million for the six

months ended June 30, 1994.

Aggregate pre-tax income of the marketplace SROs rose to $163.4

million, an increase of $10.5 million (7%), from the $152.9 million reported

in 1994. The NYSE experienced the largest dollar volume increase in pretax income, $16.9 million (21%). The PSE showed the largest percentage

increase in pre-tax income, 108% ($5.2 million). The remaining SROs

reported pre-tax income in 1995 with the exception of the PHLX and CHX

which reported pre-tax losses of $1 million and $5.5 million respectively.

The CSE reported pre-tax income of $3.9 million for the fiscal year ended

June 30, 1995, as compared to its reported pre-tax income of $1.4 million

for the six months ended June 30, 1994.

The total assets of all marketplace SROs amounted to approximately $1.8

billion in 1995, an increase of $140 million (9%) over 1994. The NYSE

showed the largest dollar volume increase in total assets, $54.9 million

(7 % ), while the PSE reported the largest percentage increase in total assets,

44 %, ($15.9 million). The BSE also reported a substantial percentage

increase in total assets, 44% ($7.1 million). The NASD, AMEX, CBOE,

and PHLX also reported increases in total assets, equalling $35.8 million

(9%), $11.8 million (9%), $14.1 million (15%), and $845,000 (l%)

respectively. The CHX reported a decrease of $3.1 million (8%). The CSE

reported total assets of $8.4 million as of June 30, 1995, as compared to its

reported total assets of $5.2 million as of June 30, 1994.

In 1995, the total liabilities of marketplace SROs increased $43.1 million

(6%) over 1994 levels. The NASD showed the greatest dollar volume

increase in liabilities, $18.7 million (14%), while the PSE reported the

178

•

•

•
greatest percentage increase, 82% ($10 million). Increases in liabilities were

also reported by the CHX ($763,000 or 5%), the PHLX ($127,000 or

0.3%), the AMEX ($16.7 million or 17%), the BSE ($6.3 million or 63%),

and the CBOE ($486,000 or 2%). Only the NYSE reported a dollar volume

decline in liabilities, $1.8 million or 0.4%. The CSE reported liabilities of

$2.2 million as of June 30, 1995, as compared to its reported liabilities of

$1.3 million as of June 30, 1994.

The aggregate net worth of the marketplace SROs rose $98.3 million in

1995 to $1.02 billion, an increase of 11% over 1994. The PSE incurred the

largest percentage increase in net worth, 24% ($5.9 million), while the

largest dollar volume increase in net worth was reported by the NYSE,

$56.7 million (15%). The CBOE also reported a substantial increase in net

worth of $13.6 million or 19%. Other marketplace SROs also experienced

positive growth in net worth with the AMEX reporting an increase of $5.0

million or 5%; the NASD reporting an increase of $17.1 million or 6 %; the

BSE reporting an increase of $823,000 or 13%; and the PHLX reporting an

increase of $718,000 million or 3%. The CHX reported a decrease in net

worth of $3.9 million or 17%. The CSE reported a total net worth of $6.2

million as of June 30, 1995, as compared to its reported net worth of $3.9

million as of June 30, 1994.

Clearing agency results have been presented in two tables by their

respective types: clearing corporations and depositories. In calendar year

1995, aggregate revenues from clearing agency services increased $54

million, or 11%, to $530 million from $476 million in 1994. Interest

income increased $49 million, or 50%, to $146 million in 1995. All

clearing agencies adjust their fee structures and refunds of fees to provide

participants with attractively priced services, to meet expenses, and to

provide the amount of earnings which they desire to retain.

Service revenues at the depositories totalled $353 million, up $61 million,

or 23%, from 1994. In part, this reflected the termination of Midwest

Securities Trust Company (MSTC) at the end of calendar year 1994 and the

redistribution of portions of its business. MSTC had $31 million in service

revenues during 1994 and $500 million in pre-tax earnings. In 1995,

Depository Trust Company (DTC) increased its service revenues by 2 % or

179
$5 million and increased its pre-tax earnings five-fold from $4 million to $21

million. The Philadelphia Depository Trust Company's 1995 service

revenues decreased by 3% or $305,000, and its pre-tax earnings decreased

51 % from $544,000 in 1994 to $265,000 in 1995.

The depositories continued to expand their base for service revenues by

increasing both the number of equity shares and principal amount of debt

securities on deposit. This gain occurred, among other reasons, because of

the further expansion of depository-eligible issues and the participants'

increased use of depository services, e.g., in 1995, 99.96% of new issue

CUSIPs requested by underwriters were made depository eligible. At year

end 1995, DTC alone had more than 1.2 million depository-eligible issues

and a total value of securities in its depository system of $10 trillion.

Service revenues of clearing corporations for 1995 decreased 2.3 % to

$206 million from $210 million for 1994, and earnings for clearing

corporations decreased to $16 million in 1995 from $23 million in 1994, a

decrease of 31 %. The Midwest Clearing Corporation (MCC), with $9

million in 1994 revenues and $227,000 in 1994 earnings, was closed down

at the end of calendar year 1994, and portions of its business were

redistributed.

Regarding pre-tax earnings among individual clearing corporations, the

trend was mixed. National Securities Clearing Corporation reported

earnings of $3.7 million for 1995 compared with $2.6 million for 1994, a

gain of 37%. Government Securities Clearing Corporation reported earnings

of $5,486 for 1995, against $3,561 for 1994, a gain of 54%. The Options

Clearing Corporation reported earnings of $3.2 million for 1995, down from

$5.2 million in 1994, a decline of 38%. The Stock Clearing Corporation of

Philadelphia reported a 1995 loss of $717 million compared with a loss of

$173 million in 1994.

The aggregate shareholders' equity of all clearing corporations and

depositories rose from $116 million to $120 million. Aggregate participant

clearing funds, which protect clearing agencies in the event of a participant

180
default, increased by $883 million, or 32%, to $3.6 billion. If a participant

defaults and its losses exceed its deposit at a clearing agency, the entire

participants' fund of the clearing agency may be assessed on a pro rata basis.

181

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184

Table 9

SELF-REGULATORY ORGANIZATIONS-DEPOSITORIES

1995 REVENUES and EXPENSES 1/

($ in Thousands)

Philadelphia

Depository Participants Depository

Trust Trust Trust

Company Company Company

12/31/95 12/31/95 12/31/95 Total

Revenues

Depository Services $312,154 $30,399 $10,308 $352,861

Interest 115,519 12.243 1,390 129,152

Other (115,164) (13,511) 713 (127,962)

Total Revenues 21 312,509 29,131 12,411 354,051

Expenses

Employee Costs $179,952 11,190 7,189 198,331

Data Processing and

Conmunrcanons Costs 23,142 3,833 599 27,574

Occupancy Costs 43,838 5,295 509 49,642

All Other Expenses 65,556 7,853 3,849 77,258

Total Expenses $312,488 28,171 12,146 352,805

Excess of Revenues

Over Expenses 'JJ $21 $960 $265 $1,246

Shareholders' EqUity $19,406 $19,573 $3,822 $42,801

Participant's Fund $692,198 $264,385 $792 $957,375

1/ Although efforts have been made to make the presentations comparable, any Single revenue or expense

category may not be completely comparable between any two cleanng agencies because of (I) the varying

classmcanon methods employed by the cleanng agencies in reportmg operating results and (II) the

grouping methods employed by the Commission staff due to these varymg classmcanon methods

IndiVidual amounts are shown to the nearest thousand Totals are the rounded result of the underlYing

amounts and may not be the aruhrnenc sums of the parts

21 Revenues are net of refunds which have the effect of redUCing a c1eanng agency's base fee rates

'JJ Thrs ISthe result of operanons and before the effect of Income taxes, which may slgnrflcantly Impact a cleanng

agency's net Income
Certificate Immobilization

Book-entry deliveries continued to outdistance physical deliveries

in the settlement of securities transactions among depository

participants of the Depository Trust Company (DTC). This tendency

is illustrated in Table 10, CERTIFICATE IMMOBILIZATION TRENDS.

The table captures the relative significance of the mediums employed,

in a ratio of book-entry deliveries to certificates withdrawn from

DTC. The figure include Direct Mail by Agents and municipal bearer

bonds. In 1995, the total certificates withdrawn decreased by 19%

from 1994, while the number of book-entry deliveries increased by

34%. In 1995, the ration was almost 3 times the 1991 ratio of 11.6

book-entry deliveries rendered for every certificate withdrawn.

Table 10

CERTIFICATE IMMOBILIZATION TRENDS

Depository Trust Company

(Including Bearer Certificates)

1995 1994 1993 1992 1991

Book-entryDelivenes

at DTC (10 thousands) 119,000 105,500 98,300 83,300 73,200

Total of All Certificates

Withdrawn (10 thousands) 3,270 3,899 4,140 6,467 6,314

Book-entry Deliveries per

Certificates Withdrawn 364 271 237 129 116

185
Investment Companies and Investment Advisers

The tables below show the number of registered investment companies

and investment advisers and the amount of assets under management. All

figures are reported for fiscal year-end.

Number of Active Registrants

% Change

1992 1993 1994 1995 1996 1992-1996

Investment

Companies 3,850 4,300 4,530 4,900 5,285 37.2%

Investment

Company

Portfolios 18,700 21,200 22,486 23,139 24,265 29.8%

Investment

Advisers 18,000 20,000 21,600 22,000 22,400 24.8%

Assets Under Management

($ billions)

% Change

1992-1996

Investment

Companies

Investment

Advisers

$1,800 $2,400 $2,500 $ 3,062 $ 3,794 110.8%

$8,100 $9,600 $9,600 $10,600 $10,700 32.1 %

The number of registered investment companies increased by almost 8

percent during 1996. Many investment companies combine several separate

portfolios or investment series in one investment company registration

statement. The number of portfolios generally ranges from three to ten.

186
However, some unit investment trusts group as many as 1,256 separate

portfolios under one Investment Company Act registration. The number of

portfolios increased by almost 4.9% percent during fiscal year 1996. In

addition, the Commission was responsible for regulating 22,400 investment

advisers at the end of 1996, a 24.4 percent increase since 1992.

Section 13(f)(I) Reports

Section 13(t)(1) of the Exchange Act and Rule 13f-1 thereunder require

"institutional investment managers" exercising investment discretion over

accounts holding equity securities with a fair market value of at least $100

million to file quarterly reports on Form 13F. The Division of Investment

Management reviews approximately 50 requests each quarter from managers

seeking to keep some or all of the information required to be filed on Form

13F from being disclosed to the public.

187
Exemptions

Section 12(h) Exemptions

Section 12(h) of the Exchange Act authorizes the Commission to grant a

complete or partial exemption from the registration provisions of Section

12(g) or from the disclosure or insider reporting/trading provisions of the

Exchange Act where such exemption is consistent with the public interest

and the protection of investors. Four applications were pending at the

beginning of 1996 and no applications were filed during the year. Requested

relief was granted to one applicant.

Exemptions for Foreign Private Issuers

Rule 12g3-2 provides various exemptions from the registration provisions

of Section 12(g) of the Exchange Act for the securities of foreign private

issuers. Perhaps the most important of these is that contained in

subparagraph (b), which provides an exemption for certain foreign issuers

that furnish to the Commission on a current basis the material specified in

the rule. Such material includes that information about which investors

ought to be reasonably informed and which the issuer has:

made or is required to make public under the law of the country in

which it is incorporated or organized;

filed or is required to file with a stock exchange on which its

securities are traded and which was made public by such exchange;

or

distributed or is required to distribute to its securityholders.

Periodically, the SEC publishes a list of those foreign issuers that appear

to be current under the exemptive provision. The most current list contains

1,221 foreign issuers.

188

•

•

•

Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Close

Columbia Gas System, Inc.j/ D. DE 1991 1996

CPT Corp. D. MN 1991

Crazy Eddie, Inc., et al. S.D. NY 1989

Dakota Minerals, Inc. D. WY 1986

Damson Oil Co. S.D. TX 1991

Dest Corp. N.D. CA 1989

Eagle-Pitcher Industries, Inc.j/ S.D. OR 1991

Eastern Air Lines, Inc., et al. S.D. NY 1989

Edison Brothers Stores, Inc. D. DE 1996

Enterprise Technologies, Inc.j/ S.D. TX 1984 1996

Enviropact, Inc.2/ S.D. FL 1994 1996

First City Bancorporation of Texas N.D. TX 1994

First Republicbank Corp. N.D. TX 1989

Future Communications, Inc. W.D. OH 1994

F & M Distributor Inc.I/ E.D. MI 1995 1996

Gander Mountain, Inc. E.D. WI 1996

Gerant Industries, Inc.j/ C.D. CA 1996 1996

Great American Recreation, Inc. D. NJ 1996

Gulf USA Corporation.j/ D. ID 1994 1996

Hamburger Hamlet

Restaurants, Inc. C.D. CA 1996

Hannover Corporation of

Americaj/ M.D. LA 1993 1996

Helionetics, Inc.I/ C.D. CA 1986 1996

Home Theater Products

International, Inc. C.D. CA 1996

House of Fabrics Inc. C.D. CA 1995

190
Table 11 (continued) 


REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 


OF THE BANKRUPTCY CODE IN WHICH 


THE SEC ENTERED APPEARANCE 


F.Y. F.Y. 

Debtor District Opened Closed 

I C H Corporation N.D. TX 1996 

Integra-A Hotel and 

Restaurant Co. D. CO 1993 

International Tourist 

Entertainment Corporation W.D. MI 1996 

International Trading, Inc.11 N.D. GA 1994 1996 

JWP, Inc.11 S.D. NY 1994 1996 

Kaiser Steel Corp.l/ D. CO 1987 1996 

King of Video, Inc. D. NV 1989 

Leslie Fay Companies, Inc. S.D. NY 1993 

Library Bureau Inc. N.D. NY 1993 

LifeCo Investment Group, Inc. D. GA 1995 

Lomas Financial Corp.11 S.D. NY 1990 1996 

Marathon Office Supply, Inc.21 C.D. CA 1988 1996 

Maxicare Health Plus Inc.11 C.D. CA 1989 1996 

MCorp (MCorp Financial, Inc. 

& MCorp Management) S.D. TX 1989 

Media Vision Technology, Inc. N.D. CA 1994 

Megafoods Stores, Inc. D. AZ 1995 

Meridian Reserve, Inc.11 W.D. OK 1989 1996 

Merry-Go-Round 

Enterprises, Inc.21 D. MD 1994 1996 

Micro Security System, Inc.21 D. UT 1996 1996 

Midwest Communications Cotp. E.D. KY 1991 
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

Mitchell Communicationsgq/ N.D. GA 1994 1996

Monarch Capitol Corp. D. MA 1991

Morrison-Knudsen Corp.j/ D. DE 1996 1996

National Gypsum Company N.D. TX 1991

New Valley Corp.j/ S.D. NY 1994 1996

NVF Company D. DE 1994

O'Brien Environmental

Energy, Inc.11 D. NJ 1995 1996

Occidental Development

Fund IIIJI C.D. CA 1989 1996

Occidental Development

Fund IVJI C.D. CA 1989 1996

Occidental Development

Fund VJI C.D. CA 1989 1996

OLR Development Fund LP C.D. CA 1989 1996

OLR Development Fund II LP C.D. CA 1989 1996

Orbitron Capitol Corp.~1 W.T. TX 1995 1996

PanAm Corporation S.D. NY 1991

Penn Pacific E.D. OK 1994

Phar-Mor, Inc. N.D. OH 1994

Premier Benefit Capitol Trust M.D. FL 1993 1996

Premium Sales Corporation M.D. FL 1993 1996

Public Service Co. of New

Hampshire D. NH 1988

QT&T, Inc.11 E.D. NY 1987 1996

192
Table 11 (continued) 


REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 


OF THE BANKRUPTCY CODE IN WHICH 


THE SEC ENTERED APPEARANCE 


F.Y. F.Y. 

Debtor District Opened Closed 

Ramtek Corporationll N.D. CA 1989 1996 

Residential Resources Mortgage 

Investment Corporation D. AZ 1989 1996 

Rymer Foods, Inc. N.D. IL 1993 

Seatrain Lines, Inc.11 S.D. NY 1981 1996 

SIS Corporationl/ N.D. OH 1989 1996 

Sizzler International, Inc. C.D. CA 1996 

Southland Corporation N.D. TX 1991 

Spectrum Information 

Technologies, Inc.l/ E.D. NY 1995 1996 

Spencer Cos., Inc. D. MA 1987 

SportsTown, Inc.11 N.D. GA 1995 1996 

Standard Oil and Exploration of 

Delaware, Inc. W.D. MI 1991 

Sterling Optical Corp. S.D. NY 1992 

Swanton Corp.l/ S.D. NY 1985 1996 

Telstar Satellite Corp. of 

America31 C.D. CA 1989 

The Centennial Group, Inc.11 C.D. CA 1992 1996 

The Circle K Corporationll D. AZ 1990 1996 

The Clothestime, Inc. C.D. CA 1996 

The First Connecticut Small 

Business Investments Company D. CT 1991 

The Group, Inc. D. NV 1990 

The Lionel Corp.11 S.D. NY 1991 1996 
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

F.Y. F.Y.

Debtor District Opened Closed

Tidwell Industries, Inc.2/ N.D. AL 1986 1996

Traweek Investment Fund

No. 22, Ltd.J/ C.D. CA 1988 1996

Traweek Investment Fund

No. 21, Ltd. C.D. CA 1988 1996

TSL Holdings, Inc. S.D. CA 1993

UDC Homes, Inc.!/ D. DE 1995 1996

USA Classic, Inc. S.D. NY 1994

Value Merchants, Inc. E.D. WI 1994

Wedgestone Financial D. MA 1991

Westworld Community

Healthcare, Inc.!/ C.D. CA 1987 1996

WRT Energy Corp. W.D. LA 1996

Total Cases Opened (FY 1996)41 16

Total Cases Closed (FY 1996)~/ 46

II Plan of reorganization confirmed.

Z,I Debtor liquidated under Chapter 7.

'11 Debtor's securities not registered under Section 12(g) of the Securities Exchange

Act of 1934.

1/ The number of cases reported inthis table as opened and closed in 1996 differ from those

reported in the Fiscal 1998 Budget Estimate. The numbers provided in this table are

accurate and supercede those provided in the Budget.

194
The Securities Industry

Revenues, Expenses, and Selected Balance Sheet Items

Broker-dealers that are registered with the Securities and Exchange

Commission earned a pre-tax profit of $11.3 billion in calendar year 1995,

$7.8 billion more than that earned the previous year. The pre-tax return on

equity capital of 20.1 % was about average when compared to the results of

the previous two decades.

Declining interest rates were the most significant factor behind the

increased profitability of securities firms in 1995. As interest rates fell

during the first half of 1995, the value of the bonds held in inventory by

broker-dealers increased, contributing to proprietary trading gains.

Securities firms earned $29 billion in their trading and investment accounts

in 1995, an increase of over $8.7 billion from last year.

Lower interest rates and higher price-earnings ratios also encouraged

debt and equity offerings. The value of new offerings of investment-grade

debt rose 24 % in 1995, while that for common stock increased 46 % . The

result was an increase in underwriting revenues of $2 billion to $8.9 billion

in 1995.

The agency business also was very profitable in 1995. Exchange

volume set a new record, and securities commissions of $23.2 billion in

1995 were $3.4 billion higher than 1994's near-record level. The volume of

margin debt outstanding increased in 1995 and, combined with a higher

average level of interest rates than that prevailing the previous year, resulted

in a $1.8 billion increase in margin interest to $6.5 billion. Investors

continued to invest heavily in mutual funds, particularly stock funds, which

typically generate higher sales fees for firms. As a result, revenues from

retailing mutual funds increased $.5 billion to $7.4 billion.

"All other revenues" are comprised primarily of interest income from

securities purchased under agreements to resell and fees from handling

private placements, mergers, and acquisitions. These revenues grew $14.2

billion in 1995 to $68.5 billion. Merger and acquisition activity was

exceptional in 1995, with the volume of announced deals setting a new

annual record. The average value of reverse repurchase agreements on the

balance sheets of broker-dealers also increased in 1995 contributing to higher

revenues.

195
Expenses rose 21 % to $132.1 billion in 1995, primarily due to higher

interest expenses. Interest expenses, the largest expense item in 1995,

increased $16.6 billion (41%). Employee compensation rose 10.5% to

$41.5 billion. Total assets rose $241 billion to $1,493 billion. Equity

capital rose $4.9 billion to $58.7 billion.

196
I able 12

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS

1991 -19951/

($ in Millions)

1991 1992 1993 1994' 1995'

Revenues

Securities Commissions $ 14,2097 $ 16,2489 $ 19,9048 $ 19,8467 $ 23.2159

Gains (Losses) In Trading and

Investment Accounts 22.641.3 21,8383 25,4272 20.2186 28.9567

Profits (Losses) from Underwriting

and Seiling Groups 6,5926 8,2997 11,2487 6.8438 8.8652

Margin Interest 2,7711 2.6896 3,2352 4.6684 6,4702

Revenues from Sale of Investment

Company Shares 4,1763 5,950.1 8.1153 6,8872 7,4335

All Other Revenues 34,4985 35,5574 40,9126 54,2934 68,4779

Total Revenues $ 84,8895 $ 90.5840 $ 108,8437 $ 112,7581 $ 143,4194

Expenses

Registered Representatives'

Compensation (Part II Only) 2J $ 9.9117 $ 12,1111 $ 14,6960 $ 13,7110 $ 15.5265

Other Employee Compensanon

and Benefits 14,444.1 17.0669 20,931 3 20.5522 22,2922

Compensation to Partners and

Voting Stockholder Officers 2.560.5 2,8929 3,4980 3.3324 3,7293

Commrssrons and Clearance Paid

to Other Brokers 3,2005 3,7221 5.3378 5.3603 5.6992

Interest Expenses 27.5118 24.5763 26.6156 40,2504 56.8838

Regulatory Fees and Expenses 5771 6392 6297 6278 6736

All Other Expenses 2J 18,0279 20,4590 24,0967 25.431 8 27,2991

Total Expenses $ 76,2336 $ 81.4674 $ 95.8051 $ 109.2659 $ 132.1036

Income and Profitability

Pre-tax Income $ 8.655.9 $ 9,1166 $ 13.0386 $ 3,4922 $ 11,3158

Pre-tax Profit Margin 102 101 120 31 79

Pre-tax Return on EqUity 236 220 267 65 201

Assets liabilities and Capital

Total Assets $787,7163 $ 978.635 0 $ 1,240.1598 $ 1.251,7410 $ 1.493.021 6

Liabilities

(a) Unsubordinated Liabilities 732.2902 916,5453 1,160.4560 1,169.1366 1 403,081 0

(b) Subordinated Liabilities 16.3471 18,1558 25,7876 28,8097 31.2775

(c) Total Liabilities 748,6373 934,7011 1.186.2436 1,197.9463 $1,434,3585

Ownership EqUity $ 39.0791 $ 43,9339 $ 53.9162 $ 53,7947 $ 58,6631

Number of Firms 7,763 7,793 7.674 7,632 7,670

Figures may not add due to rounding

r reused

p preliminary

jj Calendar. rather than fiscal, year data ISreported In trus table

2J Registered representatives' compensation for firms that neither carry nor clear IS Included In "other expenses"

as thiS expense Item IS not reported separately on Part IIA of the FOCUS Report

Source FOCUS Report

197

=

=
Table 13

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1991 19951/

($ in Millions)

1991 1992 1993 1994' 1995P

Revenues

Securrtres Commissions $13,7108 $15,4997 $ 19,3411 $ 19,2466 $ 22,405.1

Gains (Losses) In Trading and

Investment Accounts 21,371 7 20,7907 24,0425 18,9183 27,0896

Profits (Losses) from llnderwntmq

and Seiling Groups 6,591 4 8,2028 11,2486 6,8405 8,8822

Margin Interest 2,7324 2,651 7 3,2291 4,6511 5,9982

Revenues from Sale of Investment

Company Shares 4,1762 5,851 9 8,1153 6,8764 7,3982

All Other Revenues 33,7468 34,7455 40,0863 53,1214 66,2189

Total Revenues $82,3293 $87,7422 $106,0629 $109,6543 $137,992 1

Expenses

Registered Representalives'

Cnrnpsnsatron (Part II only) {j $ 9,9006 $11,7911 $ 14,671 9 $ 13,689.0 $ 15,506.2

Other Employee Cornpensauon

and Benefits 14,0665 16,601 4 20,514.9 20,0708 21,750.0

Cornpensanon to Partners and

Voting Stockholder Officers 2,3764 2,6955 3,2934 3,096.1 3,512.0

Commissions and Clearance Paid

to Other Brokers 3,0032 3,5000 5,0833 5,088.4 5,3566

Interest Expenses 27,088 1 24,2358 26,222.9 39,582.1 54,564.8

RegUlatory Fees and Expenses 511.2 580.0 5733 534.6 6145

<-

Ali Other Expenses {j 17,457.5 19,777 9 23,548.2 24,832.5 26,497.1

., Total Expenses $74,403 4 $79,181.7 $ 93,908.0 $106,893.5 $127,801.2

Income and Profitability

Pre-tax Income $ 7,9259 $ 8,5605 $12,1549 $ 2,7608 $10,1909

Pre-tax Profit Margin 96 98 11 5 2.5 7.4

Pre-tax Return on Equrty 233 222 265 54 19.2

Number of Firms 5,115 5,091 5,139 5,139 5,308

Figures may not add due to rounding.

r revised

p preliminary

1J Calendar, rather than nscal, year data IS reported In this table.

{j Registered representatives' compensanon for firms that neither carry nor clear ISIncluded In "other expenses"

as this expense Item ISnot reported separately on Part IIA of the FOCUS Report.

Source FOCUS Report

198

-

=

=
Table 14

UNCONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

YEAR-END, 1991-19951/

($ in Millions)

1991 1992 1993 1994' 1995P

Assets

Cash s 10,351 2 $ 11,0244 $ 13,128.1 $ 13.5004 s 14,5490

Receivables from Other

Broker-dealers 161,4844 216,7937 289,1680 342,0001 339,8241

Receivables from Customers 50,861.1 49,3335 68,5261 66,911.6 66,2009

Receivables from Non-customers 2,1261 4,3267 6,4125 7.2581 5.8505

Long Positions 10 Seeunnes

and Commodities 245,1645 294,294.5 363,8643 317,6257 422,8667

Securities and Investments

not Readily Marketable 1,863.9 2,3760 4,1244 4,4811 5,3594

Securities Purchased Under Agreements

to Resell (Part II only) Y 272,2261 350,4878 439,431 4 437,8056 543,6251

Exchange Membership 313.4 3153 323.1 3537 4209

Other Assets Y 23,521 2 26,502.9 30,6158 33,8188 34,015.0

Total Assets $767,9118 $955,454.8 $1,215,5938 $1,233,755.0 $1,432,711 6

Liabilities and Equity Capital

Bank Loans Payable $ 24,9056 $ 33,908.8 $ 41,9919 $ 34,471.4 $ 41,903.8

Payables to Other Broker-dealers 63,291.9 68,569.0 105,115.2 130,7364 150,726.8

Payables to Non-customers 13,730.6 6.607.7 10,836.0 11,9215 9,9772

Payables to Customers 71,977 5 70,089.7 90,942.9 98,5344 96,671 0

Short POSitions in Securities

and Commodities 113,000.9 157,295.6 199,5095 196,8075 195,149.3

Securities Sold Under Repurchase

Agreements (Part II only) 21 385,655.1 500,714.1 607,827.1 591.4231 767,670.9

Other Non-subordinated Liabilities 21 43,738.8 59,534.8 83,1244 80,846.3 84,921.6

Subordinated liabilities 15.464.1 17,7265 25,3706 28,493.5 30,331.3

Total Liabilities $731,764.6 $914,446.1 $1,164,7176 $1,173,234.6 $1,377,3520

EqUity Capital $ 36,147.3 s 41,008.7 s 50,876.2 $ 50,520.4 s 55,3595

Number of firms 5,115 5,091 5,139 5,237 5,308

Figures may not add due to roundlOg

r revised

p preliminary

jJ Calendar, rather than fiscal, year data IS reported 10 thiS table.

Y Resale agreements and repurchase agreements for firms that neither carry nor clear are mcluded 10 "other

assets" and "other non-subordmated liabilities," respectively, as these Items are not reported separately on

Part IIA of the FOCUS Report

Source. FOCUS Report

199

=

=
Carrying and Clearing Firms

Data for carrying and clearing firms that do a public business is

presented in more detail. Reporting requirements for firms that neither

carry nor clear are less detailed. Carrying and clearing firms clear securities

transactions or maintain possession or control of customers' cash or

securities. These firms produced 82 % of the securities industry's total

revenues in calendar year 1995.

Brokerage activity accounted for about 23 cents of each revenue dollar

in 1995, about one cent lower than the level in 1994. Securities

commissions remained the most important component, producing 14 cents of

each dollar of revenue. Margin interest generated about five cents of each

dollar of revenue, while revenues from mutual fund sales accounted for

about four cents.

The dealer side produced 68 cents of each dollar of revenue in 1995, up

from 61 cents in 1994. Twenty cents came from trading and investments, an

increase from 18 cents in 1994. Seven cents came from underwriting,

almost identical to that in 1994. Forty-one cents came from other securitiesrelated revenues, an increase from thirty-six cents in 1994. This revenue is

comprised primarily of interest income from securities purchased under

agreements to resell and fees from handling private placements, mergers,

and acquisitions.

Expenses accounted for 94 cents of each revenue dollar in 1995,

resulting in a pre-tax profit margin of six cents per revenue dollar, about

four cents higher than in 1994. Interest expense was the largest expense

item, accounting for 46 cents of each revenue dollar in 1995 compared to 42

cents in 1994. Employee-related expenses--compensation received by

registered representatives, partners, and other employees--consumed 29 cents

of each revenue dollar in 1995, compared to 33 cents in 1994.

Total assets of broker-dealers carrying and clearing customer accounts

were $1,394 billion at year-end 1995, a 17% increase from 1994. Relative

to other assets, the value of inventory on the books of broker-dealers

increased during 1995, reflecting at least in part the increase in bond prices

that took place over the course of the year. The relative value of reverse

repurchase agreements also increased.

Total liabilities also increased approximately 17 % to $1,349 billion in

1995. Owners' equity rose eight percent to $45.1 billion.

200
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•
Table 16

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS 11

($ in Millions)

1994' 1995P

Percent Percent Percent

of Total oITotal Change

Dollars Revenues Dollars Revenues 1994-1995

Revenues

Securities Commissions $ 13,9920 151% $ 16,2107 138% 159%

Gains (Losses) In Trading and

Investment Accounts 16,8102 18.1 23,2375 19.8 382

Prollts (Losses) from UnderWriting and Selling Groups 6,2546 67 8,2117 70 313

Margin Interest 4,6511 50 5,9982 51 290

Revenues from Sale of Investment Company Shares 4,086.9 4.4 4,3911 37 74

Miscellaneous Fees 4,795.4 52 5,1769 4.4 80

Revenues from Research 325 00 31.3 0.0 -37

Other Securities Related Revenues 33,7868 365 48,1074 41.0 42.4

Commodities Revenues 2,0300 22 (981) -0.1 -104.8

All other Revenues 6,224.8 67 6,0245 5.1 -3.2

Total Revenues $92,6643 1000% $117,291.2 1000% 266%

Expenses

Registered Representatives'

Compensallon (Part II Only)y $ 13,6890 148% $ 15,506.2 13.2% 13.3%

Other Employee Compensaton

and Benefits 15,169.7 164 16,189.9 13.8 6.7

Compensauon to Partnersand

Voting Stockholder Officers 1,911.0 2.1 2,1178 1.8 10.8

Comrrussons and Clearance Paid

to Other Brokers 3,1790 3.4 3,261.3 28 2.6

ccmmunlcaucns 3,007.1 3.2 3,129.2 27 4.1

Occupancy and Eqtnpment Costs 3,524.1 38 3,799.2 3.2 7.8

Oata Processing Costs 1,342.9 14 1,415.7 1.2 5.4

Interest Expenses 38,894.7 42.0 53,499.0 45.6 37.5

RegUlatory Fees and Expenses 416.2 0.4 4795 0.4 15.2

Losses In Error Accounts and

Bad Debts 3,9999 4.3 308.5 03 -923

All Other Expenses 9,433.8 10.2 9,966.9 85 57

Total Expenses $90,9674 982% $109,6731 93.5% 206%

Income and Profitability

Pre-tax Income $ 1,6970 18% $ 7,618.1 65% 348.9%

Pre-tax Profit Margin 18 65

Pre-tax Return on EqUity 40 175

Narnber otfnrns 785 786

Figures may not add due to rounding

r revised

p preliminary 11 Calendar, rather than nsca; year data IS reported In thiS table.

Note Includes information for firms dOing a public business that carry customer accounts or clear securities transactions

Source FOCUS Report

202

=

=
UNGON:::iuLluA II::U t:iALANC~SHI::~T FOR CARRYING/CLEARING

BROKER-DEALERS 11

($ in Millions)

Year-end 1994' Year -end 1995P

Percent Percent Percent

ofTotal ofTotal Change

Dollars Assets Dollars Assets 1994-1995

Assets

Cash $ 12.3907 10% $ 13.2324 09% 68%

Receivables from Other Broker -dealers 334.6079 281 330.5299 237 -12

(a) Secunnesfaledto Deliver 21.9760 18 5,9201 04 -731

(b) Securities Borrowed 295,3913 24.8 306,9285 220 39

(c) Other 17,2406 14 17.6814 13 26

Receivables from Customers 66,9116 56 66.2009 48 -11

Receivables from Non-customers 6,7697 06 5.2606 0.4 -223

Long Posmons In Securities and Commodilles 300,7849 252 401,7475 288 336

(a) Bankers Acceptances, Certificates

of Depositand Commercial Paper 9,5083 08 19.6101 14 1062

(b) U S and Canadian GovernmentObhgatlons 189,091.2 159 248.8268 179 316

(c) State and MUnicipal GovernmentObllgatlOns 15,460.2 13 12,7229 09 -177

(d) Corporate Obligations 58,530.8 49 69,4454 50 186

(e) Stocks and Warrants 19,894.7 17 33,741 5 24 696

(Q Options 1,949.6 02 5,5869 04 1866

(g) Arbitrage 4.265.4 04 9,1825 07 1153

(h) Other Securibes 1,719.6 01 2,0752 01 207

(I) Spot Commodities 365 0 00 5564 00 524

secunnes and Investments Not Readily Marketable 4.1995 04 4,9835 04 187

Securities Purc~ased Under Agreements

to Resell (Part II Only) 437,805.6 367 543,6251 390 242

Exchange Membership 3129 00 3716 00 188

Other Assets 28048.1 24 27,701 3 20 -12

Total Assets $1.191,8308 1000% $1.393,652 9 100.0% 16.9%

liabilities and EqUity Capital

Bank Loans Payable $ 34,3348 29% $ 41,6271 30% 212%

Payables to Other Broker-dealers 122,316.1 103 139.6560 100 142

(a) Securities Failed to Receive 23.308.9 2.0 6.0416 04 -741

(b) secunnes Loaned 79,6328 67 109,451 5 79 374

(c) Other 19.3743 16 24.1629 17 247

Payables to Non-customers 11.6289 10 9,7137 0,7 -165

Payables to Customers 98.5344 83 96,6711 69 -19

Short Positions In Securities

and Commodities 185,842.8 156 181,772 7 130 -22

Securities Sold Under Repurchase

Agreements (Part II Only) 591.423.1 496 767,6709 551 298

Other Non-subordinated

Llabllilles 78,6939 66 82,2946 59 46

Subordinated Llabllilles 27.2874 23 29,1688 21 69

Total uaonues 1,150.0614 965 1,348.5749 968 173

EqUity Capital $ 41,7694 35% $ 45,0780 32% 79%

Number of Firms 785 772

Figures may not add due to rounding

r revised

p preliminary

1/ Calendar. rather than fiscal. year data IS reported In nus table

Note Includes information for frrms dOing a public business that carry customer accounts or clear secunnes uansacnons

Source FOCUS Report

203

=

=
Securities Traded on Exchanges

Market VaIue and Volume

The market value of equity and option transactions (trading in stocks,

options, warrants, and rights) on registered exchanges totaled $3.7 trillion in

1995. Of this total, approximately $3.5 trillion, or 95%, represented the

market value of transactions in stocks, rights, and warrants; $170 billion, or

5 %, were options transactions (including exercises of options on listed

stocks).

The value of equity and option transactions on the New York Stock

Exchange (NYSE) was $3.1 trillion, up 24% from the previous year. The

market value of such transactions on the American Stock Exchange (AMEX)

increased 27.4% to $105.3 billion and increased 26.5% to $494.5 billion on

all other exchanges. The volume of trading in stocks (excluding rights and

warrants) on all registered exchanges totaled 106.4 billion shares, a 17.6%

increase from the previous year, with 84.7% of the total accounted for by

trading on the NYSE.

The volume of options contracts traded (excluding exercised contracts)

was 287.3 million contracts in 1995, 2.1 % greater than in 1994. The

market value of these contracts increased 25.8% to $118.9 billion. The

volume of contracts executed on the Chicago Board Options Exchange

decreased 2.9% to 178.5 million. Option trading on the AMEX and Pacific

Stock Exchange rose 7.9 % and 47.7 % respectively while option trading on

the Philadelphia Stock Exchange decreased 12.1%.

Nasdaq (Share Volume and Dollar Volume)

Nasdaq share volume and dollar value information has been reported on

a daily basis since November 1, 1971. At the end of 1994, there were

5,761 issues in the Nasdaq system, as compared to 5,393 a year earlier and

3,050 at the end of 1980.

Share volume for 1994 was 74.3 billion, as compared to 66.5 billion in

1993 and 6.7 billion in 1980. This trading volume encompasses the number

of shares bought and sold by market makers plus their net inventory

changes. The dollar volume of shares traded in the Nasdaq system was

$1.45 trillion during 1994, as compared to $1.35 trillion in 1993 and 68.7

billion in 1980.

204
Share and Dollar Volume by Exchange

Share volume on all registered stock exchanges totaled 106.4 billion, an

increase of 17.6% from the previous year. The NYSE accounted for 85%

of the 1995 share volume; the AMEX, 5 %; the Chicago Stock Exchange,

4 %, and the Pacific Stock Exchange, 3 % .

The dollar value of stocks, rights, and warrants traded was $3.5 trillion,

25 % higher than the previous year. Trading on the NYSE contributed 88 %

of the total. The Chicago Stock Exchange and Pacific Stock Exchange

contributed 3 % and 2 % respectively. The AMEX accounted for 2 % of

dollar volume.

205
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Table 20

SHARE VOLUME BY EXCHANGES 1/

(In Percentage)

TotalShare

Volume

Year (In Thousands) NYSE AMEX CHIC PSE PHLX SSE CSE Others2!

1945 769,018 6587 21.31 177 298 106 0.66 005 630

1950 893,320 7632 1354 216 311 097 065 009 316

1955 1.321.401 6885 19.19 209 308 085 048 005 541

1960 1,441,120 6847 2227 220 311 088 038 004 2.65

1961 2,142,523 6499 2558 222 341 079 030 004 267

1962 1,711,945 7131 2011 234 295 087 031 004 207

1963 1,880,793 7293 1883 232 282 083 029 004 194

1964 2,118,326 7281 1942 243 265 093 029 003 144

1965 2,671,012 6990 2253 263 233 081 026 0.05 1.49

1966 3,313,899 6938 2284 256 268 086 0.40 005 123

1967 4,646,553 6440 2841 235 246 087 043 002 106

1968 5,407,923 6198 2974 263 2.64 089 078 0.01 133

1969 5,134,856 6316 2761 284 3.47 122 051 000 119

1970 4,834,887 7128 1903 3.16 368 163 051 0.02 069

1971 6,172,668 7134 1842 3,52 372 191 043 003 063

1972 6,518,132 7047 18.22 371 413 221 059 003 0.64

1973 5,899,678 7492 1375 409 368 219 071 004 062

1974 4,950,842 7847 1028 4.40 348 182 086 005 064

1975 6,376,094 8099 897 397 326 154 085 013 029

1976 7,129,132 8005 935 387 393 142 078 044 016

1977 7,124,640 7971 956 396 372 149 066 064 026

1978 9,630,065 7953 1065 356 384 149 060 016 017

t: 1979 10,960,424 7988 1085 330 327 164 055 028 023

1980 15,587,986 7994 10.78 384 280 154 057 0,32 021

t: 1981 15,969,186 8068 932 460 287 155 051 037 010

1982 22,491,935 81.22 696 509 362 218 048 038 007

1983 30,316,014 8037 745 548 356 220 065 019 010

1984 30,548,014 8254 526 603 331 1.79 085 018 0.04

1985 37,187,567 8152 578 612 366 147 127 0,15 003

1986 48,580,524 8112 628 573 368 153 1.33 030 0.02

1987 64,082,996 8309 557 519 323 130 128 030 004

1988 52,665,654 8374 495 526 303 129 1.32 039 002

1989 54,416,790 8133 602 544 334 180 164 041 002

1990 53,746,087 8186 623 468 316 182 1 71 053 001

1991r 58,290,641 8201 552 466 359 160 177 086 001

1992r 65,705,037 8134 574 462 319 172 157 183 001

1993 83,056,237 8290 553 457 281 155 1.47 117 000

1994 90,786,603 8455 496 388 237 142 139 142 001

1995 107,069,656 8449 478 367 256 139 145 166 000

r==revlsed

1/ Share volume for exchangesIncludes stocks, fights and warrants, calendar, ratherthan fiscal, year data ISreported In thiStable.

f/ Includes all exchangesnot listed individually

Source SECForm R-31

208

~
Table 21

DOLLAR VOLUME BY EXCHANGES 11

(In Percentage)

Total Dollar

Volume

Year ($ In Thousands) NYSE AMEX CHIC PSE PHLX BSE CSE OthersZ!

1945 $ 16,284,552 8275 081 200 1 78 096 116 006 048

1950 21,808,284 8591 685 235 219 103 112 all 044

1955 38,039,107 8631 698 244 190 103 078 009 047

1960 45,309,825 8380 935 272 194 103 060 007 049

1961 64,071,623 82.43 10 71 275 199 103 049 007 053

1962 54,855,293 8632 681 275 200 105 046 007 054

1963 64,437,900 8519 751 272 239 106 041 006 066

1964 72,461,584 8349 845 315 248 114 042 006 081

1965 89,549,093 8178 991 344 243 1.12 042 008 082

1966 123,697,737 7977 1184 314 284 110 056 007 068

1967 162,189,211 7729 14.48 3 08 279 113 066 003 054

1968 197,116,367 7355 1799 312 265 113 104 001 051

1969 176,389,759 7348 1759 339 312 143 067 001 031

1970 131,707,946 7844 1111 376 381 199 067 003 019

1971 186,375,130 79 07 998 4 00 379 229 058 005 024

1972 205,956,263 7777 10 37 429 394 256 075 a as 027

1973 178,863,622 82 07 606 454 355 245 100 006 027

1974 118,828,270 8363 440 490 350 203 124 006 024

1975 157,256,676 8520 367 464 326 1 73 119 017 014

1976 195,224,812 84.35 388 476 383 169 094 053 002

1977 187,393,084 83.96 460 479 353 162 074 075 001

1978 251,618,179 8367 613 416 364 162 061 017 a 00

1979 300,475,510 8372 694 383 278 180 056 035 002

1980 476,500,688 8353 733 433 227 161 052 040 001

1981 491,017,139 84.74 541 5 04 232 160 049 040 000

1982 603,094,266 8532 327 583 3 as 159 051 043 000

1983 958,304,168 8513 332 628 286 155 066 016 004

1984 951,318,448 8561 226 657 293 158 085 019 000

1985 1,200,127,848 8525 223 659 306 149 1 20 018 000

1986 1,707,117,112 85 02 256 6 00 3 00 157 144 041 000

1987 2,286,902,788 8679 232 532 253 135 133 035 000

1988 1,587,950,769 8681 196 5.46 262 133 134 049 000

1989 1,847,766,971 85.49 235 546 284 177 156 054 a 00

1990 1,616,798,075 8615 233 458 277 1 79 163 074 000

1991 1,778,154,074 8620 231 434 3 as 154 1 72 083 001

1992 2,032,684,135 8647 2 07 428 287 170 152 109 000

1993 2,610,504,390 8721 2 08 410 238 152 135 137 000

1994 2,817,671,150 88 08 201 349 2 09 134 131 168 000

1995 3,507,991,171 87.71 210 326 224 127 1 43 1 99 000

1/ Dollar volumefor exchangesIncludes stocks,fights andwarrants,calendar,ratherthanfiscal, yeardataIS reportedIn trus

table

Z! Includes all exchangesnot listed individually

Source SECForm R-31

209
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Table 23

VALUE OF STOCKS LISTED ON EXCHANGES

($ in Billions)

NewYork American Exclusively

As of Stock Stock On Other

Dec31 Exchange Exchange Exchanges Total

1938 $ 475 $ 108 $ $ 583

1940 465 101 566

1941 419 86 505

1942 358 7.4 432

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 67.0 119 30 819

1949 76.3 122 31 91.6

1950 93.8 139 33 111.0

1951 109.5 165 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 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 4417

1964 474.3 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 692.3 612 60 7595

1969 6295 47.7 54 6826

1970 6364 395 48 6807

1971 7418 491 47 7956

1972 8715 556 56 9327

1973 7210 387 41 7638

1974 5111 233 29 5373

1975 6851 293 43 7187

1976 8583 360 42 8985

1977 7767 376 42 8185

1978 8227 392 29 8648

1979 9606 578 39 1,0223

1980 1,2428 1035 29 1,3492

1981 1,143.8 894 50 1,2382

1982 1,3054 776 68 1,3897

1983 1,5222 80.1 66 1,6088

1984 1,5295 520 58 1,5873

1985 1,8827 63.2 59 1,9518

1986 2,1285 703 65 2,2053

1987 2,1322 67.0 59 2,2051

1988 2,3661 841 49 2,4551

1989 2,903.5 100 9 46 3,0090

1990 2,692.1 699 39 2,7659

1991 3,5475 903 43 3,6421

1992 3,877 9 864 59 3,9702

1993 4,3149 981 72 4,4202

1994 4,240.8 865 47 4,3320

1995 5,7555 1133 68 5,8756

Source SECForm 1392 211
Table 24

APPROPRIATED FUNDS vs FEES* COLLECTED

$ Millions

800

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350

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300

250

200

150

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Fy1976 78 80 82 84 86 88 90 92 94 96

77 79 81 83 as 87 89 91 93 95

* Excludes disgorgements from fraud actions.

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