1 9 9 7

Annual Report

United States

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

Superintendent of Documents, Mall Stop SSOP, Washington, DC 20402-9328

ISBN 0-16-049588-1
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The Honorable Albert Gore, Jr.

Vice President of the United States

and 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 send you the annual report of the Securities and

Exchange Commission for fiscal year 1997. The activities and

accomplishments identified in the annual report continue the

Commission's long tradition of hard work and high achievement. I have

highlighted some of the Commission's achievements below.

Enhancing Investor Protections

The Commission consistently brings cases against regulated entities

and associated individuals, sending a strong message to the industry that

misconduct relating to the sale of securities will not be tolerated. One

very significant matter in 1997 resulted from an undercover Federal

Bureau of Investigation operation involving a small brokerage firm. The

FBI, working in close cooperation with the SEC and the National

Association of Securities Dealers (NASD), conducted a sting operation

in which 45 stock promoters, company officials, and current or former

brokers were charged criminally for illegal kickbacks to brokers for sales

of over-the-counter and Nasdaq stocks. Based on the same conduct

underlying the criminal complaint, the SEC brought administrative

proceedings against 29 of the stock promoters, company officials,

brokers, and others.

Successful coordination between the Commission and criminal

authorities also resulted in the termination of a microcap fraud involving

the internet. In this matter, the chairman of a small company that was

promoted over the internet secretly distributed millions of shares to

iii
family members, to corporations he controlled, and as bribes to a

network of touters, traders, brokers, and promoters. He then manipulated

the market by, among other things, issuing false and misleading

information about the company and its value as an investment. After the

Commission suspended trading in the company's stock and brought an

emergency enforcement action to enjoin the fraud and to freeze assets,

the company's chairman pleaded guilty to stock fraud and agreed to

surrender most of his assets to a receiver for distribution to the victims of

his fraud. He is currently in prison. Four other individuals have also

pleaded guilty to criminal charges for their role in this scheme. In

Commission enforcement actions, participants in this scheme have been

ordered to surrender a total of more than $15 million in illegal profits.

The Commission also continued to focus on coordinating

examinations with foreign, federal, and state regulators and selfregulatory organizations. During the year, Commission staff conducted

examinations with the Hong Kong Securities and Futures Commission,

the Ontario Securities Commission, and the U.S. Office of the

Comptroller of the Currency, among others.

This past year, the Commission implemented new order handling

rules. The new rules reinforce the SEC's 1996 settlement with the

NASD and help protect investors in all markets. Since the rules were

implemented, the markets have witnessed an historic decline between the

"bid" and "asked" prices for securities. This means that investors are

getting better prices, which was an important goal of the rules. The

markets have become more fair for all investors, and in the long run, this

increased fairness and openness will be to everyone's benefit.

We also approved new "cold calling" rules proposed by the NASD

and the Municipal Securities Rulemaking Board and similar rules

proposed by the American Stock Exchange and the New York Stock

Exchange. The cold calling rules require that securities professionals

call investors only between 8:00 a.m. and 9:00 p.m., say who's calling

and why, put investors on a "do not call" list if they ask, and get written

approval before taking money directly from investors' bank accounts.

To inform investors about these rules, our Office of Investor Education

and Assistance prepared an educational brochure, Cold Calling Alert.

iv
The SEC's website transmitted its billionth page of text and data

during the year. Since going on-line in September 1995, our website has

received more than 95 million hits. Our website, featuring the agency's

EDGAR system, has changed the way information on public companies

and mutual funds is collected and disseminated.

Disclosure Developments

In the area of disclosure, the Commission proposed three major

initiatives to improve the disclosure of information about mutual funds to

investors, including: (1) permitting funds to use a summary document,

or profile; (2) revising the mutual fund registration form; and (3)

requiring a mutual fund, or other registered investment company, with a

name suggesting that the fund focuses on a particular type of investment

to invest at least 80 percent of its assets in the type of investment

suggested by its name. While some funds have worked successfully to

develop improvements in their prospectuses, these initiatives will be a

catalyst for change throughout the fund industry.

We also redoubled our efforts to make sure that our rules and

interpretations protect the millions of investors who today rely on

investment advisers. During the year, we created a Task Force on

Investment Adviser Regulation to implement the legislation enacted last

year splitting regulatory jurisdiction over advisers between the

Commission and the states, to review existing Commission regulations

and develop proposals to modernize them, and to develop a means by

which investors can easily obtain information about investment advisers.

In the accounting area, the Commission adopted rules requiring

additional disclosures concerning derivatives and other financial

instruments. The required 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.

Technological Challenges

One of the most significant areas the Commission has been focusing

on is automation and the many technological challenges facing the

industry. First and foremost among them is preparing for the year 2000.

This past year, our efforts centered on encouraging swift and aggressive

v
action and actively monitoring progress among exchanges, clearing

agencies, and the NASD. We also communicated with public

companies, reminding them of their disclosure requirements and offering

informal guidance about how to apply those requirements to the year

2000 problem. In addition, we worked with industry groups to educate

the public on the issue.

During the year, we began are-evaluation of the Commission's

approach to regulating markets, particularly the Commission's oversight

of alternative trading systems, registered exchanges, and foreign market

activities in the United States. In connection with this initiative, the

Commission issued a concept release to elicit public views on ways to

regulate the U.S. securities markets in light of technological advances.

International Listings

We continued our efforts to widen the range of choices available to

U.S. investors by promoting the internationalization of our markets. In

1990,434 foreign companies were reporting in the U.S.; today, there are

nearly 1,000 foreign companies from 51 countries. We will continue to

do all we can to encourage more companies to list here.

* * *

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

few years ago. Change has always been the hallmark of our markets and

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

have every confidence that the Commission will continue to perform its

responsibilities with the professionalism and dedication that all of us

have come to expect.

Sincerely,

Arthur Levitt

Chairman

vi
Commission Members and Principal Staff Officers

Biographies of Commission Members

Table of Contents

Xl

XIV

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

Paul R. Carey. Laura S. Unger

Regional and District Offices

Enforcement

Key 1997 Results

Enforcement Authority • Enforcement Activities • Sources

for Further Inquiry

International Affairs

Key 1997 Results

Arrangements for Exchange of Information and Assistance •

Enforcement Cooperation and International Cases •

Technical Assistance. International Organizations •

International Market Oversight

Investor Education and Assistance

Key 1997 Results

Investor Complaints and Inquiries • Referrals • Plain

English Initiative • Investor Outreach

Regulation of the Securities Markets

Key 1997 Results

Securities Markets, Trading and Significant Regulatory

Issues. Broker-Dealer Regulation. Oversight of

Self-Regulatory Organizations

XIX

1

20

26

31

vii
Investment Management Regulation

Key 1997 Results

Significant Investment Company Act Developments •

Significant Investment Advisers Act Developments •

Significant Public Utility Holding Company Act

Developments

Compliance Inspections and Examinations

Key 1997 Results

Investment Company and Investment Adviser Inspections •

Broker-Dealer and Transfer Agent Examinations.

Self-Regulatory Organization Inspections

Full Disclosure System

Key 1997 Results

Review of Filings • Rulemaking, Interpretive, and Related

Matters • Staff Legal Bulletins • Conferences

Accounting and Auditing Matters

Key 1997 Results

Accounting-Related Rules and Interpretations. Oversight

of Private-Sector Standard Setting • International

Accounting and Auditing Standards

Other Litigation and Legal Activities

Key 1997 Results

Significant Litigation Developments • Significant

Adjudication Developments • Legal Policy •

Significant Legislative Developments • Corporate

Reorganizations • Ethical Conduct Program

viii

50

65

73

84

91
Municipal Securities Initiatives

Key 1997 Results

Municipal Securities Disclosure + Technical Assistance +

Outreach

Economic Research and Analysis

Key 1997 Results

Economic Analysis and Technical Assistance

Program Management and Administrative Support

Key 1997 Results

Policy Management + Administrative Support

Endnotes

Appendix

113

116

120

129

147

Enforcement Cases Initiated by the Commission During Fiscal

Year 1997 in Various Program Areas + Fiscal 1997 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, 1997 + 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, 1996 Revenues and Expenses + Self-Regulatory

Organizations--Depositories, 1996 Revenues and Expenses +

Certificate Immobilization + Section 13(f)( 1) Reports +

Exemptions + Corporate Reorganizations + The Securities

Industry +Unconsolidated Financial Information for BrokerDealers, 1992-1996 + Unconsolidated Annual Revenues and

Expenses for Broker-Dealers Doing a Public Business, 1992-

1996 + Unconsolidated Balance Sheet for Broker-Dealers Doing a

Public Business Year-end, 1992-1996 + Carrying and Clearing

ix
x

Firms + Securities Industry Dollar in 1996 for Carrying/Clearing

Firms + Unconsolidated Revenues and Expenses for

Carrying/Clearing Broker-Dealers + Unconsolidated Balance

Sheet for Carrying/Clearing Broker-Dealers + Securities Traded

on Exchanges + Market Value of Equity/Options Sales on Ll.S.

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

Exchanges + Share Volume by Exchanges + Dollar Volume by

Exchanges + Securities Listed on Exchanges + Value of Stocks

Listed on Exchanges + Appropriated Funds vs. Fees Collected +

Budget Estimates and Appropriations + Securities and Exchange

Commission Organization Chart
Commission Members and Principal Staff Officers

(As of November 5, 1997)

Commissioners*

Arthur Levitt, Chairman**

Norman S. Johnson, Commissioner

Isaac C. Hunt, Jr., Commissioner

Laura S. Unger, Commissioner

Paul R. Carey, Commissioner

Principal Staff Officers

Jennifer Scardino, Chief of Staff

Term Expires

1998

1999

2000

2001

2002

Brian J. Lane, Director, Division of Corporation Finance

Meredith B. Cross, Deputy Director

William E. Morley, Senior Associate Director

Robert A. Bayless, Associate Director

Albert S. Dandridge, III, Associate Director

Martin Dunn, Associate Director

Howard F. Morin, Associate Director

Mauri Osheroff, Associate Director

David A. Sirignano, Associate Director

*Steven M.H. Wallman resigned from the Commission on October 2,

1997.

**On April 3, 1998, Arthur Levitt was confirmed for a second term as

Chairman of the Securities and Exchange Commission.

xi
William R. McLucas, Director, Division of Enforcement

Colleen P. Mahoney, Deputy Director

Paul V. Gerlach, Associate Director

Thomas C. Newkirk, Associate Director

Vacant, Associate Director

Joan E. McKown, Chief Counsel

Christian J. Mixter, Chief Litigation Counsel

Stephen J. Crimmins, Deputy Chief Litigation Counsel

Walter Schuetze, Chief Accountant

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

Barry Barbash, Director, Division of Investment Management

Vacant, Associate Director

Robert Plaze, Associate Director

Douglas Sheidt, Associate Director

Kenneth J. Berman, 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

Vacant, Associate Director

Richard Walker, General Counsel, Office of General Counsel

Paul Gonson, Solicitor and Deputy General Counsel

Karen Burgess, Associate General Counsel

Anne E. Chafer, Associate General Counsel

Richard M. Humes, Associate General Counsel

Diane Sanger, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

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

Examinations

Mary Ann Gadziala, Associate Director

Gene Gohlke, Associate Director

C. Gladwyn Goins, Associate Director

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

Brenda Murray, Chief Administrative Law Judge, Office of the

Administrative Law Judges

Erik Sirri, Chief Economist, Office of Economic Analysis

Vacant, 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

Vacant, Associate Executive Director

Marisa Lago, 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

Christopher Ullman, Director, Office of Public Affairs, Policy

Evaluation and Research

Jonathan G. Katz, Secretary to the Commission

xiii
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 SECj 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 world wide

website, 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.

xiv
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

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 Director Liability, State of Utah and numerous other

committees and groups concerned with the application of federal and

state securities laws.

xv
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

Februray 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, 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.

xvi
Commissioner

Paul R. Carey was nominated to the

Securities and Exchange Commission by

President Bill Clinton and confirmed by the

Senate on October 21, 1997 for a term which

expires June 5, 2002.

Prior to being nominated to the

Commission, Mr. Carey served as Special

Assistant to the President for Legislative

Affairs at the White House where he had been since February of 1993.

Mr. Carey was the liaison to the United States Senate for the President,

handling banking, financial services, housing, securities, and other

related issues. Prior to joining the Administration, Mr. Carey worked in

the securities industry focusing on equity investments for institutional

clients.

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

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

Commissioner

Laura S. Unger was sworn in on

November 5, 1997 as a member of the

Securities and Exchange Commission, for a

term expiring June 2001. Before being

appointed to the Commission, Ms. Unger

served as Counsel to the United States Senate

Committee on Banking, Housing and Urban

Affairs where she advised the Chairman,

Senator Alfonse M. D'Amato (R-NY). As

counsel, Ms. Unger followed legislative issues relating to banking and

securities.

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

a Congressional Fellow for Banking and Securities matters in the office

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

was an attorney in the Enforcement Division of the Securities and

Exchange Commission in Washington, D.C.

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

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

XVlll
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xix
Central Regional Office

Daniel F. Shea, Regional Director

1801 California Street, Suite 4800

Denver, Colorado 80202-2648

(303) 391-6800

Fort Worth District Office

Harold F. Degenhardt, District Administrator

801 Cherry Street, 19th Floor

Forth Worth, Texas 76102

(817) 334-3821

Salt Lake District Office

Kenneth D. Israel, Jr., District Administrator

50 South Main Street, Suite 500

Salt Lake City, Utah 84144-0402

(801) 524-5796

Midwest Regional Office

Mary Keefe, Regional Director

Citicorp Center

500 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

Boston District Office

Juan M. Marcelino, District Administrator

73 Tremont Street, 6th Floor

Boston, Massachusetts 02108-3912

(617) 424-5900

xx
Philadelphia District Office

Ronald C. Long, District Administrator

The Curtis Center, Suite 1005E

601 Walnut Street

Philadelphia, Pennsylvania 19106-3322

(215) 597-3100

Pacific Regional Office

Elaine M. Cacheris, Regional Director

5670 Wilshire Boulevard, 11th Floor

Los Angeles, California 90036-3648

(213) 965-3998

San Francisco District Office

David B. Bayless, District Administrator

44 Montgomery Street, Suite 1100

San Francisco, California 94104

(415) 705-2500

Southeast Regional Office

Randall J. Fons, Regional Director

1401 Brickell Avenue, Suite 200

Miami, Florida 33131

(305) 536-4700

Atlanta District Office

Richard P. Wessel, District Administrator

3475 Lenox Road, N.W., Suite 1000

Atlanta, Georgia 30326-1232

(404) 842-7600

XXI

Enforcement

The Commission's enforcement program is designed to protect investors

and foster confidence by preserving the integrity and efficiency of the

markets.

Key 1997 Results

In 1997,the Commission's investigations and actions resulted in

significant sanctions against securities law violators. The Commission

obtained court orders requiring defendants to disgorge illegal profits of

approximately $214 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

more than $49 million.

Enforcement Actions Initiated

1993 1994 1995 1996 1997

Civil Injunctive Actions 172 196 171 180 189

Administrative Proceedings 229 268 291 239 285

Contempt Proceedings 15 33 23 32 14

Reports of Investigation -.Q -.Q _1 -l _1

Total 416 497 486 453 489

In Commission-related cases, criminal authorities obtained 93

indictments or informations and 98 convictions during 1997. The

Commission granted access to its files to domestic and foreign

prosecutorial authorities in 197 instances.

1
Enforcement Authority

The Commission has broad authority to investigate possible violation;

of the federal securities laws. In its informal investigations, the staff

requests information on a voluntary basis. In its formal investigations, the

staff can use the Commission's subpoena power to compel witnesses to

testify or to produce books, records, and other evidence.

The federal court injunction, an order that prohibits future violations

of the law, has historically been one of the Commission' s principal

enforcement tools. Conduct that violates the injunction may result in fines

or i~prisonment. In actions seeking injunctions, the Commission also

may request temporary restraining orders and preliminary injunctions as

emergency reliefto address ongoing violations. In its emergency actions,

the Commission will often request freeze orders to protect investor funds

and assets. As additional sanctions in civil actions, the Commission

frequently seeks orders requiring disgorgement of illegal profits and the

payment of civil penalties. The Remedies Act authorized the courts to

impose civil penalties 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 equitable

authority of the 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 violators may be

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

suspended or revoked. The Commission may impose similar sanctions on

persons employed by regulated firms, and may bar respondents from

further participation in penny stock offerings. In administrative

proceedings against regulated firms and their employees, the Remedies Act

authorizes the Commission to order the payment of penalties and

disgorgement.

The Commission also may issue cease and desist orders in

administrative proceedings against any person violating the federal

securities laws. The Commission may require disgorgement of illegal

profits in its cease and desist proceedings. In emergency situations, the

2
Commission may issue temporary cease and desist orders against regulated

firms or their employees.

The Securities Act of 1933 (Securities Act) permits the Commission

to suspend the effectiveness of registration statements containing false or

misleading statements, and to order compliance with the law. Rule I02(e)

of the Commission's Rules of Practice provides for administrative

proceedings against professionals, including accountants and attorneys, in

which they may be barred or suspended from appearing or practicing

before the Commission based on violations of the federal securities laws or

other evidence of unfitness.

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

or local authorities, or self-regulatory organizations (SROs). Any violation

of the federal securities laws can be prosecuted as a criminal violation, and

the staff often provides substantial assistance to the Department of Justice

in federal criminal actions.

Enforcement Activities

Most of the Commission's enforcement actions were resolved by

settlement with the defendants or respondents, who generally consented to

the entry of judicial or administrative orders without admitting or denying

the factual allegations made against them. Table 2 contains a list of all

enforcement actions instituted in 1997. The following summaries are

provided as a sampling of the year's significant actions.

Offering Cases

Securities offering cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act.

Internet Cases

The internet and the various commercial online services have become

popular sources of information about many areas of public interest,

including securities. In some instances, however, communications over

the internet have been used to solicit the purchase of unregistered securities

or to further securities frauds.

3
Successful coordination between the Commission and criminal

authorities resulted in the termination of a massive manipulation of the

stock of Systems of Excellence, Inc. (SOE), a manufacturer and distributor

of video teleconferencing equipment. Following an expedited

investigation, the Commission filed an action against Charles O. Huttoe,

SOE' s former chief executive officer, the publisher of a daily stock

newsletter that touted SOE over the internet, and eleven other individuals

and entities (SEC v. Charles 0. Huttoe'Y. The Commission alleged,

among other things, that Huttoe secretly distributed millions of SOE shares

to his family members and corporations under his control, manipulated the

market by issuing false favorable information, and then sold his shares into

the inflated market. Huttoe artificially inflated the price of SOE shares

through false and misleading press releases announcing nonexistent

multimillion dollar sales of SOE products, an acquisition that had not

occurred, and revenue projections for SOE that were without basis. The

Commission alleged that more than $10 million was obtained from the

dumping of SOE shares when the stock reached its high in June 1996.

Huttoe consented to the entry of an injunction, and the Commission

obtained relief as to a number of relief defendants in this action. Related

criminal actions were brought against Huttoe, the newsletter publisher, and

a former SOE auditor.

The Commission filed a complaint in SEC v. Merle S Finkel, 2

alleging that Finkel, a certified public accountant, issued materially false or

inaccurate audit reports on the financial statements of SOE and two other

publicly-traded companies, Twenty First Century Health, Inc., and

Combined Companies International Corp. The complaint alleged that,

with respect to each of the three issuers, Finkel's audit reports falsely

stated that he had conducted audits in accordance with generally accepted

auditing standards, and falsely represented that the financial statements

were fairly presented in conformity with generally accepted accounting

principles. Finkel consented to the entry of an injunction and a

Commission order denying him the privilege of appearing or practicing

before the Commission as an accountant.

The Commission filed a complaint against George Chelekis and two

companies that he controlled, KGC, Inc., and Hot Stocks Review, Inc.

(SEC v. George Chelekis, et al.3). Chelekis published and distributed

4
internet and print versions of investment newsletters known as the Hot

Stocks publications. Chelekis failed to disclose that he and the other

defendants received at least $1.1 million from more than 150 issuers, and

275,500 shares of stock from ten issuers, as payment for recommending

those issuers' securities. The defendants consented to the entry of an

injunction and orders requiring them to pay a total of $162,727,

r~presenting$75,050 in disgorgement,$12,627 in prejudgment interest,

and a $75,050 civil penalty.

Other Offering Violations

The Commission filed an action against First Interregional Advisors

Corporation, a company engaged in the financing and distribution of

equipment lease contracts, a related broker-dealer firm, and the individual

who acted as president of both companies (SEC v. First Interregional

Advisors Corporation, et al.4). The complaint alleged that First

Interregional promised investors that they were purchasing particular

leases or groups of leases with specific governmental units, from which

they would receive an income stream over the life of the lease. In fact,

most of the investors were sold leases that had already been sold to others.

Interregional did not have sufficient funds to meet obligations to investors.

The Commission obtained a temporary restraining order and the

appointment of a receiver in these proceedings, which were pending at the

end of the year.

The Commission alleged that Global Financial Traders, Ltd., an

investment newsletter publisher, and individuals and companies related to

Global, engaged in a manipulation and concerted telemarketing campaign

to sell unregistered stock of American Image Motor Company (SEC v.

Global Financial Traders, Ltd. 5). The defendants sold large amounts of

the stock from their own accounts. The Commission obtained a temporary

restraining order, an asset freeze, and a preliminary injunction against the

firm and its principals.

Municipal Securities Cases

Individual investors have become important players in the municipal

securities markets, through direct purchases of municipal bonds and

through investments in mutual funds that hold these securities. At the

same time, the overall size of the market has grown substantially. To

5
protect investors in municipal securities, the Commission has focused

increased attention on potentially illegal activities in this market.

In cease and desist proceedings against Syracuse, New York, and two

of its financial officers, the Commission alleged that the city

misrepresented its financial condition and results of operations when

offering and selling municipal securities issued in December 1995 and

February 1996 (In the Matter of The City of Syracuse, New York, et al.6).

The official statements used to sell the securities showed a surplus of

$400,000 in the city's general and debt service funds, when in fact the city

had a deficit of $9.4 million. As a result of that and other misstatements,

the city overstated its 1995 ending fund balance by $24.2 million. The city

also described summary financial information as audited, without

disclosing that some of the information was derived from financial

statements on which auditors had issued reports containing qualified

opinions. Syracuse and the two individual respondents consented to the

entry of cease and desist orders.

The Commission alleged failure to reasonably supervise by Smith

Barney, Inc., in connection with a bond offering by Dade County, Florida

in 1993 (In the Matter of Smith Barney, Inc. \ The county had originally

planned to issue fixed-rate bonds. Smith Barney proposed an alternative

financing structure under which the county would issue variable-rate

bonds. The county would then exchange its obligation to make variablerate payments for another issuer's obligation to make fixed-rate payments.

When the alternative financing structure was first proposed, the Smith

Barney employee's calculations showed that the county would realize

substantial savings by adopting its alternative. However, a subsequent

change in interest rates caused the potential savings to the county to fall

below the threshold it had set for use of the alternative structure. The

Smith Barney employee responsible for structuring the transaction then

manipulated variables in the calculations to create the false impression that

the alternative would generate savings in excess of the minimum required.

The use of faulty and inaccurate assumptions in the calculations resulted in

the overstatement of hypothetical savings by at least $5 million. In

reliance on these calculations, the county decided to adopt the alternative

financing structure. Smith Barney consented to the entry of an order in

which the Commission found that it had failed to supervise the employee

responsible for the transaction. The order censured the firm and required it

to pay disgorgement of $1,584,671, plus prejudgment interest of $452,365,

6
to Dade County. The firm also was required to pay a civil penalty of

$250,000.

The Commission charged CS First Boston Corporation and two of its

former investment bankers with fraud in the offer and sale of $110 million

in bonds issued by Orange County, Califomia(SEC v. c.s. First Boston

Corporation, et al.8). The complaint alleged that the defendants misled

investors about the risks of the county's investment strategy and losses.

Information about the county's investment strategy, risks, and investment

losses was material to investors in the $110 million bond offering because

the county guaranteed the bonds' liquidity. Investors had the right to

liquidate their investment upon seven days' notice, and, if the bonds could

not be resold in that time, the county agreed to repurchase them. This case

was pending at the end of the year.

Financial Disclosure Cases

Actions involving false financial statements, or false and misleading

disclosures about matters affecting an issuer's financial condition, tend to

be complex, and generally demand a greater commitment of 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 90 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 filed an action charging Fabri-Centers of America,

Inc., a fabric and crafts retailer, Robert L. Norton, and Joseph E. Williams

with materially overstating Fabri-Centers' earnings and profitability prior

to a $74.75 million convertible debt offering in March 1992 and in the next

three fiscal quarters (SEC v. Fabri-Centers of America, Inc., et al.9). The

overstatements allowed Fabri-Centersto sell its convertible debt at better

prices and on more favorable terms than if accurate information had been

provided. Fabri-Centers consented to entry of an injunction and an order

requiring the payment of $3 .28 million in disgorgement.

In administrative proceedings, the Commission alleged that W.R.

Grace & Co. failed to disclose fully the substantial retirement benefits it

7
had agreed to provide J. Peter Grace, Jr. on his retirement as chief

executive officer (In the Matter ofWR. Grace & Co. 10). W.R. Grace also

failed to disclose a related-party transaction with Grace's son in its 1993

Form 10-K and its 1994 proxy statement. The undisclosed transaction

involved the acquisition, by a group headed by Grace's son, of Grace Hotel

Services Corporation, a W.R. Grace subsidiary. W.R. Grace consented to

the entry of a cease and desist order. The company and three of its former

officers and directors also consented to the issuance of a Report of

Investigation under section 21 (a) of the Securities Exchange Act of 1934

(In the Matter ofWR. Grace & Co.l1). The 21(a) Report emphasized the

affirmative responsibilities of corporate officers and directors to ensure that

shareholders receive accurate and complete disclosure of information

required in proxy solicitations and periodic reports.

The Commission filed an action against Ferrofluidics Corporation and

five individuals alleging false and misleading statements about a sham

private placement of securities, the company's equity investments, and its

sales of products (SEC v. Ferrojluidics Corporation, et al. 12). The

defendants also disseminated favorable, but baseless, projections of the

company's profitability and business prospects. The company was in fact

experiencing significant losses, as well as difficulties in developing and

manufacturing its products. The complaint further alleged that two of the

defendants engaged in insider trading by selling Ferrofluidics stock while

in possession of material, non-public information about the company's true

financial condition. This action was pending at the end of the year. The

Commission also instituted five related administrative proceedings against

a total of eleven individuals and a broker-dealer firm.

In a civil action against Montedison, S.p.A., an Italian company, the

Commission alleged that the company concealed bribes paid to politicians

in Italy and to other persons (SEC v. Montedison, Sip.A. 13). By misstating

its financial condition and results of operation, Montedison was able to

conceal losses of$398 million and to materially overstate its assets for

fiscal years 1988 through 1991. These proceedings were pending at the

end of the year.

The Commission's complaint against Triton Energy Corporation and

some of its former officers was based on numerous improper payments

that were intended to influence Indonesian government employees in

violation of the Foreign Corrupt Practices Act (SEC v. Triton Energy

8
Corporation, et al. 14). The payments were falsely entered on corporate

books as routine business expenditures. The complaint alleged that Triton

Energy failed to maintain an adequate system of internal accounting

controls to detect and prevent improper payments to government officials

and to provide reasonable assurance that transactions were recorded as

necessary to permit preparation of financial statements in conformity with

generally accepted accounting principles. Triton Energy consented to the

entry of an injunction and an order requiring the payment of a $300,000

civil penalty. In addition, one of Triton's former officers consented to an

injunction and an order requiring the payment of a $50,000 civil penalty.

The Commission instituted related administrative proceedings against

former Triton employees David Gore, Robert Puetz, William McClure,

and Robert P. Murphy for their conduct in connection with the improper

payments and misbookings The respondents consented to the entry of

cease and desist orders.

Insider Trading

Insider trading occurs when a person in possession of material nonpublic information engages in securities transactions or communicates the

information to others who trade. The ITSA authorizes the Commission to

seek a civil penalty, payable to the United States Treasury, of up to three

times the profit gained or loss avoided by 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. In injunctive actions against insider traders, the

Commission often seeks disgorgement of illegal profits in addition to civil

penalties. During 1997, the Commission brought 57 cases alleging insider

trading violations.

The complaint filed against Roy Handojo alleged insider trading in the

stock of five companies involved in four separate merger negotiations

(SEC v. Roy Handojo'i). Handojo obtained material non-public

information while employed as an analyst by J.P. Morgan's Financial

Institutions Group, which participated in the negotiations as adviser. His

trading resulted in profits of more than $477,000. The Commission

obtained an order freezing assets in the defendant's brokerage and bank

accounts in these proceedings, which were pending at the end of the year.

9
The Commission filed an action against FrederickLiu, a Hong Kong

resident, alleging that he obtained material non-public information about

the proposed acquisition of Renaissance Hotel Group by Doubletree

Corporation (SEC v. Frederick LiuI6). The 1.4 million shares of

Renaissance common stock that Liu purchased for an average price of

$15.66 increased in total value by $11,270,000 after the public

announcement of the merger. Liu canceled the trades and abandoned the

trading profits when he learned of the Commission's emergency

enforcement action. Liu consented to the entry of an injunction and an

order requiring him to pay a civil penalty of $2 million.

In an emergency action, the Commission filed a complaint against an

unknown trader (since identified as Abdul Ismail) and Ong Congqin

Bobby (SEC v. One Unknown Purchaser of the Call Options of APL

Limited, et al. I\ The complaint was subsequently amended to add an

additional defendant, Lum Kwan Sung, a resident of Singapore. The

Commission alleged that the defendants engaged in insider trading prior to

the public announcementthat APL Limited would be acquired by

Singapore-based Neptune Orient Lines, Ltd. Ismail purchased call options

anonymously through an account at a Swiss bank, while Ong purchased

calls through a Singapore subsidiary of a United States brokerage firm.

Lum purchased APL common stock. The court granted the Commission's

request for a temporary asset freeze and orders requiring the defendants to

identify themselves, allowing expedited discovery, and granting other

ancillary relief. Ismail has been dismissed from this action, which was

pending at the end of the year.

In an emergency action filed against Emanuel Pinez, the former chief

executive officer of Centennial Technologies, Inc., the Commission

alleged insider trading by Pinez while he was in possession of information

regarding Centennial's true financial condition (SEC v. Emanuel Pinez 18).

Pinez caused Centennial to record fictitious sales in which he secretly paid

for products with his own funds. Pinez also allegedly altered inventory

tags, which resulted in an overstatement of inventory. Pinez's apparent

motive for these transactions was to ensure that Centennial's reported

results met analysts' expectations. Pinez purchased put options and sold

call options on Centennial stock, while aware that Centennial's fmancial

condition was substantially worse than reported. The court granted the

Commission's request for a temporary restraining order and for orders

10
freezing assets, requiring an accounting, and providing other relief. Pinez

was indicted in related criminal proceedings.

Regulated Entities

The Commission exercises oversight of SROs in the securities

business. The Commission instituted administrative and cease and desist

proceedings against Stock Clearing Corporation of Philadelphia (SCCP)

and Philadelphia Depository Trust Company (Philadep) (In the Matter of

Stock Clearing Corp. of Philadelphia and Philadelphia Depository Trust

Co. 19). The Commission's order found that SCCP and Philadep failed to

comply with their own rules and procedures, failed to file necessary

proposed rule changes with the Commission and, in the case of SCCP,

violated margin lending requirements of Regulation T. Some ofSCCP's

and Philadep' s violations were the result of inadequate internal and risk

management controls. For example, specific funds collected from SCCP

and Philadep clearing members and maintained as collateral in the event of

a financial emergency, as required by SCCP' s and Philadep' srules, were

not safeguarded against improper uses. As a result, these funds were

commingled with general operating funds and were available and used,

almost without limitation, to meet operating expenses and cover cash

shortfalls at the Philadelphia Stock Exchange. Other violations resulted

when SCCP and Philadep utilized procedures and methodologies that were

not approved by the Commission and conducted operations in a manner

contrary to their own rules and regulations. SCCP and Philadep consented

to the entry of a cease and desist order requiring them to comply with

detailed undertakings. The Commission instituted related proceedings

against Timothy J. Guiheen, the former president and chief executive

officer of the SCCP and Philadep; Guiheen consented to the entry of a

cease and desist order.2o The Commission also instituted cease and desist

proceedings against William N. Briggs, who was formerly employed by

the SCCP and Philadep and is currently chief financial officer of the

Philadelphia Stock Exchange/ ' The proceedings against Briggs were

pending at the end of the year.

11
Retail Sales Practices

The Commission consistently brings high profile cases against the

entities and individuals it regulates, sending a strong message to the

industry that misconduct relating to the sale of securities will not be

tolerated. Moreover, the Commission is placing greater emphasis on firm,

and their managers, increasing the number of cases alleging failure to

supervise, and imposing stiffer sanctions.

A number of proceedings have involved schemes in which brokers

sold securities in exchange for undisclosed payments from issuers or

promoters. In October 1996, as a result of an undercover investigation by

the Federal Bureau ofInvestigation(FBI), working in cooperation with the

Commission, NASD Regulation, and the U.S. Attorney's Office for the

Southern District of New York, 45 individuals were arrested and charged

variously with conspiracy, securities fraud, and criminal contempt

following extensive investigations into illegal payments made to securities

brokers in connection with sales of over-the-counter and Nasdaq stocks to

customers.t' The Commission brought administrative proceedings against

29 of the stock promoters, company officials, brokers, and others who

were arrested. The Commission's proceedings charged the individuals

with securities fraud based on the same conduct underlying the criminal

complaints and sought cease and desist orders, bars on promoting penny

stocks, and disgorgement. According to the criminal complaints,

undercover FBI agents operating a small brokerage firm in Manhattan

posed as brokers who managed millions of dollars and were willing to

accept payoffs to sell over-the-counter bulletin board and Nasdaq stocks to

customers. The payments were generally made by and through stock

promoters who, working with officers of the companies whose stocks were

being touted, paid the brokers as much as 40 percent of the value ofthe

stock being sold to the brokers' customers.

The Commission instituted administrative proceedings against 11

respondents alleged to have participated in a scheme to sell securities to

brokerage customers in return for undisclosed compensation (In the Matter

of John L. Banach, et a123). The respondents included John L. Banach, the

former president of Enrotek Corporation. Banach and others made

payments to registered representatives at two brokerage firms in exchange

for purchases of Enrotek stock by the brokerages' customers. These

proceedings were pending at the end of the year.

12
The Commission also instituted administrative proceedings against

four individuals, alleging that they participated in a scheme to sell common

stock of Teletek, Inc. in return for payments that were not disclosed to

24 customers (In the Matter a/Steven Ira Wertman, et al. ). Steven Ira

Wertman, a stock promoter, arranged for secret payments to Robert Bruce

Orkin, the owner and principal officer of a now defunct brokerage firm.

Wertman and Orkin also allegedly manipulated the market in Teletek

stock. These proceedings were pending at the end of the year. In related

proceedings, the Commission alleged that Thomas Cloutier, a former

registered representative with a broker-dealer firm, sold Teletek stock in

exchange for undisclosed compensation (In the Matter a/Thomas John

Cloutier25). These proceedings also were pending at the end of the year.

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 can also impose sanctions

upon firms and their senior management for failure reasonably to supervise

employees to prevent violative conduct.

The order instituting proceedings against H. Beck, Inc., a registered

broker-dealer, and its chief executive officer, Gary S. Hurvitz, alleged that

an H. Beck registered representative engaged in a scheme to defraud

customers through the offer and sale of unregistered partnership interests

(In the Matter 0/H Beck, Inc., et al. 26). The registered representative

churned the account of an H. Beck customer and attempted to cover up the

scheme by sending misleading statements and updates to investors. The

Commission charged that H. Beck and Hurvitz failed reasonably to

supervise the registered representati ve with a view toward preventing his

violations. The respondents failed to implement a system reasonably

designed to prevent and detect his violations, failed adequately to monitor

his day-to-day activities, and failed to take adequate action in response to

red flags regarding his conduct. These proceedings were pending at the

end of the year.

13
The Commission filed an action against Sterling Foster & Co., Inc., a

New York broker-dealer, and four of its employees, Adam Lieberman,

Craig Kellerman, Frank Monroig, and Dennis Rueb, alleging that they had

obtained at least $75 million in connection with the manipulation of

securities of six issuers (SEC v. Sterling Foster & Co., Inc., et al.27).

Sterling Foster, Lieberman, and Kellerman manipulated the price of

securities of six public companies and sold these securities at artificially

inflated prices to investors. Lieberman and Monroig trained Sterling

Foster representati ves to induce customers to purchase these securities

through "boiler-room" sales practices. Sterling Foster, Lieberman, and

Kellerman charged customers undisclosed excessive markups of at least

$75 million on purchases of these securities and prevented the customers

from selling their positions. Sterling Foster, Lieberman, Kellerman, and

Monroig consented to the entry of a temporary restraining order that

appointed a special compliance monitor for Sterling Foster. This action

was pending at the end of the year.

The Commission instituted administrative proceedings against Royal

Alliance Associates, Inc., a registered broker-dealer (In the Matter of Royal

All iance Associates, Inc. 28). The managing executive of Royal Alliance's

Greensboro office transferred funds among approximately 50 of his

customers through various deceptive means, including the use of separate

entities. When the scheme ended, 14 of the managing executive's

customers had suffered losses of about $600,000. The managing executive

of Royal Alliance's Cocoa Beach office misappropriatedapproximately

$400,000 from ten of his customers. The Commission alleged that Royal

Alliance lacked adequate supervisory and compliance procedures and

failed adequately to implement the procedures that were in place with

respect to its Greensboro and Cocoa Beach offices. Royal Alliance

consented to the entry of an order requiring payment of a civil penalty of

$50,000 and retention of an independent consultant to review the firm's

policies and procedures.

The Commission instituted public administrative proceedings against

GKN Securities Corporation, a registered broker-dealer, and Robert H.

Gladstone, GKN's executive vice president, alleging that they had failed

reasonably to supervise a number of GKN registered representatives with a

view to preventing securities law violations (In the Matter ofGKN

Securities Corp., et al.29). GKN grew rapidly between 1990 through 1992.

The number of customer complaints received by the firm rose substantially

14
during this period and included multiple complaints against particular

registered representatives supervised by Gladstone. Customer complaints

included unauthorized trading and failure properly to execute sale orders.

Gladstone did not regularly review the complaints or the conduct of the

registered representatives who were the subjects of the complaints. GKN

and Gladstone failed to establish adequate supervisory procedures to

monitor the sales practice activities of the registered representatives and

failed to put in place procedures to track and adequately respond to

customer complaints. GKN consented to pay a $100,000 civil penalty, to

implement and maintain policies and procedures designed to reasonably

detect and prevent violations and to retain an independent consultant to

review their policies and procedures. Gladstone consented to a 30-day

suspension from association and an II-month supervisory suspension.

Investment Advisers and Investment Companies

The Commission brought a number of significant cases in 1997

involving investment advisers and investment companies. In this area, the

Commission expressed concern over the use of "soft dollars." A soft dollar

arrangement involves the use of commission dollars generated by trades

executed in client accounts to pay for research, brokerage, or other

products, services, or expenses. This creates a potential conflict of interest

for the adviser that must be disclosed to clients for their consideration

when hiring an adviser.

A recent case dealing with the failure to disclose a soft dollar

arrangement to clients involved Oakwood Counselors, Inc., a registered

investment adviser, and its president and sole owner, Paul J. Sherman (In

the Matter of Oakwood Counselors, Inc., et al.30). The Commission

alleged that Oakwood entered into a soft dollar arrangement with a brokerdealer and, from January 1989 to June 1995, used soft dollar credits

generated by the arrangement to pay for most of its own expenses,

including phone bills, office equipment, client solicitation fees, and client

accounting and marketing expenses. This arrangement was not disclosed

to Oakwood's clients. Oakwood consented to the entry of an order

requiring it to pay disgorgementof$419,763 and a civil penalty of

$25,000.

The Commission instituted administrative and cease and desist

proceedings against Parnassus Investments, a registered investment adviser

15
that acted as adviser to the Parnassus Fund, a mutual fund based in San

Francisco, and to individuals (In the Matter of Parnassus Investments, et

al.31). The Commission alleged that the respondents overstated the fund's

net asset value for over two years by failing properly to value its holding of

Margaux, Inc., a thinly traded security. The overstated net asset value

caused redeeming shareholders to receive more than they were entitled to,

thereby diluting the holdings of remaining shareholders, and caused

purchasing shareholders to pay more for fund shares than their actual

value. This violation also had the effect of increasing Parnassus

Investment's compensation as adviser to the fund. The Commission

alleged that Parnassus improperly used soft dollar credits from the fund's

broker to benefit Parnassus instead of the fund and its shareholders.

Parnassus failed to disclose the improper use of soft dollar credits.

The Commission alleged a scheme by Devon Capital Management,

Inc., a registered investment adviser, that resulted in the loss of millions of

dollars of municipal bond proceeds invested by Pennsylvania school

districts (SEC v. John Gardner Black, et af.32). Devon represented to its

school district advisory clients that their funds were fully protected by a

pool of securities equal to their principal investment and that they would

receive a specified rate of return over a fixed period. In fact, the

investment program resulted in a combined loss of approximately $71

million for the school districts. Devon concealed the loss by

misrepresenting the value of assets held as collateral. In addition, Devon

continued to accept new clients even though their investments were

immediately diluted. Devon, an affiliated company, and John Black, who

controlled both entities, used at least $2 million of school district funds for

personal and business expenses. The defendants consented to the entry of

injunctions and an order requiring further discovery as to disgorgement

and civil penalties.

In administrative proceedings against Ronald V. Speaker and Janus

Capital Corporation, the Commission alleged that Speaker, the portfolio

manager for a registered mutual fund, breached his fiduciary duty by

taking an investment opportunity without disclosing the opportunity to the

fund (In the Matter of Ronald V Speaker, et af.33). An institutional

salesman for a broker-dealer offered Speaker the opportunity to purchase

securities in Time Warner, an offer that Speaker rejected on behalf of the

fund. Later that day, he learned of a bid from another broker-dealer for the

debentures at a price higher than the price he had been offered. Without

16
disclosing his conflict of interest to the fund, and without obtaining the

fund's prior consent, Speaker personally purchased $10 million of the

debentures in two transactions and sold the debentures that same day for a

total profit of $16,000. The compliance department at Janus became aware

of the trade, but took no action after reviewing the transaction. Speaker

consented to the entry of a cease and desist order and orders requiring him

to pay disgorgementof$16,000, plus prejudgmentinterestof$5,199, and

to pay a civil penaltyof$16,000. He also consented to a suspension from

association for 90 days, and to limitations on his personal securities

transactions for a 3-year period. Janus consented to the entry of an order by

which it was censured and required to pay a civil penalty of $25,000.

The Commission instituted administrative proceedings against

Alliance Capital Management, L.P., a registered investment adviser,

alleging that Alliance failed reasonably to supervise Roger W. Honour (In

the Matter of Alliance Capital Management, L.p.34). Honour was the

portfolio manager for two technology funds with a total of $220 million

under management. On 24 occasions, he personally traded in securities

being bought or sold by the funds and other Alliance clients. On several

occasions, Honour was able to obtain better prices for himself than for

Alliance clients. While Honour was associated with Alliance, the adviser

lacked adequate procedures to detect and prevent either his personal trades

made on the same day as client trades or his trading in breach of his

fiduciary duties that did not occur on the same day as a client trade.

Alliance consented to the entry of an order that imposed a censure and

required the firm to pay a civil penalty of $100,000.

The Commission instituted administrative proceedings against

Fundamental Portfolio Advisors, Inc., a registered investment adviser;

Vincent J. Malanga, Fundamental's president; Lance M. Bronfman, the

former portfolio manager of the Fundamental U. S. Government Strategic

Income Fund; and Fundamental Service Corporation, a broker-dealer

affiliated with Fundamental (In the Matter of Fundamental Portfolio

Advisors, Inc., et al.35). The Income Fund failed to disclose risks that

stemmed largely from its substantial investment in inverse floating

collateralized mortgage obligations (inverse floaters). The fund was

marketed as a relatively safe and conservative investment with a limited

duration of three years or less. Because of the fund's investment in inverse

floaters, it actually had a heightened sensitivity to changes in interest rates.

17
The fund's duration also was much higher than three years. These

proceedings were pending at the end of the year.

The Commission's administrative proceedings against Mitchell

Hutchins Asset Management, Inc. arose from the adviser's management of

the Paine Webber Short- Term U.S. Government Income Fund (In the

Matter of Mitchell Hutchins Asset Management Inc. 36). The adviser

marketed the fund as a higher-yield and somewhat higher-risk alternative

to money market funds and certificates of deposit. The fund told investors

that it did not intend to invest in certain classes of interest only and

principal only stripped mortgage-backed securities. Nonetheless, the fund

began investing in such securities in the fall of 1993. The adviser failed to

review the securities purchased by the fund's portfolio manager or to

ensure that the fund's investments were consistent with the prospectus and

other public disclosures. When interest rates increased in 1994, the fund

incurred significant losses. Mitchell Hutchins consented to the entry of a

cease and desist order that required the firm to pay a civil penalty of

$500,000.

Sources for Further Inquiry

The agency publishes the SEC Docket, which includes

announcements regarding enforcement actions. SEC litigation releases

describe civil injunctive actions and also 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, as well as other

information. The SEC Docket also contains Commission orders instituting

administrati ve proceedings, making findings, and imposing sanctions in

those proceedings; initial decisions; and significant procedural rulings

issued by administrative law judges.

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 Website (http://www.sec.gov). Persons who wish to

report possible instances of fraud on the internet -or any other violations of

the federal securities laws--may now send messages to the Commission

through its internet site. The Commission's Enforcement Complaint

Center may be reached through the Enforcement web page; visitors have

18
the option of using either an internet form or sending an electronic mail

message through the site. In addition, electronic mail may be sent directly

to the Division of Enforcement at enforcement@sec.gov.

19
International Affairs

The SEC works in the international arena to promote cooperation and

assistance and to encourage the adoption of high regulatory standards.

The Office of International Affairs develops and implements the SEC s

international enforcement and regulatory initiatives. Tofurther these

goals, the office negotiates and oversees the implementationof

information-sharingarrangementsfor enforcement and regulatory

matters, conducts a technical assistance program for countries with

emerging securities markets, and ensures that the SEC's interests are

furthered through its participation in international organizations.

Key 1997 Results

In 1997, the office made 240 requests to foreign governments for

enforcement assistance on behalf of the SEC and responded to 363

requests for enforcement assistance from foreign governments. The

international affairs staff responded to 160 foreign requests for technical

assistance and provided training for 341 foreign capital markets officials

from 91 countries.

The SEC signed with the Bank of England the agency's first crossborder, cross-sectoral agreement to assist in regulatory cooperation. In

addition, the SEC signed memoranda of understanding to assist in law

enforcement with authorities in Germany and Portugal.

The SEC's leadership role in the International Organization of

Securities Commissions (IOSCO) and the Council of Securities Regulators

of the Americas (COSRA) continued to advance international regulatory

and market oversight issues. IOSCO published a paper on internet

enforcement and surveillance and continues to examine the impact of the

internet on securities regulation. rosco also adopted a comprehensive

resolution on recordkeeping and collection of information that will

facilitate enforcement cooperation. Finally, IOSCO approved a paper to

facilitate information sharing by regulators and market authorities during a

market or firm crisis.

20
Arrangements for Exchange of Information and Assistance

The SEC obtains foreign-based information to protect U.S. investors

and markets from cross-border fraud and other violations of the U.S.

federal securities laws. The SEC has entered into 32 arrangements with

foreign counterparts for information sharing and cooperation in the

investigation and prosecution of securities law violations. As an

outgrowth of its experience in the enforcement arena, the SEC has

expanded its arrangements to encompass cooperation on regulatory

matters.

The SEC signed a Memorandum of Understanding (MOU) with the

Bank of England and the Commodity Futures Trading Commission to

strengthen regulatory oversight of globally active U.S. and U.K. entities

engaged in securities and futures activities. The newly named U.K.

Financial Services Authority (FSA) also signed the MOU to confirm that

its provisions will continue upon the transfer of U.K. banking supervision

to the FSA in 1998. The MOU is the first formal understanding among

U.S. and U.K. securities, futures and banking regulators, and evidences

increased regulatory cooperation across international borders and across

financial sectors (securities and banking).

The SEC signed an MOU with the Bundesaufsichtsamtfur den

Wertpapierhandel (BAWe) (Germany's securities regulator) for

cooperation and sharing information in enforcing U.S. and German

securities laws. The MOU is the first to be signed by the BA We with a

securities authority outside of the European Union.

The SEC signed an MOU with the Comissao do Mercado de VaIores

Mobiliarios (CVM) of Portugal, concerning consultation and cooperation

in enforcing U.S. and Portuguese securities laws. The MOU was signed

after Portuguese law was amended to allow the CVM to use its

investigatory powers on behalf of foreign regulators.

21
Enforcement Cooperation and International Cases

Assistance from foreign authorities helps the SEC to institute

enforcement proceedings. In 1997, the SEC made 240 requests to foreign

governments for enforcement assistance and responded to 363 requests for

enforcement assistance from foreign governments. The following are

significant cases involving either the SEC's receipt of assistance from

foreign regulators or substantial international dimensions.

SECv. Pinez. After the SEC sued the defendant in the U.S., he moved

over $1 million in alleged insider trading proceeds to an account in Jersey.

Based on information provided by the Jersey Financial Services

Commission, the SEC brought an action in Jersey and had the illegally

obtained proceeds frozen there.

SEC v. Montedison. With assistance of the Italian Commissione

Nazionale per le Societa e la Borsa, the SEC brought action against a

foreign issuer for fraudulent financial statements and disclosures. This

case demonstrates that foreign firms listing in the U.S. will be held to the

same disclosure standards as U.S. firms.

SEC v. Comparator. In this fraud case, the Malaysian Securities

Commission and the Malaysian Central Bank assisted the SEC for the first

time, obtaining bank records that revealed illegally obtained profits.

SEC v. Ong. The SEC alleged that two Singapore business people

bought millions of dollars of common stock and options of APL, a

Delaware corporation, in advance of the public announcementthat

Singapore-basedNeptune Orient Lanes had agreed to acquire APL. The

SEC obtained a temporary restraining order and freeze orders against the

defendants.

SEC v. Triton Energy Corp. The SEC alleged violations of the

Foreign Corrupt Practices Act by Triton Energy Corp., an international gas

and oil company based in Dallas, for allowing and concealing bribes to

Indonesian officials. In addition, administrative proceedings were

concluded against four former employees in connection with the improper

payments and misbookings.

22
Technical Assistance

The SEC's technical assistance program helps emerging foreign

securities markets to develop regulatory structures that promote investor

confidence. The technical assistance program is multifaceted and includes

training programs, review of foreign securities laws and regulations, and

responses to ad hoc requests. In the past year, the Office ofInternational

Affairs responded to 160 foreign requests for technical assistance and

provided U.S. training for 341 capital market officials from 91 countries.

The cornerstone of the training 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 66 countries attended the 1997 Market

Development Institute. An additional 101 delegates representing 50

countries attended the week -long International Institute for Securities

Enforcement and Market Oversight. SEC staff also conducted training

programs on enforcement and disclosure issues geared toward regulators

from targeted geographic regions. SEC staff contributed to IOSCO' s first

international educational program, which focused on the regulation and

supervision of market intermediaries.

The Office ofInternational Affairs strengthened its partnership with

the U.S. Agency for International Development (USAID), which provides

funding for many of the SEC's technical assistance programs. The two

agencies entered into a global agreement in 1997 that enables the SEC to

provide technical assistance to regulatory agencies and stock exchanges in

emerging economies throughout the world. USAID continues to fund the

SEC's technical assistance programs in the New Independent States of the

former Soviet Union and Central and Eastern Europe, including a regional

office training program. Also the SEC began a USAID- funded technical

assistance program with Egypt, which includes a short -term resident SEC

advisor in Cairo and training for staff of the Egyptian Capital Markets

Authority.

International Organizations

Through its involvement in international organizations, the SEC

promotes its regulatory approach, fosters high regulatory standards, and

23
develops international consensus on many issues. The SEC also benefits

from a better understanding of foreign regulations, markets and practices

as a result of its participation in multilateral organizations.

International Organization of Securities Commissions

With over 150 members, loseo promotes cooperation and

consultation among the world's securities regulators. In 1997, loseo

completed work on:

• a paper on internet enforcement and surveillance;

• a resolution focusing on conducting successful investigations and

prosecutions of securities violations; and

• a paper identifying the types of core information that may be

needed to assess and manage the impact of specific emergency

events and that should facilitate information sharing during a

crisis.

loseo's key ongoing activities include:

• working with the International Accounting Standards Committee

as that body develops international accounting standards for use in

cross-border offerings;

• heightening regulators' awareness of the need for their industry to

address year 2000 computer issues;

• examining a range of internet-related issues; and

• developing a set of core principles for securities regulation.

Council of Securities Regulators of the Americas

COSRA enhances the efforts of countries in the Americas to develop

sound securities markets that are fair to all investors. COSRA's

membership represents both developed and emerging markets. In 1997,

eOSRA approved principles for effective oversight of independent

24
auditors. COSRA also launched a hemisphere-wide investor education

campaign, and will unveil investor education and protection materials that

focus on saving and investing.

Organization/or Economic Cooperation and Development (OECD)

In May 1997, the OECD Ministers agreed to enact national

legislation, as well as sign an international treaty, criminalizing foreign

bribery by the end of 1998. The agreement also calls for an end to the taxdeductibility of bribes and stricter accounting and auditing guidelines for

companies. The SEC worked with other U.S. government agencies in

developing the accounting and auditing guidelines that were adopted.

International Market Oversight

At the 1997 Denver Summit, the heads of state of the Group of Seven

(G-7) countries asked securities and banking regulators to cooperate in

enhancing regulatory oversight and to promote stronger risk management

and improved transparency in markets. The SEC is using its specialized

knowledge of foreign securities systems to contribute to two initiatives that

respond to the G-7 directive: (1) the SEC is working with IOSCO to

develop a core set of principles for regulating securities markets, which

should improve the quality of supervision; and (2) within the Joint Forum

on Financial Conglomerates, the SEC is working to facilitate information

exchange among securities, banking and insurance supervisors concerning

the activities of internationally active firms.

25
Investor Education and Assistance

The Office of Investor Education and Assistance serves investors who

complain to the SEC about investmentfraud or the mishandling of their

investments by securities professionals. The office also responds to a

broad range of investor inquiries, produces and distributes educational

materials, and organizes town meetings and seminars.

Key 1997 Results

During the year, the investor assistance specialists analyzed and

responded to 48,169 complaints and inquiries from the public. These

actions helped investors recover approximately $1 million.

As part of the agency's effort to educate investors, the office

organized five investors' town meetings and held twenty-four seminars on

how to invest wisely. The office also released two new publications

entitled, Cold Calling Alert and Corporate Bankruptcy.

The Office ofInvestor Education and Assistance began working with

securities regulators from throughout the Western Hemisphere, members

of the Council of Securities Regulators of the Americas, to plan an

international investor education week from March 29 to April 4, 1998.

Investor Complaints and Inquiries

In 1997, the investor assistance specialists analyzed and responded to

48,169 complaints and inquiries, 6 percent more than in 1996. Since 1993,

the volume of investor contacts has risen by over 36 percent.

26
OlEA Complaint & Inquiry

Totals by Fiscal Year

+6%

50000 +7% 48169

+ 10% 45370

45000 +12% 42575

40000 ~---~ --- ~38839

35000

34713

30201

30000 27504

25000 22420

20000

16419

15000

10000

5000 -j -

0

1993 1994 1995 1996 1997

L Complaints 0 lnqumes • Totals

% = percentage Increase/decrease over previous year

Approximately two-thirds of the 48,169 investor contacts in 1997

were inquiries, and one-third were complaints. The most common investor

inquiries included (1) questions about the laws governing the securities

industry, (2) questions concerning the filing status of companies, and

(3) requests for SEC publications.

Of the 17,968 complaints the investor assistance specialists handled in

1997, approximately 55 percent involved broker-dealers, and

approximately 21 percent involved issuers. The remainder involved

mutual funds, investment advisers, banks, transfer and clearing agents, and

other financial and non-financial entities.

A majority of the broker-dealer complaints involved common stocks.

As the chart that follows demonstrates, investors most frequently

complained that their brokers engaged in unauthorized transactions.

During the year, complaints concerning unauthorized transactions

increased by 12 percent compared with 1996. Complaints concerning

misrepresentations declined by 8 percent compared with 1996, while

complaints concerning a broker's failure to follow instructions rose by 25

27
percent. A growing number of investors--1 0 percent more than in 1996--

complained about cold calling problems during the year. From 1995 to

1997, cold calling complaints nearly doubled.

OlEA Broker Dealer Complaints by Major Complaint Type

Fiscal 1997

1400 1370

1200

,

-,

~4

1000 ;:~; v

i/

877 824

800 ~.':.'

600 "

421 395

400 .. , 366

200 132

0

Unauthonzed Mlsrep- Failure Cold UnsUitable High Churning

Transactions resentations to Follow Calling Investments Pressure

Instructions Problems Sales

During 1997, more than half of the office's initial contacts with

investors occurred over the telephone. The remainder came either in the

form of letters or through electronic mail (e-mail). In June 1996, the SEC

opened an internet e-mail box--"help@sec.gov"--for investor complaints

and inquiries. Since then, the investor assistance staff has processed and

substantively responded to over 3,486 complaints and inquiries by internet

e-mail.

Referrals

When a complaint contains allegations of egregious misconduct or

suggests a pattern of sales practice abuses by a broker-dealer, the Office of

Investor Education and Assistance refers the complaint to the Division of

Enforcement or the Office of Compliance Inspections and Examinations.

In 1997, the office referred over 2,000 complaints to other SEC divisions

and offices or other regulatory agencies.

28
Plain English Initiative

The Office ofInvestor Education and Assistance continued to work

with issuers to help them create disclosure documents in plain English.

The office also led plain English writing workshops for several groups

nationwide, including the New York Stock Exchange's Arbitration Board,

the Investment Company Institute, the Financial Accounting Standards

Board, the Practicing Law Institute, and various SEC offices and divisions.

Together with the Divisions of Corporation Finance and Investment

Management, the Office of Investor Education and Assistance developed

guidelines for preparing disclosure documents in plain English. In January

1997, the office prepared and distributed a draft handbook on writing

disclosure documents in plain English.

Investor Outreach

Because a well educated investor provides one of the most important

defenses against securities fraud, the SEC continued its aggressive investor

outreach program. During 1997, the agency's investor education

initiatives included:

• Facts on Saving and Investing Campaign. At a June 1997 meeting

with the Council of Securities Regulators of the Americas, the

council finalized plans to kick -off national public awareness

campaigns in each country during the week of March 29 to April

4, 1998. Under a unified banner, 21 countries in the Western

Hemispherejoined the Facts on Saving and Investing Campaign,

with the slogan: "Get the facts. It's your money. It's your

future." In the United States, govemmentalagencies, the states,

consumer groups and industry organizations joined the campaign

to promote public awareness of savings and investing options

among the public and in the schools.

• Investors' Town Meetings and Seminars. The Office ofInvestor

Education and Assistance organized town meetings in Fort

Lauderdale, Florida; San Francisco, California; Los Angeles,

29
30

California; Hamden, Connecticut; and Tulsa, Oklahoma. These

meetings gave investors an opportunity to talk with Chairman

Arthur Levitt and to attend educational seminars on how the

markets work and how to invest wisely. In coordination with the

securities industry, the office sponsored 24 educational seminars.

Over 13,000 investors attended town meetings in 1997, and

millions more have viewed them through television broadcasts

and videotape distribution.

• New Publications. The Office of Investor Education and

Assistance distributes over a dozen brochures that explain in plain

English how the securities industry works, how to invest wisely,

and what to do if something goes wrong. In February 1997, the

office published a new pamphlet entitled, Corporate Bankruptcy.

This pamphlet answers frequently asked questions about what

happens when a public company files for protection under the

federal bankruptcy laws. In September 1997, the office released a

new brochure entitled, Cold Calling Alert. This brochure tells

investors what the cold calling rules are, how to deal with cold

calls, how to stop them, and how to evaluate investment

opportunities that come over the telephone.

• Toll-Free Information Service. The SEC made improvements to

its toll-free information service (800-SEC-033 0) to better meet the

needs of investors. Investors may call the toll-freeline 24 hours a

day, 7 days a week, to hear investor protection messages, request

educational materials, and learn how the SEC can assist them with

their complaints and inquiries. The toll-free investor information

service received over 15,000 calls during the year.

• Internet Site. The Office of Investor Education and Assistance

maintains and regularly updates the investor assistance and

complaints section of the SEC's internet website

(http://www.sec.gov). Investors who access this section can read

and download the SEC's educational publications and see the

agency's latest investor alerts. They can also link to other internet

sites that offer information for investors. During 1997, the

investor assistance and complaints section was viewed by over

200,000 users from around the world.
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 1997, the

SEC supervised approximately 8,500 registered broker-dealers with over

63,000 branch offices and over 556,000 registered representatives. In

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

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

securities market, 15 registered clearing agencies, 748 transfer agents, the

Municipal Securities Rulemaking Board, and the Securities Investor

Protection Corporation.

Broker-dealersfiling FOCUS reports with the Commission had

approximately $2. 2 trillion in total assets and $120.4 billion in total

capitalfor fiscal year 1997. At the end of calendar 1997, equity market

capitalization equaled approximately $12. 8 trillion in the United States

and $35.5 trillion worldwide. Average daily trading volume reached 524

million shares on the New York Stock Exchange and 646 million shares on

the Nasdaq StockMarket.

Key 1997 Results

The Division issued a concept release that reexamines the regulation

of the U.S. securities markets in light oftechnological developments. The

concept release discusses the activities of two types of entities: (l) trading

systems that present alternatives to traditional exchange trading; and (2)

foreign markets, broker-dealers, and other entities that provide investors in

the U.S. with direct electronic links to foreign markets.

The order handling rules, which were implemented this year, appear

to have enhanced transparency in the marketplace. Regulation M was also

implemented this year. This new approach to public offerings has

simplified the process for all participants. This year the market

experienced significant trading volume and volatility. Technical support

for heavy volume is closely monitored by the staff. The levels at which

circuit breakers are triggered are also under review. Guidance on trading,

31
cleanng, and risk assessment are offered telephonically during volatile

trading sessions.

The Division conducted two studies that were submitted to Congress

this year. First, the Report on the Practice 0/Preferencing discusses the

impact of preferencing on retail customers. Second, the Study a/State

Licensing Requirements/or Associated Persons a/Broker-Dealers

addresses the uniformity of requirements among the states and the

possibility of streamlining such requirements.

Finally, as part of the continuing implementation of the settlement

with the National Association of Securities Dealers (NASD), several major

rule proposals were enacted to address issues such as corporate

governance, listing standards, and anti-competitive conduct.

Securities Markets, Trading, and Significant Regulatory Issues

Concept Release Concerning Regulation of Alternative Trading Systems,

Exchanges, and Foreign Markets

On May 23,1997, the Commission issued a concept release'"

soliciting comment on ways to update the SEC's regulatory framework to

address recent changes in the U. S. securities markets resulting from

technological advances. The concept release focused on: (1) the rapid

growth in electronic trading systems that present alternatives to traditional

exchange trading; and (2) the development of technology that allows U.S.

investors to trade directly on foreign markets from the United States. The

comment period closed October 3, 1997.

Derivatives

The Commission approved several self-regulatory organization (SRO)

proposals that strengthened market stability and integrity while facilitating

use of exchange-traded derivatives for risk management purposes,

including the following:

• proposals chaniing position and exercise limits for equity and

index optionsr'

32
• proposals that provide the U.S. options exchanges greater

flexibility to set margin standardsr'" and

• a proposal by the New York Stock Exchange (NYSE ) transfering

its options business to the Chicago Board Options Exchange

(CBOE).4o

The Commission also approved several proposals to list and trade new

options products, such as packaged butterfly spreads" and packaged

vertical spreads,42 and proposals to list and trade options based on various

domestic and international stock indices.43

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 SEC under a framework for voluntary oversight. In 1997,

the five reporting firms provided the SEC with quarterly credit and market

risk information. 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 continued to work with the International Organization of

Securities Commissions (lOSCO) and the Basle Committee on Banking

Supervision on a survey regarding the trading and derivatives activities of

internationally active banks and securities firms for the period 1993-1997.

The survey provided additional information on derivatives activities

disclosed in these firms' annual reports.

Automation Initiatives

Rule 17a-23 under the Securities Exchange Act of 1934 (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 SEC.44 The Division received 135

filings for automated trading systems.

Automation reviews of the exchanges, Nasdaq, and clearing agencies

continued, including 9 on-site reviews that resulted in 9 reports and 30

recommendations for technology improvements." Through the

33
Automation Review Policy program, the staff monitored and assessed the

SROs' national market system electronic data processing facilities. The

staff also completed 9 technology updates and performed 3 special reviews

of information vendors and broker-dealers. In addition, the staff undertook

numerous special projects to address relevant technology issues, including:

(1) systems capacity, (2) quoting stocks in sixteenths, and (3)

decimalization.

The staff issued no-action letters providing relief to the following

broker-dealers with respect to their operation of automated trading systems

without registration as an exchange under section 6 of the Exchange Act:

(1) TradeWeb LLC, (2) Niphix Investments Inc., and (3) Bloomberg

Tradebook LLC.46 In addition, the staff issued letters confirming that

previously issued no-action letters providing relief from exchange

registration will continue to apply if additional types of securities are

traded on the system47 or if the ownership of the system sponsor changes

but does not affect the operation of the system."

In October 1996, the staff granted no-action reliefto The Flamemaster

Corporation, permitting it to operate an internet bulletin board on which

investors can post indications of interest to buy and sell the company's

shares.49 The staff noted in particular that buyers and seIIers would have

to execute and settle their transactions independently of the trading system.

Year 2000 Compliance

Throughout 1997, the Automation Review Policy program focused on

the industry's efforts to prepare its computer systems for the year 2000.

The Division undertook or was heavily involved in the following year

2000 projects:

• ongoing oversight and review of SRO remediation efforts;

• periodic surveys to assess SRO progress towards year 2000

compliance;

• review of broker-dealer year 2000 compliance efforts;

34
• development of a year 2000 examination checklist for agencywide use;

• assessment of compliance among third-party vendors;

• coordination with industry, other agencies, and Congress

regarding year 2000 issues; and

• the Commission's Year 2000 Task Force, inc!uding the

preparation of a report to Congress on year 2000 issues.

Order Handling Ru1es

On January 20, 1997, the Commission began phasing in the order

handling rules. The order handling rules were designed to improve the

handling and execution of customer orders in exchange-traded securities

and securities traded over-the-counter (OTC). 50 As of October 13, 1997,

all exchange-listed and Nasdaq securities were phased-in. 5I

Trading Practices Developments

The Commission completed a comprehensive restructuring of its antimanipulation regulation of securities offerings by adopting Regulation M

and rescinding Exchange Act rules 10b-6, 10b-6A, 1Ob-7, 1Ob-8, and 10b21 (the trading practice rules).52 RegulationM is intended to prevent

manipulative conduct by persons with an interest in the outcome of an

offering, such as underwriters, issuers, and selling security holders. The

regulation provides streamlined and flexible regulation of market

participants and enhances marketplace competition, while retaining

investor safeguards. Regulation M consists 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 security holders conducting a

distribution;

• Nasdaq passive market making;

35
• stabilization transactions and similar offering-related activities by

underwriters;

• the recordkeeping of underwriting syndicate activity; and

• short selling in anticipation of a public offering.

Odd-Lot Tender Offers by Issuers

In December 1996, the Commission amended rule 13e-4 to make it

easier for issuers to conduct continuous, periodic, or extended tender offers

to shareholders of odd-lots (i.e., 99 or fewer shares). S3 The amendment

provides issuers with greater flexibility in reducing the number of small

shareholdings where the costs to issuers of servicing such holdings, and

the costs to shareholders of seIling such holdings, are disproportionate to

their value.

Unlisted Trading Privileges

The Joint Industry Plan for Unlisted Trading Privileges in OTC

Securities (OTCIUTP Plan), operating under temporary Commission

approval, permits exchanges to trade Nasdaq/national market securities

subject to the terms of the OTCIUTP Plan. Currently, any exchange

participant to the plan may trade up to 500 Nasdaq/nationalmarket

securities. On June 30, 1997, the Commission extended its temporary

approval ofthe OTCIUTP Plan through December 30, 1997.S4 The

Commission also approved trading of Standard & Poor's Depository

Receipts and Standard & Poor's MidCaf 400 Depository Receipts

pursuant to unlisted trading privileges. S

Municipal Securities

The staff responded to requests for interpretive or no-action guidance

regarding the application of the November 1994 amendments to rule 15c2-

12 under the Exchange Act. For example, on July 3, 1997, the Division

issued an interpretive letter stating that the initial assignment by Moody's

Investors Service, in January 1997, of modifiers to rating symbols was not

the type of event for which "material event" reporting was intended to be

required under rule l5c2-12. S6

36
Letters to the Commodity Futures Trading Commission

The staff responded to requests from the Commodity Futures Trading

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

financial products. Of particular note, the staff issued letters to the CFTC

relating to:

• the Chicago Mercantile Exchange's proposal to trade futures and

futures options on the Mini Standard & Poor's 500 Stock Price

Index;57

• the application of the Singapore International Monetary Exchange

Limited (Simex) to permit the offer and sale to persons in the

United States of futures and futures options on the Morgan Stanley

Capital International Taiwan Index to be traded on or subject to

the rules of Simex;S8 and

• the designation of the Chicago Board of Trade as a contract

market for futures and futures options on the Dow Jones Industrial

S9 Average.

International Activities

Supervisory Oversight

The SEC took a leading role to improve supervisory oversight of

participants in the global securities industry. During 1997, the staff

participated in bilateral and multilateral efforts to: (l) enhance the

cooperation among supervisors with oversight of internationally active

financial institutions; (2) strengthen risk management and capital

assessment in firms; (3) improve transparency in the derivatives markets;

and (4) reduce payment and settlement risk.

In furtherance of its August 1995 joint initiative with the Securities

Investment Board to conduct an analysis of the financial, operational, and

management controls used by major global financial conglomerates

involved in significant cross-border securities and banking activities, the

staff participated with United States and United Kingdom securities firms

37
and banking entities in oversight reviews of major global financial

conglomerates. The joint reviews have improved communication channels

between the United States and the United Kingdom and have resulted in

additional bilateral meetings to discuss firm-specific issues, as well as

additional discussions on the sharing of information in emergency

situations.

Within laSCO, SEC staffhave prominent roles in the standing

working groups on the regulation of secondary markets (WG2) and the

regulation of market intermediaries (W03). In 1997, WG2 prepared a

paper to provide guidance to supervisors on information sharing,

developed with their Bank of International Settlement counterparts a

disclosure framework for securities settlement systems, and continued to

work on the supervisory challenges presented by the year 2000. W03

initiated work on defining acceptable methodologies for determining

minimum capital standards and supervisory approaches, as well as risk

management and internal controls and systems, to be applied to

internationally active securities firms.

Memorandum of Understanding

In October 1997, Chairman Arthur Levitt signed a Memorandum of

Understanding (MOU) with the Bank of England. The MOU establishes a

framework to share supervisory information on globally active United

States securities firms and United Kingdom banking entities engaged in

cross-border securities and futures activities.

Broker-Dealer Regulation

Report on the Practice of Preferencing

Section 51D(d) of the National Securities Markets Improvement Act

of 1996 (NSMIA) directed the Commission to conduct a study on the

impact on investors and the national market system of the practice of

preferencing on one or more registered exchanges. Congress specified that

the study should examine: (1) how preferencing impacts the execution

prices received by retail securities customers whose orders are preferenced;

(2) the ability of retail securities customers in all markets to obtain

executions of their limit orders in preferenced securities; and (3) the cost of

38
preferencing to retail securities customers. The Commission submitted its

report entitled Report on the Practice 0/Preftrencing to Congress on April

11, 1997.

The Commission generally concluded that preferencing has not had a

deleterious effect on the national market system, has not diminished the

quality of preferencing exchanges as compared to other regional

exchanges, and has enhanced the preferencing exchanges' ability to

compete. More specifically, the Commission found that preferencing has

not diminished the ability of customers to receive quality executions. The

report reiterated broker-dealers' duties of best execution in selecting

markets for routing customer orders.

Study of State Licensing Requirements for Associated Persons

On October 10, 1997, the Commission submitted to Congress its

study of the impact of disparate state licensing requirements on associated

persons of registered broker-dealers, as requested by Congress. The report

is entitled Study a/State Licensing Requirements/or Associated Persons 0/

Broker-Dealers.

The Commission found that the states have achieved substantial

uniformity in their agent licensing requirements and procedures, but that

certain disparities exist that may cause unnecessary delays in the agent

licensing process. Accordingly, the Commission recommended that the

states work together and with industry participants to further streamline

state licensing requirements. The Commission offered in its report several

recommendations for the states and the industry to consider in working

toward this goal. Because the Commission believes that state regulators

perform a valuable service in scrutinizing individuals wishing to engage in

securities transactions in their jurisdictions, it did not recommend a

wholesale replacement of the existing state licensing process.

Electronic Record Retention for Broker-Dealers

The Commission amended rule 17a-4 to allow broker-dealers to use

electronic storage media (including optical disk and CD-ROM) to maintain

their records.6o The adopting release for the amendments includes a

Division no-action position that will permit broker-dealers, transfer agents,

and clearing agencies to fulfill their record retention and preservation

39
requirements set forth in rules under the Exchange Act by using electronic

storage media. The adopting release also includes an interpretation of rule

17a-4 that requires broker-dealers to retain electronic mail and internet

communications that relate to a broker-dealer's business.

Net Capital Rule

The Commission approved amendments to rule 15c3-1 (the net capital

rule) to permit broker-dealers to use theoretical option pricing models in

determining capital requirements for listed options and related positions." I

The amendments are intended to simplify the net capital rule's treatment

of options for capital purposes and more accurately reflect the risk inherent

in broker-dealer options positions.

Mortgage-Backed Securities

In December 1996, the Division issued a no-action letter that permits

broker-dealers to use an altemativemethod to calculate haircuts (i.e., the

percentage reduction in value when determining net capital) for certain

pass-through mortgage-backed securities.Y Rather than basing the haircut

on their remaining time to maturity as the current rule requires, under the

no-action letter, the haircut for pass-through mortgage-backed securities is

based on their market price relative to par value. Under the no-action

letter, capital charges for pass-through mortgage-backed securities are

better matched to the actual hedging practices of broker-dealers, thereby

substantially lowering haircuts for these broker-dealers and making the

capital charges consistent with the actual risk assumed by broker-dealers.

Books and Records Rules

The Commission proposed amendments to rules 17a-3 and 17a-4 in

response to concerns of the North American Securities Administrators

Association that the rules do not obligate broker-dealers to make and retain

certain types of records that would be valuable to state regulators during

examination and enforcement proceedings. 63 The proposed amendments

modify and expand recordkeeping requirements for: (1) purchase and sale

documents, (2) customerrecords, (3) associated person records, (4)

customer complaints, and (5) certain other matters. In addition, the

proposed amendments specify certain types of books and records that

broker-dealers must make available in their local offices.

40
Foreign Broker-Dealers

On April 9, 1997, the staff issued a letter granting no-action and

interpretive relief relating to rule 15a-6 in a number of important respects.

The letter expands the definition of a major U.S. institutional investor in

the rule to include any entity, including any investment adviser (whether or

not registered), with aggregate financial assets in excess of $100 million.

The letter also relaxes rule 15a-6' s chaperoning requirements and permits

the direct transfer of funds and securities between a U.S. institutional

investor and a foreign broker-dealer in transactions involving the clearance

and settlement of foreign securities or U. S. government securities.64

The staff granted no-action relief to Morgan Stanley & Co. (Morgan)

and its India affiliate (Morgan India) for transactions in Indian securities

executed in India by Morgan India for Morgan's U.S. institutional

customers. Indian law precludes Morgan, as a U.S. broker-dealer, from

holding funds and securities on behalf of its U.S. customers whose

transactions in Indian securities are executed through Morgan India.

Under the no-action letter, transactions in Indian securities between

Morgan's U.S. institutional customers and Morgan India may be cleared

and settled through each customer's custodian in India on a deliveryversus-payment basis or through India's National Stock Exchange

clearinghouse, which nets obligations of its members and guarantees

settlement of their trades.'"

Telemarketing Rules

The Telemarketing and Consumer Fraud Prevention Act

(Telemarketing Actj'" required the Commission to issue a rule, or direct

the SROs to issue a rule, that prohibits certain deceptive and abusive

telemarketing practices in connection with the sale of securities. The staff

worked with the SROs to combat cold-calling abuses in the securities

industry. As a result, several of the SROs adopted rules that prohibit

certain telemarketing practices in connection with the sale of securities.

On April 7, 1997, the Commission found that these rules satisfied the

requirements of the Telemarketing Act." To date, the NASD, the NYSE,

the American Stock Exchange (AMEX), the MSRB, the Philadelphia

Stock Exchange (PHLX), and the CBOE have adopted these types of rules.

41
Internet Issues

In response to a request from the Small Business Administration, the

staff granted no-action relief from broker-dealer registration to the Angel

Capital Electronic Network (the Network) and the universities and other

nonprofit entities that participate in its operation. The Network is an

internet website that allows accredited investors to gain access to a

password-controlled listing of small corporate stock offerings exempt frorr

registration under Regulation A or D and to download offering circulars.

Accredited investors can also review listings with the help of a "search

engine" that will sort listings based on various criteria, including state,

type of business, amount of capital needed, and minority ownership.I"

The staff granted no-action relief from broker-dealerregistration to

America Online, Compuserve, and Microsoft. The relief enables each

online service to connect its subscribers to Charles Schwab & Co., Inc.

(Schwab) and receive a nominal, flat fee per order from Schwab for each

securities order sent by its subscribers to Schwab through the online

service. The online services may not, among other things, recommend

specific securities, take part (other than by routing messages) in the

financial services offered by Schwab, answer questions or engage in

negotiations involving securities accounts or transactions, accept or route

orders, handle customer funds or securities, extend credit to customers in

connection with securities transactions, or receive any fee from Schwab

other than a flat fee per order transmitted. The fee may not vary depending

on the number of shares or value of the securities included in the order or

whether the order results in an executed trade.69

Money Laundering

The Division worked with the Financial Crimes Enforcement

Network of the Department of 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

Continuing efforts to strengthen the securities arbitration process, the

Division worked closely with the NASD and other members of the

42
Securities Industry Conference on Arbitration. On July 1, 1997, the

Commission approved an NASD proposal to impose surcharges on its

members who are named in arbitration proceedings in order to fund

enhancements to its program/" On May 14, 1997, the Commission

approved an NASD proposal that increases to $25,000 the claims that can

be resolved under the NASD's simplified arbitrationprocedures.I' Work

also continued on regulatory responses to the 1996 recommendations of

the NASD Arbitration Policy Task Force.

Extension of Credit

The staff granted no-action relief to permit registered broker-dealers

to underwrite a limited portion of a foreign distribution of securities, sold

on an installment basis, to qualified institutional buyers (QIBs) and other

institutional accredited investors. In those transactions, the staff generally

conditioned the relief on the fact that:

• the global offering would be large, making it difficult for the host

market to absorb the full cost of the offering in one payment;

• a limited portion of the offering, never exceeding 20%, would be

sold in the U.S.;

• the U.S. portion of the offering would be sold in the United States

solely to QIBs and a limited number of other institutional

accredited investors;

• it was customary in the host country, which would provide the

primary secondary market for these securities, to distribute

securities on an installment basis; and

• the securities would be sold in the U.S. under substantially the

same terms and conditions as they would be sold in the host

country. 72

Transaction Confirmations

The staff, by delegated authority, granted exemptive relief from rule

1Ob-l 0 to permit registered broker-dealers to confirm transactions in U.S.

43
Treasury Inflation Indexed Securities (TIPS). Because the principal

amount of TIPS is adjusted daily for inflation, broker-dealers sought relief

relating to the required disclosure of the price and principal amount and

. ld . h fi . 73 yie -to-maturity on t e con rmation.

The staff granted no-action relief to the NASD, NASD Regulation,

and Nasdaq, on behalf of all registered broker-dealers, to permit them to

send average-price and multiple capacity confirmations of individual

orders effected through multiple executions in compliance with the

Commission's order handling rules.74 The staff letter clarifies that brokerdealers will not have to send multiple confirmations where the individual

orders are filled through more than one execution.

The staff granted no-action relief to MBS Clearing Corporation

(MBSCC), on behalf of its members, to permit MBSCC broker-dealer

participants to confirm principal transactions with MBSCC non-brokerdealer participants, in certain government securities cleared through

MBSCC, by relying on MBSCC generated confirmations of the

transactions. The staffprovided that MBSCC participants may rely on

delivery of: (l) the MBSCC Purchase and Sale Report and the Message

Detail Report, to customer participants as confirmation of principal trades

between those MBSCC broker-dealer participants and MBSCC nonbroker-dealer participants; (2) the Purchase and Sale Report to customer

participants, but deliver pool allocation information to customers

independentlyofMBSCC; and (3) the Message Detail Report to customers

to provide pool allocation information, but send all other information

required by rule 1Ob-l 0, including their capacity, to satisfy rule 1Ob-I0.75

Transfer Agent Regulation

Transfer agents maintain records of securityholders, including the

securityholders' addresses, on behalf of corporations. Because transfer

agents maintain these records, they typically send out dividend checks,

interest payments, and other items to securityholders. For various reasons,

transfer agents occasionally have outdated or incorrect addresses for some

securityholders. As a result, these lost securityholdersdo not receive

benefits or information from their companies. On October 7, 1997, the

Commission adopted two rules that should reduce the number of lost

44
11

securityholders.i'' The first rule requires transfer agents to search for the

correct address at least twice during a three-month period when the transfer

agents does not have a correct address for a securityholder. Under the rule,

a transfer agent does not have the correct address when two separate items

of correspondence mailed at least three months apart are returned to the

transfer agent as undeliverable. The second rule requires transfer agents to

file information about their lost securityholders with the SEC.

Lost and Stolen Securities Program

As of December 31, 1996,25,231 institutions were registered in the

program, a 1 percent increase over 1995. The number of securities

certificates reported as lost, stolen, missing, or counterfeit decreased 4

percent, from 2,171,867 in 1995 to 2,093,233 in 1996. The aggregate

dollar volume of these reported certificates has decreased 76 percent, from

$234,516,242,722in 1995 to $56,177,860,398in 1996. The total number

oflost and stolen reports received decreased 25 percent, from 217,030 in

1995 to 162,076 in 1996. However, the dollar value of recovery reports

received increased 265 percent, from $1,916,322,423 in 1995 to

$7,000,530,298 in 1996. The total number of certificates inquired about

by institutions participating in the program increased 37 percent, from

6,221,425 in 1995 to 8,538,192 in 1996. In 1996, the dollar value of

certificate inquiries that matched previous reports of lost, stolen, missing,

or counterfeit securities certificates increased 883 percent, from

$525,592,801 to $5,164,280,780.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1997, there were eight active securities

exchanges registered with the SEC as national securities exchanges:

AMEX, Boston Stock Exchange (BSE), CBOE, Cincinnati Stock

Exchange (CSE), Chicago Stock Exchange, NYSE, PHLX, and Pacific

Exchange (PCX). The SEC granted exchange applications to delist 102

debt and equity issues, and granted applications by issuers requesting

withdrawal from listing and registration for 54 issues.

45
The exchanges submitted 209 proposed rule changes during 1997. A

total of272 pending and new filings were approved by the SEC, and 11

were withdrawn. Rule filings approved by the SEC included:

• an amendment to revise circuit breaker rules to increase the

trading halt levels from declines of250 to 350 points and 400 to

550 points in the Dow Jones Industrial Average;77

• proposals to trade equity securities in trading increments of

sixteenths of a dollar; 78

• rules for Optimark, a new trading facility operated by the PCX

that matches contra-orders based on the price, quantity, and

relative willingness to buy or sell a particular security; 79 and

• amendments to the Articles of Incorporation and By-Laws of the

PHLX to provide for a balanced Board of Governors and a revised

committee structure. 80

National Association of Securities Dealers, Inc.

The NASD is the only national securities association registered with

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

and operates the Nasdaq Stock Market as a wholly-owned subsidiary.

The NASD submitted 95 proposed rule changes to the SEC during the

year. The SEC approved 73 proposed rule changes, including some

pending from the previous year, and 7 were withdrawn. Among the

significant changes approved by the SEC were:

• a rule revising NASD Nasdaq National Market and SmallCap

I

.. d d 81 istmg stan ar s;

• proposals to revise corporate governance documents, disciplinary

proceedings, and procedures regarding mernbershiprf

• an interpretationofNASD conduct rule 2110 relating to

. . . d 83 anticompetitrve con uct;

46
• audit trail procedures; 84and

• the excess spread rule.85

The SEC also approved SR-NASD-97-7, which granted permanent

approval to the OTC Bulletin Board Service (OTCBB).86 The OTCBB

provides a real-time quotation medium that NASD member firms can use

to enter, update, and retrieve quotation information (including unpriced

indications of interest) for equity securities traded over-the-counter that are

neither listed on the Nasdaq Stock Market nor on a primary national

securities exchange. Under the terms of the rule approval, after March 31,

1998, all securities quoted on the OTCBB must be fully registered with the

SEC under section 12 of the Exchange Act to remain eligible to be quoted

on the OTCBB.

In addition, the SEC approved the Actual Size Rule to expand from

50 to 150 the number of securities in a pilot program for which market

makers may quote their actual size, reducing the minimum quotation size

requirement for market makers in certain securities listed on the Nasdaq

Stock Market to one normal unit of trading. The pilot was also extended

through March 28, 1998.87

As part of its settlement with the Commission in 1996, the NASD

committed to perform various undertakings in 1997. The staff received

and coordinated multiple rule changes as noted above from the NASD to

satisfy many of these undertakings. In addition, the staff, in conjunction

with the Division of Enforcement, continued to assist the NASD in

enhancing existing rules and procedures in accordance with the

undertakings.

Municipal Securities Rulemaking Board

The MSRB is the primary rulemaking authority for municipal

securities dealers. The SEC received 8 new proposed rule changes from

the MSRB. A total of 9 new and pending proposed rule changes were

approved by the SEC. Among these were interpretations of several rules

concerning political contributions, notice following a close-out, and the

use of consultants. 88 The SEC also approved a rule amendment to increase

transparency in the municipal market by adding retail and institutional

47
customer transaction information to the inter-dealer transactions that are

already part of the MSRB' s Transaction Reporting Program. 89

Clearing Agencies

Fifteen clearing agencies were registered with the SEC at the end of

1997. On July 1, 1997, the SEC proposed registering the EMCC90 to clear

91 and settle Brady bonds. The SEC also exempted Cede! Bank from

registration as a clearing agency and proposed exempting Euroclear from

registration as a clearing agency.92

Registered clearing agencies submitted 240 proposed rule changes to

the SEC. The SEC processed 123 new and pending proposed rule changes

including the following:

• The Depository Trust Company (DTC) amended its charge back

and return of funds policies to shorten from ten business days to

one business day after the payable date the period within which a

paying agent can request that DTC return principal and income

payments that have been allocated to participants."

• The National Securities Clearing Corporation (NSCC) amended

its rules to permit unit investment trusts to be processed through

NSCC's Fund/SERV, Networking and Mutual Fund Commission

Settlement Services. Prior to the rule change, unit investment

trusts were eligible for NSCC processing only through NSCC's

. I 94 contmuous net sett ement system.

• The Commission approved a proposed rule change filed by the

Options Clearing Corporation (GCC) to change the method by

which it values the equity securities and corporate debt securities

that its clearing members are permitted to deposit as margin

collateral. Under the rule change, OCC increased the valuation

rate that it applies to those securities from 60 percent to 70

percent.

48
Applications for Re-entry

Rule I9h-I 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 1997, the Commission received 42

filings from SROs pursuant to rule 19h-I. Of the 42 filings, the NASD

made 27, the NYSE made 14, and the AMEX made 1.

49
Investment Management Regulation

The Division of Investment Management regulates investment companies

(which include mutual funds) and investment advisers under two

companion statutes, the Investment Company Act of 1940 and the

Investment Advisers Act of 1940. The Division also administers the Public

Utility Holding Company Act of 1935.

Key 1997 Results

During 1997, the Division of Investment Management focused on

implementing the provisions of the National Securities Markets

Improvement Act of 1996 (NSMIA) and proposing revisions to the way

investment companies communicate with their shareholders. NSMIA

required the Commission to adopt a number of new rules, including rules

governing the new division of jurisdiction over investment advisers

between the SEC and the states. The Division proposed major changes to

the primary disclosure form used by all mutual funds and proposed the use

of a new disclosure document, called a "profile," that is intended to

provide investors with a summary of key information about a mutual fund.

The Division also issued many no-action and interpretive letters

addressing rapid changes occurring in the investment company and

investment advisory businesses.

Significant Investment Company Act Developments

Rulemaking

Mutual Fund Disclosure Initiatives

The Commission proposed three major initiatives in February 1997 to

improve the disclosure of information about mutual funds to investors.

These initiatives were the result of the Commission's efforts to identify

ways to promote more effective communication of information about

mutual funds. The efforts included:

50
• Amendments to Mutual Fund Registration Form. The

Commission proposed amendments to Form N-1A, the mutual

fund registration form, to improve prospectus disclosure.f The

proposed amendments would (l) minimize prospectus disclosure

about organizational and legal matters that does not help investors

evaluate mutual funds and (2) focus disclosure on essential

information about a fund that investors need to know before

investing. In recognition of the importance of risk disclosure to

investors, the proposed amendments would require a new

risk/return summary at the beginning of a mutual fund prospectus

(and the proposed profile). The risk/return summary would

include a concise narrative description of a mutual fund's overall

risks, a bar chart of a fund's annual returns for 10 years that

illustrates performance fluctuations from year to year, and a table

that compares a fund's performance to that of a broad-based

securities market index.

• Fund Profiles. The Commission proposed rule 498, which would

permit funds to use a short-form disclosure document called a

"profile.T" The proposed profile summarizes key information

about a mutual fund in a standardized format designed to facilitate

comparison among funds. If a fund uses a profile, an investor

could purchase the fund's shares based on the profile or could

request and review the fund's prospectus and other information

before making an investment decision. All investors would

receive a prospectus no later than confirmation of purchase.

• Fund Names. The Commission also proposed rule 35d_1.97 It

would require a mutual fund (or other registered investment

company) with a name suggesting that the fund focuses on a

particular type of investment (e.g., stocks or bonds) to invest at

least 80 percent of its assets in the type of investment suggested by

its name. Under current staff guidelines, these funds are subject to

a 65 percent investment requirement. The proposed rule is

intended (1) to provide investors with greater assurance that a

mutual fund's investments are consistent with its name and (2) to

help reduce confusion when an investor selects a fund for specific

investment needs and asset allocation goals.

51
Private Investment Companies

The Commission adopted new rules to implement provisions of

NSMIA that exclude privately offered investment companies from

regulation under the Investment Company Act.98 The rules define terms

under the new exclusion for certain privately offered companies, all of

whose investors are highly sophisticated or qualified purchasers. The rules

also address several other matters, including transition issues for existing

privately offered investment companies with no more than 100 investors.

Affiliated Underwriters

The Commission adopted amendments to rule IOf-3.99 This rule

permits a fund affiliated with a member of an underwriting syndicate to

purchase securities underwritten by the syndicate when certain safeguards

are met. The amendments increase the percentage of an underwriting that

a fund may purchase, alone or with other funds having the same

investment adviser, from approximately 4 percent to 25 percent. The

amendments also expand the scope of the rule to permit purchases of the

securities of certain foreign and domestic issuers not registered under the

Securities Act. The amendments are intended to provide funds with

additional flexibility to make investments that may be in the best interest

of their shareholders, while continuing to protect those shareholders from

underwriters that seek to "dump" unmarketable securities on funds that

they control.

Money Market Funds

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

rule that regulates money market funds. 100 The amendments would revise

the rule's terminology and its treatment of certain instruments to reflect

market usage. The amendments also would resolve interpretive issues,

including the application of other amendments adopted in 1996 concerning

tax-exempt money market funds and investments in asset-backed

securities. 101 The Commission also proposed to amend its advertising

rules to clarify the formula used to calculate yield for money market

~ d 102 lun S.

52
Foreign Custody Arrangements

The Commission adopted amendments to rule 17f-5, the rule that

governs the custody of fund assets outside of the United States. 103 The

amendments give funds greater flexibility in managing their foreign

custody arrangements, consistent with the safekeeping of fund assets. The

amendments expand the class of foreign banks and securities depositories

that may serve as fund custodians and permit a fund's board of directors to

delegate its responsibility to select and monitor foreign custodians.

Registration Fees for Certain Funds

The Commission adopted amendments to rule 24f-2, the rule that

prescribes the method by which certain funds calculate and pay registration

fees under the Securities Act. 104 The amendments implement provisions

ofNSMIA that simplify the method of determining fee amounts.

Multiple Class Funds

The Commission adopted amendments to rule 18f-3, the rule that

permits mutual funds to issue multiple classes of shares representing

interests in the same portfolio. lOS The amendments expand and clarify the

methods by which a multiple class fund may allocate among its classes

income, gains and losses, and expenses not allocated to a particular class.

The amendments also clarify the shareholder voting provisions of the rule.

Asset-BasedSales Loads

The Commission adopted an amendment to rule 12b-l, the rule that

permits the use of mutual fund assets to pay for the distribution of fund

shares.106 The amendment clarifies the application of the rule to a series

fund offering a variety of investment portfolios.

Disclosure

Disclosure Improvement

For several years, the Division of Investment Management has

encouraged investment companies to improve their prospectus disclosure

by using plain English and eliminating legalistic, technical, and overly

53
complicated disclosure. In 1997, the number of investment companies that

improved their prospectus disclosure in this manner increased

substantially. The staff provided informal guidance concerning disclosure

requirements to many of these investment companies.

Filings Reviewed

In 1997, the staff reviewed 79 percent of the 1,870 new portfolios

filed with the Commission, including over 90 percent of newly filed

mutual fund and closed-end portfolios. The staff also reviewed 85 percent

of the 809 proxy statements filed, 15 percent of the 16,028 existing

portfolios filed, and 435 insurance contract filings.

Exemptive Orders

The Commission issued 324 exemptive orders to investment

companies (other than insurance company separate accounts) seeking relief

from various provisions of the Investment Company Act. Some of the

more significant developments with regard to exemptive orders in 1997 are

discussed below.

Funds of Funds

NSMIA permitted mutual funds to invest in other mutual funds that

are part of the same fund family. NSMIA also granted the Commission

specific exemptive authority to permit other types of funds-of- funds

arrangements. The Commission granted a number of exemptive orders to

funds seeking flexibility to invest in operating companies in addition to

investing in funds in their own family. 107 In addition, the Commission

granted an order permitting a fund that invests in its own fund family to

invest in unaffiliated funds in reliance on a separate provision in the

Investment Company Act. 108

Plain English Notices of Exemptive Applications

The process of issuing an exemptive order under the Investment

Company Act involves publishing for public comment a notice

summarizing the application. To further the SEC's goal of improving

communications with investors, the staff undertook an initiative to issue

plain English notices. These changes are designed to make the notices

54
easier to understand and more effective in communicating information to

the public.

Interpretive and No-Action Letters

The Division of Investment Management responded to 631 formal and

informal requests for interpretive guidance under the Investment Company

and Investment Advisers Acts during 1997. Some of the more significant

interpretive and no-action letters issued by the staff during the year are

discussed below.

Merger of Investment Advisers

The staff took the position that the merger of two publicly-traded,

widely-held financial services holding companies as equals does not

constitute an assignment of the advisory contracts of their respective

. d . b .d. . 109 Investment a viser su Sl lanes.

Foreign Investment Companies

The staff concluded that an unregistered foreign fund would not

violate the public offering restrictions of the Investment Company Act if it

sells its securities exclusively to qualified purchasers in the United States,

complying with the provisions of section 3(c)(7) of the Investment

Company Act. In addition, an unregistered foreign fund generally may

rely on the definition of "U.S. Person" in Regulation S under the

Securities Act to determine whether a potential investor is a U.S .

.d no resi ent.

Pricing of Fund Shares

The staff took the position that a mutual fund would not violate

Commission rules on pricing of mutual fund shares if it prices purchase

and sale orders placed with an authorized agent of the fund at the net asset

value next computed after receipt of the order by the agent.Ill

Private Fund Offerings on the Internet

The staff adopted the position that a company may create and

maintain a world wide website featuring information about private fund
offerings that can be accessed only by pre-qualified accredited investors

or qualified purchasers. Similarly, private funds and their advisers could

place information on a website without being required to register under

the Investment Company Act or the Investment Advisers Act,

respectively. In reaching these conclusions, the staff emphasized the

importance of a password protection system that limited access to prequalified purchasers. I 12

Purchasesfrom an Affiliated Underwriter

The staff agreed not to recommend enforcement action under the

Investment Company Act or the Investment Advisers Act against a fund

that purchases securities in a private placement for which the placement

agent is an affiliate of the fund's adviser because the placement agent's

compensation would be within specified limits and the transactions would

be structured to minimize potential conflicts of interest. 113

Closed-End to Open-End Fund Conversions

The staff agreed that a closed-end fund that converts to an open-end

fund without obtaining prior shareholder approval would not violate the

Investment Company Act if the conversion is triggered when certain

objective standards are met and those standards are disclosed

prominently in the fund's prospectus. 114

Allocation of Fund Advisory Fees

The staff adopted the position that advisory fees paid by a fund may

be reallocated between the fund's investment adviser and the fund's subadviser without shareholder approval if the total advisory fee does not

increase and the fund complies with all of the other requirements of the

Investment Company Act provision governing investment advisory

us contracts.

Insurance Products

The Division of Investment Management reviews registration

statements, recommends rules, processes exemptive orders, and issues noaction and interpretive letters relating to variable annuities, variable life

56
insurance, and other insurance products that are securities. The following

describes some of the more significant issues in this area that the staff

addressed this past year.

Equity Index Annuities

Equity index annuities, recently introduced by the insurance industry,

are contracts that provide for accumulation of the contract owner's

payments at a rate of return that is based on changes in an index of equity

securities. The insurer also guarantees a minimum return (typically 90

percent of premiums accumulated at a 3 percent annual rate of interest) to

the contract owner if the contract is held to maturity. Equity index

annuities combine features of traditional insurance products and traditional

securities, and the Commission is considering their status under the federal

securities laws. The Commission published a concept release requesting

information about the structure of equity index annuities, the manner in

which they are marketed, and other related matters. 116

Disclosure for Retirement Plans

The staff issued a no-action and interpretive letter stating that it would

not object if insurers selling variable annuity contracts to group retirement

plans treat certain prospectus summaries as communications satisfying the

requirements of rule 482 under the Securities Act. This letter was intended

to improve disclosure to retirement plan participants investing in variable

• 117 annuity contracts.

Allocation of Purchase Payments During Variable Annuity Free Look

Period

The staff agreed in a no-action and interpretive letter that variable

annuity issuers may require that purchase payments received during the

free look period be allocated to a fixed interest rate option. The letter

applies to insurance companies required to refund a purchaser's payments

upon exercise of a free look right, which permits contract owners to

examme. a contract and cance l i if h . fi d 118 It 1 t ey are not satis re .

57
Protectionfrom Claims

The staff adopted the position that insurance companies may provide

the assets of certain separate accounts with protection from third-party

claims without registering those separate accounts under the Investment

Company Act. The no-action and interpretive letter for this staff position

applies to separate accounts that support annuity contracts that pay a rate of

return based on a mathematical formula that takes into account changes in

a speciified mar ket et iIIIdex. 119

Significant Investment Advisers Act Developments

Formation of Task Force

In April 1997, the SEC formed a Task Force on Investment Adviser

Regulation in the Division oflnvestment Management. The Task Force is

responsible for implementing the provisions ofNSMIA relating to

investment advisers, overseeing SEC participation in an electronic filing

system for investment advisers, and developing a means by which

investors can easily obtain information about investment advisers. During

the year, the Task Force reviewed existing SEC regulations for investment

advisers and developed proposals to improve them.

Rulemaking

As a result ofNSMIA, a substantial number of small investment

advisers are prohibited from registering with the SEC and generally must

register with state securities regulators. To implement the reallocation of

regulatory authority mandated by NSMIA, the Commission adopted

several new rules, as well as changes to several existing rules and forms. 120

The most significant of these rules are:

• rule 203A-I, which establishes procedures for advisers to

transition between SEC and state registration;

• rule 203A-2, which creates exemptions from the prohibition on

registration with the SEC for four categories of investment

advisers;

58
• rule 203A-3, which defines certain terms, including investment

adviser representative and place of business; and

• amendments to Form ADV, which require advisers annually to

report their eligibility for SEC registration on a new Schedule I.

The Commission also adopted Form ADV -T, a temporary form by

which investment advisers indicated whether they were eligible to remain

registered with the SEC. Based on these filings, the Commission estimates

that approximately 7,500 investment advisers (or 33 percent of all those

previously registered) will remain registered with the SEC.

Interpretive and No-Action Letters

Some of the more significant interpreti ve and no action letters issued

by the staff during the year are discussed below.

Performance Advertising by Advisers

The staff took the position that an investment adviser may (1)

advertise its performance, using gross-of- fees performance information, as

long as net-of-fees performance information is presented with equal

prominence and (2) advertise the composite performance of advisory

accounts that include one or more mutual fund accounts, without

complying with the advertising rules that govern mutual funds, as long as

the advertisement does not identify any specific mutual fund. 121

Use of Client Lists in Adviser Advertising

The staff interpreted the advertising rules under the Investment

Advisers Act to permit an investment adviser to include in an

advertisement a list of some, but not all, of the adviser's clients. The staff

concluded that a list that does no more than identify certain clients is not a

prohibited testimonial and that an advertisement containing a partial client

1. . '1 c. 1 . 1 di 122 1StISnot necessan y la se or nus ea mg.

59
Principal and Agency Transactions

The staff concluded that a dual registrant (an entity registered both as

a broker-dealer and an investment adviser) is not subj ect to the Investment

Advisers Act restrictions on principal and agency cross transactions with

its wrap fee clients if the dual registrant:

• provides only generalized investment advice, and

• does not provide investment advice with respect to the specific

transactions that it executes for its clients pursuant to an

unaffiliated portfolio manager's instructions. 123

Significant Public Utility Holding Company Act Developments

Developments in Holding Company Regulation

As a result of the current trend toward industry consolidation, the

Commission considered a number of proposed utility combinations.

Several of these transactions involved combinations of companies that

owned gas properties with companies that owned electric properties. One

transaction resulted in the creation of a new registered holding company.

Registered holding companies also continued to demonstrate their interest

in nonutility activities, both in the United States and abroad. The

complexity of applications and requests for interpretive advice continued

to increase. The Commission expects these trends to continue in 1998, as

the restructuring of the industry continues.

Registered Holding Companies

As of September 30, 1997, there were 16 public utility holding

companies registered under the Holding Company Act. The registered

systems were comprised of 101 public utility subsidiaries, 46 exempt

wholesale generators (EWGs), 51 foreign utility companies (FUCOs), 280

nonutility subsidiaries, and 55 inactive subsidiaries, for a total of 533

companies and systems with utility operations in 28 states. These holding

company systems had aggregate assets of approximately $150 billion and

60
operating revenues of approximately $58 billion for the period ended

September 30, 1997.

Financing Authorizations

The Commission authorized registered holding company systems to

issue approximately $19.2 billion of securities, a decrease of less than one

percent from last year. The total financing authorizations included, for

example, $1.57 billion for investments in enterprises engaged in energy

management, an increase of 12 percent over 1996, and $350 million for

investments in EWGs and FUCOs.

Examinations

The staff examined three subsidiary service companies, three parent

holding companies, and three special purpose corporations. The

examinations focused on the methods of allocating costs of services and

goods shared by associate 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 acti vities resulted in savings to consumers of

approximately $10.6 million.

Applications and Interpretations

The Commission issued various orders under the Holding Company

Act. Some of the more significant orders are discussed below.

TUC Holding Company

The Commission authorized the acquisition by TUC Holding

Company, a company not previously subject to the Holding Company Act,

of(1) Texas Utilities Company, a Texas electric public utility holding

company exempt from all provisions of the Holding Company Act except

section 9(a)(2) and, through this acquisition, two electric utility

subsidiaries operating exclusively in Texas and (2) ENSERCH

Corporation, a Texas gas public utility company. 124 The Commission also

granted TUC Holding Company an order under section 3(a)(1) exempting

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

61
following the acquisition. The Commission determined that a holding

company may acquire utility assets that will not, when combined with the

acquiring company's utility assets, make up an integrated system, provided

that there is de facto integration of contiguous utility properties and the

holding company will be exempt from registration under section 3 of the

Holding Company Act following the acquisition.

New Century Energies, Inc.

The Commission authorized the acquisition by New Century

Energies, Inc. (NCE) of (1) Public Service Company of Colorado, a

Colorado gas and electric public utility company and a holding company

exempt from all provisions of the Holding Company Act except section

9(a)(2) and (2) SouthwestemPublic Service Company, a New Mexico

electric public utility company. 125 As a result of the transaction, NCE will

own three separate integrated public utility systems. In finding that the

transaction satisfied the Holding Company Act's standards for having

more than one integrated system, the Commission evaluated several

factors, including the convergence of the gas and electric industry and the

loss of economies associated with separating existing gas and electric

operations. NCE has registered as a holding company under section 5 of

the Holding Company Act.

Houston Industries Incorporated

The Commission authorized a request by Houston Industries

Incorporated (HI), an exempt public utility holding company, and its

electric utility subsidiary company, Houston Lighting & Power

Company (HLP), for an exemption under section 3(a)(2) from all

provisions ofthe Holding Company Act, except section 9(a)(2),

following the consummation of certain transactions. 126 These

transactions involved the merger of HI and HLP, with the surviving

entity being renamed Houston Industries Incorporated (Houston), and

Houston's acquisition of Nor Am Energy Corp. (NorAm) as a new gas

utility subsidiary company. The Commission concluded that an

exemption for HI under section 3(a)(2) was appropriate, notwithstanding

that the ratio ofNorAm's operating revenues to HI's would be higher

than the same ratio had been in past cases. The Commission noted,

among other things, that HI would not be an unregulated entity through

62
which potential abuses could be undertaken, but instead would be a

public utility company subject to state and local regulation.

Central and South West Corporation

The Commission authorized Central and South West Corporation

(CS W), a registered holding company, to use financing proceeds to invest

in EWGs and FUCOs and to guarantee the obligations ofEWGs and

FUCOs in amounts that, together with all other such investments, do not

exceed 100 percent of CSW' s consolidated retained earnings. 127 The order

requires CSW to provide quarterly information to facilitate the

Commission's monitoring of CSW' s investments in EWGs and FUCOs

and their effects on the CSW system.

ConsolidatedNatural Gas Company

The Commission authorized Consolidated Natural Gas Company, a

registered gas holding company, to acquire an interest in two foreign gas

pipeline projects. 128 The Commission determined that section 2(a) of the

Gas Related Activities Act of 1990, which modifies section 11(b)(1) of the

Holding Company Act, does not exclude a registered holding company

from engaging in international activities that fall within the scope of

section 2(a).

Rulemaking

Rule 58

The Commission adopted rule 58, which permits registered holding

companies, without the need of an application, to invest up to the greater of

15 percent of consolidated capitalization or $50 million in certain energyrelated companies that were previously found to be functionally related to

the business of registered public utility systems.129 The rule identifies

several energy-related businesses, including energy management services,

the development of energy conservation and storage technologies, and the

production and sale of thermal energy products. Rule 58 codifies prior

orders and permits investments of a type that the Commission, in previous

63
instances, has found to satisfy the standards of the Holding Company Act.

Rule 58 thus reduces regulatory burdens and delays. Conforming

amendments were made to rules 45 and 52.

64
Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations, through

examination staff in headquarters and in the SEC's regional and district

offices, administers the SEC's nationwide program of compliance

inspections and examinations. Inspections and examinations are

authorized by the Securities Exchange Act of I 934, 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 (SROs), transfer agents, clearing

agencies, investment companies, and investment advisers.

Key 1997 Results

During the year, the inspections and examinations program focused on

areas within firms that appear to pose the greatest danger of compliance

risk. To accomplish this, the staff considered a variety of risk factors.

Areas covered and inspection techniques used varied from examination to

examination because of the diverse population of registrants, differing risk

assessment results, changing market conditions and industry

developments, the presence or absence of SRO oversight, and, most

importantly, variations in the effectiveness of internal compliance

procedures.

The staff also enhanced cooperation with foreign, federal, and state

regulators, as well as with SROs. The staff conducted coordinated

examinations with staff from foreign regulatory organizations and with the

U.S. Office of the Comptroller of the Currency. In addition, the staff

conducted joint examinations of broker-dealers and investment advisers

with state regulators and SROs. The staff also provided extensive training

and assistance to state regulators in order to implement the National

Securities Markets Improvement Act of 1996 (NSMIA).

Increased cooperation among SEC examiners responsible for different

types of regulated entities continues to be one of the office's key

accomplishments. For example, when appropriate, SEC examinations of

firms with broker-dealer and investment advisory activities were

65
conducted by multi-disciplinary examination teams. The objective of these

joint and cooperative efforts is to increase the efficiency and effectiveness

of SEC oversight of dual registrants.

Investment Company and Investment Adviser Inspections

Investment Companies

During the year, examiners inspected 240 investment company

complexes with $1.1 trillion under management, indicating an average

frequency of inspection for the 1,030 investment company complexes of

once every 4.3 years. The complexes inspected managed 2,377 portfolios,

which represented approximately 21.6 percent of the mutual fund and

closed-end fund portfolios in existence at the beginning of 1997. The

complexes inspected represented a mix of large and smaller complexes.

Serious violations found in 17 examinations warranted referrals for

further investigation by enforcement staff. In 76 percent ofthe

examinations resulting in a referral, the staff found misconduct involving

fraud. In addition, of all referrals, 70 percent related to the role of the

fund's board of directors, 65 percent related to registration and

Commission filings, and 59 percent related to books and records.

Investment Advisers

The examination staff continued to target for inspection those advisers

posing a higher risk to clients, such as those with actual custody of clients'

funds and securities and those with discretionary management authority

over clients' cash and securities. Examiners in the regional offices were

primarily responsible for inspecting all discretionary managers and nondiscretionary managers with $100 million or more under management.

In total, the examination staff completed 1,609 inspections of

investment advisers, including examinations of 1,034 advisers with

discretionary management authority. The non-investment company assets

managed by the advisers inspected totaled $1.9 trillion. The 1,034

inspections of discretionary advisers covered 11 percent of all such

advisers, indicating an average inspection cycle for discretionary advisers

of once every 9.1 years, which increased from once every 7.1 years in

66
1996. A primary reason for this change is the significant amount of time

spent by the inspections staff training state examiners in how to conduct

inspections of financial planners. Regional office examiners inspected 133

investment advisers for cause.

Serious violations warranting enforcement referrals were uncovered in

76 of the examinations. In 82 percent of the examinations resulting in a

referral, the examination staff found misconduct involving fraud. In

addition, of all referrals, 61 percent involved Form ADV or brochure

disclosure or delivery, 59 percent related to books and records, and 49

percent related to conflicts of interest.

During 1997, the Investment Advisers Supervision Coordination Act,

Title III ofNSMIA, went into effect. As a result of the Coordination Act, a

substantial number of small investment advisers were removed from

federal registration. This reduction in the population subject to SEC

oversight has enabled the staff to reconsider and significantly modify its

approach to investment adviser examinations. Most importantly,

beginning in 1998, the staff expects to examine approproximately20% of

all investment advisers each year. At that rate, all advisers will be

examined at least once every five years.

The staff also continued initiatives to enhance cooperation with

foreign regulators. Specifically, the staff conducted coordinated

examinations with stafffrom the Hong Kong Securities and Futures

Commission, the Ontario Securities Commission, and the Investment

Management Regulatory Organization in the United Kingdom.

Mutual Fund Administrators

Approximately 51 percent of all mutual fund complexes use third

party administrators to perform their accounting and administrative

functions. During 1997, examiners inspected 10 administrators as an

adjunctto mutual fund oversight. None of the examinations resulted in

enforcement referrals.

Variable Insurance Products

In response to the rapid growth in variable insurance product assets

and the emergence of new channels of distribution, specialized insurance

67
product examination teams conducted examinations in this area. These

teams identified and examined variable life and annuity contract separate

accounts. Special emphasis was placed on examining branch offices of

broker-dealers selling these products to determine patterns of sales practice

abuses. The teams examined 24 insurance company complexes,

representing 20 percent of the insurance sponsors as of the beginning of

1997. This maintains a five-year inspection cycle for insurance sponsors.

Deficiency letters were issued in 21 examinations.

In addition, the examination staff, in conjunction with the Division of

Enforcement, initiated a limited review of the marketing and sales

practices of 14 insurance company sponsors.

Bank Advised Mutual Funds

Based on a November 1995 agreement to better coordinate

examinations, staff from the SEC and the Office of the Comptroller of the

Currency jointly examined mutual funds advised by national banks, and

national banks providing advisory services to mutual funds. Examiners

completed one examination started in the prior year and two additional

examinations. The examiners reviewed key internal control areas and

analyzed portfolio transaction data relating to mutual fund and trust

department client trading. In addition, in October 1997, the Director of the

Office of Compliance Inspections and Examinations testified before the

Subcommittee on Financial Institutions and Consumer Credit of the

Committee on Banking and Financial Services of the U.S. House of

Representatives concerning the SEC's examination oversight of securities

firms affiliated with banks.

Soft Dollar Sweep

The SEC dedicated several months to inspecting the current state of

the soft dollar industry. The staff completed examinations of 75 brokerdealers and 280 investment advisers and investment companies. The

inspections covered soft dollar arrangements existing during the period

January 1, 1996 through October 31, 1996. Of the 355 examinations, 18

were referred to enforcement staff for further investigation.

68
State Training and Assistance

Through the first half of 1997, the SEC examined 268 investment

advisers with less than $25 million in assets under management in

conjunction with state examiners in 29 states. The goal was to train state

examiners as they established examination programs for the advisers

leaving federal registration and oversight as a result ofNSMIA. In

addition, the staff provided extensive training assistance to the states. This

included staff participation in state-sponsored training programs and onsite training programs in state capitals.

Broker-Dealerand Transfer Agent Examinations

Broker-Dealers

The broker-dealer examination program conducted oversight

examinations that tested the quality of SRO examination programs, cause

examinations that focused on activity that may have violated the federal

securities laws, and surveillance examinations that assessed broker-dealer

compliance and industry practices and trends. The staff began a complete

overhaul of its examination modules and procedures to reflect current

industry trends, rule amendments and new product developments. The staff

also continued a project to update the office's computerized tracking

system for broker-dealer examinations.

The examination staff completed 312 oversight and 347 cause and

surveillance examinations of broker-dealers, government securities brokerdealers, and municipal securities dealers. While the examination program

attempts to maintain a balance between oversight and cause examinations,

the staff conducted more cause and surveillance examinations in 1997 in

order to respond to complaints by investors and indications of financial and

operational problems experienced by broker-dealers. In addition,

surveillance examinations were conducted to review industry practices and

broker-dealer compliance when oversight examinations were not

appropriate. The staff completed 110 examinations of broker-dealers'

branch offices, emphasizing the adequacy of supervision over the activities

of salespersons in branch offices.

69
Serious violations were uncovered in 136 examinations warranting

referrals for further investigation by enforcement staff. Findings in an

additional 48 examinations were referred to SROs for appropriate action.

In 30 percent of the examinations resulting in a referral, the examination

staff found misconduct involving fraud. The most common violations and

deficiencies found were recordkeeping deficiencies, misrepresentations

and unsuitable recommendations to customers, and unauthorized trading in

customers' accounts.

The broker-dealer examination program devoted significant attention

to abuses in the underwriting, trading, and selling oflow-priced,

speculative securities, often referred to as microcap securities.

Examinations also emphasized municipal securities underwriters'

compliance with Municipal Securities Rulemaking Board (MSRB) rule 0-

36, supervision of registered representatives classified as independent

contractors and operating in franchised branch offices, the adequacy of

broker-dealers' internal controls and risk management, and soft dollar

practices (as noted above). The staff also began a review of clearing firm

policies and procedures with respect to the activities of introducing firms.

Broker-dealer examination staff also continued initiatives to enhance

cooperation with foreign, federal, and state regulators, as well as with

SROs. Examiners are working with SRO and state regulators to

implement the objectives of the Memorandum of Understanding to achieve

maximum coordination of regulatory programs. The examination staff

also began considering opportunities to coordinate examinations of brokerdealers, clearing agencies, and transfer agents with bank regulators.

Transfer Agents and Clearing Agencies

In 1997, the staff conducted 170 examinations of registered transfer

agents, which included 14 federally regulated banks. The program resulted

in 115 deficiency letters, 13 cancellations or withdrawals of registrations,

12 referrals to enforcement staff, 12 referrals to bank regulators, and 2 staff

conferences with registrants. In addition, the staff conducted an

examination sweep of registered transfer agents that act as recordkeepers

for retirement plans. The staff also conducted four inspections of clearing

agencies.

70
Self-Regulatory Organization Inspections

The staff completed 36 inspections of various SRO regulatory

programs during the year. The staff inspected at least one program at 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 National Association of Securities Dealers (NASD), the New York

Stock Exchange, the Pacific Exchange, the Philadelphia Stock Exchange,

and the MSRB. On a routine basis, SROs were inspected in the following

SRO programs:

• arbitration programs;

• listing, maintenance, and unlisted trading privileges programs;

• financial/operationaland sales practice examination programs;

• market surveillance, investigatory, and disciplinary programs; and

• customer communication review programs.

The staff also conducted routine inspections of the regulatory

programs administered by the NASD' s district offices. These inspections

included reviews of NASD district offices' examinations, fmancial

surveillance, and formal disciplinary programs. The staff also reviewed

the district offices' investigations of customer complaints and terminations

of registered representatives for cause.

Self-Regulatory Organization Final Disciplinary Actions

Section 19(d)( 1) of the Securities Exchange Act of 1934 and rule 19d1 thereunder require all SROs to file reports with the Commission of all

final disciplinary actions. In 1997, reports of 1,162 final disciplinary

actions were filed with the SEC, as reflected in the following table.

71
Self-Regulatory Organization

Reports of Final Disciplinary Action

Self-Regulatory Organization

American Stock Exchange

Boston Stock Exchange

Chicago Board Options Exchange

Chicago Stock Exchange

Cincinnati Stock Exchange

Government Securities Clearing Corporation

National Association of Securities Dealers

National Securities Clearing Corporation

New York Stock Exchange

Options Clearing Corporation

Philadelphia Stock Exchange

Pacific Exchange

Total Disciplinary Actions

72

Number of

Actions

16

o

60

5

o

2

893

o

179

o

4

J.

1,162
Full Disclosure System

The full disclosure system is administered by the Division of Corporation

Finance. The system is designed to provide investors with material

information,foster investor confidence, contribute to the maintenance of

fair and orderly markets, facilitate capital formation, and inhibit fraud in

the public offering, trading, voting, and tendering of securities.

Key 1997 Results

A record $1.4 trillion in securities were filed for registration during the

year, a 20 percent increase over the $1.2 trillion in 1996. Common stock

offerings of almost $800 billion filed for registration in 1997 (compared to

$691 billion in 1996) reflected an increase in overall market activity,

including merger transactions. Offerings filed by first time registrants

(IPOs ), however, totaled approximately $166 billion, almost 11 percent

less than the level in 1996 (approximately $185.5 billion).

REGISTRATION STATEMENTS FILED

DOLLAR VALUE ($BILLIONS)

UNAllOCATED

SHELF OTHER EQUITY

85.7 238

7% 2%

1996

TOTAL - $1,192.7

UNAllOCATED

SHELF

152.4 OTHER EQUITY

11% 49.5

3%

1997

TOTAL - $1,445.7

73
Foreign companies' participation in the United States public market

continued to show strong growth in 1997. During the year, nearly 200

foreign companies (a record) from 37 countries entered the United States

public markets for the first time. At year-end, there were nearly 1,000

foreign companies from 51 countries filing reports with the Commission.

The over $100 billion registered in 1997 by foreign companies for public

offerings set a new record for an amount registered in a single year.

The Commission continued its efforts to relieve regulatory burdens

and simplify requirements relating to capital formation. This included

proposing or adopting a number of changes recommended by the 1996

Task Force on Disclosure Simplification. The broad reexamination of the

regulatory framework for the offer and sale of securities under the

Securities Act of 1933 (Securities Act) is continuing.

Review of Filings

In 1997, the Division of Corporation Finance set new records on the

number of filings with full year financial statements and the number of

issuers reviewed. Almost 27 percent of the reporting issuers were

reviewed, along with 1,255 Securities Act IPOs, 349 Securities Exchange

Act of 1934 (Exchange Act) new issuer registration statements, and 111

RegulationA exemptive filings. By the beginning of 1997, responsibility

for the review of all regional IPO small business filings and Regulation A

exemptive filings had been transferred from the regional offices to the

Division. These record results were accomplished without replacing the

regional office review staff, who were reassigned to other Commission

activities. These accomplishments are attributable to many factors,

including:

• the efficiencies and flexibility gained through reassignments in the

Division;

• more frequent and improved staff training; and

• improved access to computerized research tools and disclosure

documents.

74
The following table summarizes the principal filings reviewed during

the last five years. The levels of reviews of new issuer filings, third party

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.

75
Full Disclosure Reviews

1993 1994 1995 1996 1997

Reporting Issuer Reviews W 3,531 3,400 3,930 3,210 3,513

New Issuer Reviews Q/ 1,2149' 1,599 1,150 1,658 1,604

Major Filing Reviews

Securities Act Filings:

Home Office

IPOsQ! 877 1,167 805 1,267 1,255

Repeat Issuers 924 863 815 769 723

P/EAmdts.~ 115 114 100 56 41

Regulation A 0 0 0 0 111

Regions d/

IPOs 189 217 145 145 0

PIEAmdts.~ 105 90 115 84 0

Regulation A 89 100 69 77 0

Exchange Act Initial

Registrations 148 215 200 246 349

Annual Report Reviews:

Full 1,466 1,085 1,345 790 1,149

Full Financial 1,155 1,405 1,585 933 1,208

Special f! 360 455 585 656 800

Tender Offers (14D-l) 56 82 140 165 234

Going Private Schedules 61 75 77 100 94

Contested Proxy 35 42 59 62 83

Proxy Statements:

Merger/Going Private 149 163 225 261 233

Others wIFinancials 149 180 205 199 238

¥Includes companies subject to Exchange Act reporting whose financial statements were

reviewed during the year.

!2/Includes reviews of Securities Act or Exchange Act registration statements of nonExchange Act reporting companies. Excludes reviews of Regulation A filers.

£IRevised.

QlReviews of regional office small business filings were transferred to the home office

during 1996.

~/Includes only post-effective amendments with new financial statements.

f/lncludes annual reports reviewed in connection with the review of other filings that

incorporated financial statements by reference. Special reviews in years before 1997

includes some reviews where the referenced proxy statement contained fmancial

statements.

76
Rulemaking, Interpretive, and Related Matters

Phase II Recommendations of Task Force on Disclosure Simplification

The Commission continued its consideration and implementation of

the recommendations of the 1996 Task Force on Disclosure Simplification

by adopting another set of changes to eliminate more rules and forms and

to simplify others.130 Among other things, the Commission:

• simplified the Exchange Act registration process;

• exempted American Depositary Receipts from Exchange Act

registration when the ADRs are listed on a national securities

exchange and registered under the Securities Act;

• eased the rules so that issuers may now switch to a shorter

Securities Act registration form at the time any amendment is filed

if the issuers have become eligible to use the shorter form; and

• provided automatic effectiveness upon filing of post-effective

amendments to Securities Act registration statements filed solely

to add exhibits.

Plain English

The Commission proposed rule changes to improve the readability of

prospectuses by requiring issuers to write portions of their documents in

plain English. 131 The proposed rules would apply to both corporate issuers

and mutual funds. They would require, among other things, that public

companies use plain English principles in the organization, language and

structure of the cover pages, summary, and risk factors section of the

prospectus. These principles include the use of the active voice, short

sentences, everyday words, tabular presentation, and the avoidance of legal

jargon and multiple negatives. The proposed rules encourage issuers to

apply these principles throughout the prospectus, and to use pictures,

logos, charts, graphs, or other design elements to convey information in a

more readable and understandable manner.

77
Expansion of Short Form Registration to Include Companies with Nonvoting Equity

The Commission adopted amendments to expand the availability of

the short Forms S-3 and F-3 under the Securities Act. 132 The amendments

changed the test for eligibility to include 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.

The Commission also adopted conforming amendments to other forms and

rules.

Regulation S

The Commission published for comment a proposal to amend

Regulation S, the Securities Act safe harbor for offshore sales of securities,

to address abusive practices. 133 The amendments would affect

unregistered offshore offerings of common stock and other types of equity

securities (including convertible securities) by United States publicly

traded companies. The proposals also would apply to unregistered

offerings by foreign companies where the principal market (more than 50

percent of worldwide trading) for their equity securities is in the United

States. These amendments are designed to eliminate the abusive practices

mainly by providing a longer restricted period and adding a holding period.

Offshore Press Conferences

The Commission adopted two new safe harbors under the Securities

Act and the Williams Act that are designed to eliminate perceived grounds

for the exclusion of any journalist from access to offshore press

activities. 134 In some foreign countries, it is common practice for

companies to conduct press conferences, issue press releases, and meet

with members of the press when offering securities or conducting a tender

offer. United States journalists, and journalists for foreign publications

with a significant United States circulation, have had difficulty obtaining

direct access to these offshore press activities because of uncertainty about

whether this type of access violates the United States federal securities

laws. The new safe harbors are intended to reflect existing offering

practices in certain foreign countries and level the playing field between

78
United States and foreign journalists with respect to accessing these press

activities.

Delayed Pricing for Offerings by Smaller Companies

The Commission proposed an amendment to Securities Act rule 430A

to permit certain smaller companies, including small business issuers, to

delay pricing of registered securities offerings after clearance of the

registration statement until the company desires to sell the securities. 135

The increased marketplace flexibility provided by the proposed rules is

intended to result in smaller issuers raising more capital through the public

markets rather than through exempt offerings conducted in the domestic

and offshore markets. Use of the proposed procedures would be

conditioned on the availability of adequate and current disclosure in order

that investors may make informed investment decisions at the time the

securities are offered and sold.

Derivatives and Market Risk Disclosure

The Commission adopted amendments to Regulation S-K, Regulation

S-X, and various forms to make information about deri vati ve financial

instruments and certain derivative commodity instruments more useful to

readers.136 The rules, which do not apply to small business issuers, have

been revised to:

• require enhanced descriptions of accounting policies for

derivatives in the footnotes to the financial statements;

• require disclosure outside the financial statements of quantitative

and qualitative information about market risk from derivative

financial instruments, certain derivative commodity instruments,

and other financial instruments; and

• extend the statutory safe harbor for forward-looking statements to

the quantitative and qualitative information without regard to

whether the company otherwise would be eligible for the safe

harbor.

79
Reduction of Holding Period Requirements and Streamlining Rule 144 and

145

The Commission adopted amendments to the rule 144 holding period

requirements applicable to privately placed and other restricted

securities.137 The amendments permit limited resales of restricted

securities after a one-year holding period (instead of the previous two-year

period) and unlimited resales by non-affiliates after a two-year holding

period (instead of the previous three-year period). Parallel changes were

made to the resale provisions of Securities Act rule 145 covering securities

received in certain mergers and other business combination transactions.

The Commission also proposed additional changes to make rule 144

easier to understand and apply. 138 The proposals reorganize and rework

the text of the rule in a more succinct and straightforward fashion. In

addition, the rules would be simplified by:

• providing a distinct exclusion from the rule 144 definition of

affiliate;

• eliminating the manner of sale requirements;

• increasing the threshold requirements for filing form 144 to reflect

inflation since their initial adoption; and

• amending Securities Act rule 145 to eliminate the resale

limitations that are based on a presumptive underwriter approach.

At the same time, the Commission solicited comment on the need to:

• further revise the rule 144 holding periods;

• revise the volume limitation standard by eliminating the two

trading volume tests; and

• address the application of the Securities Act to hedging activities.

80
Shareholder Proposals

The Commission proposed a package of reforms, including

amendments to rule 14a-8, the shareholder proposal rule, to address a

range of concerns raised by shareholder and corporate participants in the

shareholder proposal process. 139 The proposed changes include an

override mechanism to make it easier for shareholders to include a broader

range of proposals in companies' proxy materials. The amendments also

would provide companies with clearer ground rules and more flexibility to

exclude proposals that failed to attract significant shareholder support in

prior years. In addition, the Commission proposed to re-write the rule in

an easy to understand, question and answer format.

Definition of "Prepared by or On Behalf of the Issuer" for Purposes of

Determining if an Offering Document is Subject to State Regulation

The National Securities Markets Improvement Act of 1996 revised

section 18 of the Securities Act to reallocate regulatory responsibility

relating to securities offerings between the federal and state governments

based on the nature of the security or offering. Among other things, the

revised statute prevents states from directly or indirectly prohibiting,

limiting, or imposing any conditions on the use of any offering document

for a covered security if the offering document is prepared by or on behalf

of the issuer. Pursuantto a statutory mandate, the Commission adopted

new rule 146 to provide a definition of the term "prepared by or on behalf

of the issuer.,,140Itprovides that if an issuer or an agent or representative

authorizes an offering document's production and approves the document

before its use, it is prepared by or on behalf of the issuer.

EDGAR Rule Revisions

The Commission adopted a number of minor and technical

amendments to its rules governing electronic filing, including the

elimination of the transition rules used during the phase-in period for the

Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. 141

The amendments codify several staff interpretations, add new rules, and

revise other rules to clarify issuers' electronic filing obligations.

81
Amendments to Forms and Schedules to Eliminate Provisions Requiring

Disclosure of Social Security Numbers

The Commission adopted revisions to its forms and schedules to

eliminate the need for individuals to provide their social security numbers

on documents filed with the SEC. 142 The Commission took this action in

response to increasing concerns about the improper use of social security

numbers for access to otherwise non-public information.

Staff Legal Bulletins

The staff began issuing stafflegal bulletins during the year to provide

advice to the public on frequently recurring issues. The bulletins contain

Division views on various topics, including:

• the requirements issuers must satisfy when requesting confidential

treatment for required information;

• periodic reporting requirements for issuers in reorganization or

liquidation;

• the section 3(a)(l 0) exemption from Securities Act registration

available when a court or certain state regulators make a fairness

finding;

• spinoffs, where a parent company distributes shares of its

subsidiary to its shareholders; and

• disclosure obligations arising from year 2000 conversion.

The bulletins are publicly available and are posted on the SEC's

internet website.

82
Conferences

SEC Government-BusinessForum on Small Business Capital Formation

The sixteenth annual SEC Government-BusinessForum on Small

Business Capital Formation was held in San Francisco, California on

September 18-19, 1997. 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.

SECINASAA Conference Under Section 19(c) of the Securities Act.

The fourteenth annual federal/state uniformity conference was held in

Washington, D.C. on April 28, 1997. Approximately60 Commission

officials met with approximately 60 representatives of the North American

Securities Administrators Association to discuss methods of achieving

greater uniformity in federal and state securities matters. After the

conference, a final report summarizing the discussions was prepared and

distributed to interested persons and participants.

Small Business Town Hall Meetings

In September 1996, the Commission began holding local town hall

meetings for small businesses, where entrepreneurs could meet with SEC

and other federal officials to raise specific concerns and learn about the

available governmental programs and opportunities for small companies

under existing laws and regulations. During the year, a meeting was held

in Richmond, Virginia.

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Accounting and Auditing Matters

The Chief Accountant is the principal advisor to the Commission on

accounting and auditing matters arisingfrom 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 and implements financial disclosure

requirements;

• review and comment process for agency filings directed to

improving disclosures infilings, identifying emerging accounting

issues (which may result in rulemaking or private sector standardsetting), and identifying problems that may warrant enforcement

actions;

• enforcement actions that impose sanctions and serve to deter

improper financial reporting by enhancing the care with which

registrants and their accountants analyze accounting issues; and

• oversight of and participation in, private sector efforts,

principally by the Financial Accounting Standards Board (FASB),

the American Institute of Certified Public Accountants (AICPA),

the Independence Standards Board (ISB), and various

international accounting bodies, which establish accounting and

auditing standards and independence criteriafor accountants

designed to improve financial accounting and reporting and the

quality of audit practice, including standards applicable to

multinational offerings.

Key 1997 Results

The Commission adopted 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

84
auditing standards. The Commission and the AICPAjointly announced

the formation of a new private sector body to establish independence

standards applicable to auditors of public companies.

Accounting-RelatedRules and Interpretations

The agency'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 SX, which governs the form and content of financial statements filed with

the SEC.

During the year, the Commission adopted rules to require additional

disclosures concerning derivatives and other financial instruments. 143 The

required 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 rules clarify and expand existing

requirements for financial statement footnote disclosures about accounting

policies for derivatives and require disclosures, outside the financial

tatements, of qualitative and quantitative information about the market

risks inherent in derivatives and other financial instruments.

In July 1997, the staff issued an interpretive release, in a question and

answer format, to provide guidance to registrants in imElementing the

market risk disclosures called for under the new rules. I 4

Oversight of Private-Sector Standard Setting

Financial Accounting Standards Board

The SEC monitors the structure, activity, and decisions of the privatesector standard-setting organizations, which include the FASB. The

Commission and its staff oversee the FASB' s ongoing efforts to improve

the standard-setting process, including the need to respond to various

regulatory, legislative, and business changes in a timely and appropriate

manner.

85
During 1997, the FASB completed its joint undertaking with the

Accounting Standards Board of the Canadian Institute of Chartered

Accountants to revisit the current reporting requirements under Statement

of Financial Accounting Standards No. 14, Financial Reporting/or

Segments of a Business Enterprise. A final standard was issued to

establish common standards on segment disclosures. 145

In a coordinated effort with the IntemationalAccounting Standards

Committee (lASC), the FASB issued another final standard to revise the

computation and presentation of earnings per share. 146 The approach taken

in the FASB standard generally is consistent with the approach set forth in

the IASC standard on this topic. In a related action, the FASB adopted a

final standard to require certain disclosures about capital structure. 147

The FASB continued its efforts on its long-term project to address

financial instruments and off-balance sheet financing issues. During the

year, the FASB deliberated to improve the current accounting for

derivative instruments and hedging. The FASB issued a draft standard that

would require all derivatives to be recognized as assets and liabilities and

measured at fair value. 148 Changes in fair value would be recognized in

earnings unless the instruments are designated as hedges and qualify for

hedge accounting. The FASB modified various aspects of its proposed

approach to qualifying for hedge accounting treatment based on various

comments. The comment period on the draft final standard ended on

October 14, 1997; a final standard is expected in early 1998.

In a related action, the FASB adopted standards for reporting and

displaying comprehensive income and its components (revenues, expenses,

. d I ) 149 gams, an osses.

During the year, the FASB began deliberations to reconsider the

accounting for business combinations presently encompassed by

Accounting Principles Board Opinion Nos. 16, Business Combinations,

and 17, Intangible Assets. Among the issues being considered is whether

the existence of two separate and distinct methods of accounting for

business combinations should continue. The FASB published a special

report, Issues Associated with the FASB Project on Business

Combinations, during 1997 to solicit comment.

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The FASB issued an exposure draft to revise the disclosure

requirements concerning an employer's obligations for pensions and other

post-employment benefits. ISO The objective is to examine the disclosure

requirements of existing FASB standards on employers' accounting for

pensions and other post-employment benefits and determine how such

requirements can be simplified without losing useful information. The

impetus for these revisions stems from a study conducted by a working

group of the Financial Accounting Standards Advisory Committee

(FASAC) recommending that the FASB take an inductive approach to

disclosure effectiveness, beginning with an evaluation of pension

disclosure requirements.

The FASB' s Emerging Issues Task Force (EITF) continued to identify

and resolve accounting issues. The EITF reached consensus on a number

of issues, including questions relating to accounting for fmancial

instruments, business combinations, consolidation policies, and accounting

for the effects of competition on rate-regulated entities. The objective of

the EITF process is to narrow divergent reporting practices of public

companies within the context of existing authoritative accounting

standards.

American Institute of Certified Public Accountants

The SEC oversaw various processes and activities conducted through

the AICPA. These included (1) the Auditing Standards Board (ASB),

which establishes generally accepted auditing standards; (2) the SEC

Practice Section (SECPS), which seeks to improve the quality of audit

practice by member accounting firms that audit financial statements of

public companies; and (3) the Accounting Standards Executive Committee

(AcSEC), which provides guidance through its issuance of statements of

position and practice bulletins.

ASB. The staff oversaw efforts of the ASB to enhance the

effectiveness of the audit process. During 1997, the ASB issued a

Statement on Auditing Standards to clarify an auditor's existing

responsibility to plan and perform an audit to search for fraud.lsl The

ASB also issued a proposed standard to provide guidance to auditors when

performing an attestation engagement with respect to management's

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discussion and analysis presentations of SEC registrants.152 The ASB

issued a series of annual Audit Risk Alerts to provide auditors with an

overview of recent economic, professional, and regulatory developments

that may affect 1997 year-end audits.

SEeps. Two programs administered by the SECPS are designed to

ensure that the financial statements of SEC registrants are audited by

accounting firms that have adequate quality control systems. A peer

review of member firms by other accountants is required every three years,

and the Quality Control Inquiry Committee (QCIC) reviews on a timely

basis the quality control implications of litigation against member firms

that involves public company clients. The staff coordinates its oversight of

these two programs with the oversight activities of the Public Oversight

Board (POB). The POB is independent of the AICP A except for funding.

The Commission exercises oversight of the SECPS through frequent

contacts with the POB and members of the executive, SEC regulations,

peer review, and quality control inquiry committees of the SECPS. During

the year, 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. The staff also reviewed closed case summaries

prepared by the QCIC and related POB oversight files are also reviewed by

the staff. These reviews and discussions with the POB and QCIC staffs

provided SEC staff with information to assess the QCIC process. As in

prior years, this oversight showed that the peer review process contributes

significantly to improving the quality control systems of member firms,

and that the QCIC process is an effective supplement to the peer review

process.

AcSEC. The AcSEC issued a statement of position to provide

id .. f ftw . 153 Th gui ance on revenue recognrtion rom so are transactions. e

AcSEC also continued to address accounting issues involving specialized

industries, dedicating resources in such areas as accounting for certain

computer software costs, motion picture accounting, and insurance

accounting.

ISB. During the year, the SEC and the AICPAjointly announced the

formation of a new private sector body, the Independence Standards

Board. The ISB, with Commission oversight, is expected to establish

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independence standards applicable to audits of public entities. The ISB' s

standards are expected to serve the public interest by promoting investors'

confidence in the audit process and in the securities markets. The ISB

consists of eight members. Four are public members who are not affiliated

with auditing firms, three are managing partners in auditing firms, and one

is the president of the AICPA. The Chairman of the ISB is required to be

one of the four public members. ISB standard-setting meetings will be

open to the public, draft ISB standards will be published for public

comment, and the SEC will oversee the ISB process.

International Accounting and Auditing Standards

The requirements for listing or offering of securities vary from

country to country. Issuers wishing to access capital markets in more than

one country may have to comply with requirements that differ in many

respects, including accounting principles to be used to prepare financial

statements. These differing requirements can increase compliance costs

for registrants and create inefficiencies in attempts to access multiple

capital markets. As a result, securities regulators around the world have

been working on several projects to reduce differences in reporting and

disclosure requirements.

The International Organization of Securities Commissions (IOSCO),

of which the SEC is a member, has been working with the International

Accounting Standards Committee (IASC) for several years on a project to

develop a core set of accounting standards for financial reporting in crossborder securities offerings. A brief chronology of the efforts related to this

project follows:

• In 1994, IOSCO reviewed the existing IASC standards and

identified standards that need to be improved, including issues

deemed critical to the success of the project by some countries.

• In July 1995, IOSCO and the IASC agreed on a core standards

work plan, and in April 1996, the IASC announced an intention to

complete that plan by March 1998. Completion of a

comprehensive set of core standards that is acceptable to IOSCO

89
will allow IOSCO's Technical Committee to recommend

acceptance of IASC standards for cross-border capital raising and

listing purposes.

• In April 1996, the Commission released a statement in support of

the efforts ofIOSCO and the lASe. That statement indicated that,

if the IASC successfully completes the agreed-upon work plan, the

Commission will consider accepting the core standards in

securities offerings by cross-border issuers in the United States if

those standards satisfy the criteria for acceptance described by the

Commission in that statement. The Commission believes the

work ofIOSCO is an important effort to improve capital market

reporting and, therefore, capital market efficiency around the

world. Because of the importance of this issue, the Commission

continued to devote significant resources to this project.

• During 1997, the IASC finalized standards for five ofthe twelve

projects on the core standards work program, 154 and exposure

drafts of proposed standards have been published for six of the

seven remaining areas. 155 The IASC also agreed to work with a

group of national standard setters to develop a standard on

financial instruments, and the IASC began to develop an interim

solution for financial instruments with a goal of completing its

core standards work program in 1998.

Finally, in October 1997 the Commission submitted a report to

Congress on the development of international accounting standards and the

outlook for successful completion of a set of international standards that

would be acceptable to the Commission for offerings and listings by

foreign corporations in United States markets.156 This report was

submitted pursuant to section 509(5) ofthe National Securities Markets

Improvement Act of 1996.

90
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 1997 Results

In a major victory for the government, the Supreme Court, in United

States v. 0 'Hagan, 157 upheld the misappropriation theory of insider trading

liability. The Commission drafted substantial parts of the government's

brief in the case. The SEC testified and the staff provided technical and

other assistance with respect to the National Securities Markets

Improvement Act of 1996 (NSMIA), which was enacted in October 1996.

Significant Litigation Developments

Insider Trading

In United States v. 0 'Hagan, one of the most important victories for

the government in a securities enforcement case, the Supreme Court

upheld the validity of the misappropriation theory of insider trading

liability. Under this theory, it is a form of securities fraud to trade in

securities on material non-public information that has been deceptively

misappropriated. The Supreme Court also upheld the validity of

Commission rule 14e-3, which bans trading while in possession of certain

material non-public information in connection with a tender offer. The

Commission worked closely with the U.S. Solicitor General in litigating

this criminal insider trading case.

In the pending appeal in SEC v.Adler,158 the Commission argued that

a corporate insider who trades in his company's securities while in

possession of inside information violates the securities laws, whether or

91
not he uses that information in his trading. In the pending appeal in United

States v. Smith,159 the Commission filed a friend of the court brieftaking

the same position as in Adler.

The Shingle Theory and Excessive Markups

In the pending appeal in Banca Cremi v. Alex. Brown & Sons, Inc.,16o

the Commission filed friend of the court briefs in a private action alleging

fraud based on excessive undisclosed markups on purchases of

collateralized mortgage obligation bonds. The Commission argued that

the duty to disclose an excessive markup derives from the longstanding

"shingle theory," under which a broker-dealer makes an implied

representation of fair dealing with customers. The Commission also

argued that its prior releases and decisions and court decisions give

adequate guidance on excessive markups, including markups on debt

securities.

"In Connection With" Requirement

In Levitin v. Painewebber.Inc.l'" and Bissellv. Merrill Lynch & Co.,

Inc.,162the Commission filed friend of the court briefs in appeals to the

Second Circuit of district court decisions restricting the scope of the "in

connection with the purchase or sale of a security" clause of section IO(b)

to misrepresentations or omissions that pertain to a security. The

Commission argued that in using the clause Congress intended, contrary to

the conclusion of the district court, that section IO(b) covers all deception

that could reasonably be expected to influence a securities transaction

including, for example, (I) misrepresentations about the qualifications of a

securities salesperson, (2) the risks of margin trading, (3) the terms of a

margin account, and (4) a brokerage firm's solvency. These cases are

awaiting decisions.

Securities Fraud and Conversion of Savings and Loan From Mutual to

Stock Ownership

In Dougherty v. Carver Federal Savings Bank,163the Court of

Appeals for the Second Circuit, essentially for the reasons urged by the

Commission in a friend of the court brief, reversed a district court decision

dismissing a complaint alleging fraud in an initial public offering of stock

92
in a federally-chartered savings bank. The offering was made pursuant to a

plan of conversion from mutual to stock ownership approved by the Office

of Thrift Supervision (OTS). The court of appeals agreed with the

Commission that the OTS' s approval of the conversion did not preclude a

private action under the antifraud provisions of the securities laws for

misrepresentations or omissions alleged to have occurred in the sale of the

securities to investors.

Transnational Subject-Matter Jurisdiction

In Europe and Overseas Commodity Traders, S.A. v. Banque Paribas

London,l64 the Commission filed a friend of the court brief, arguing that

the federal courts have subject-matter jurisdiction over antifraud and

registration claims when misrepresentations from abroad are directed by

telephone to a person temporarily in the United States, in order to induce

him to buy securities. The case is awaiting decision.

Joint and Several Liability for Disgorgement

In SEC v. Hughes Capital Corp., 165 the Third Circuit held that the

burden is on the party challenging joint and several liability for

disgorgementto establish the manner in which liability should be

apportioned.

Litigation under the Private Securities Litigation Reform Act of 1995

The Commission filed a friend of the court brief in the District Court

for the Northern District of California in In re Silicon Graphics, Inc. Sec.

Litig. 166 The Commission argued that the district court had erred in

initially holding that the new pleading standard in the Private Securities

Litigation Reform Act of 1995 (Reform Act) eliminated recklessness as a

basis for liability under section 1O(b)and rule 10b-5. The district court, in

a late opinion, essentially agreed with the Commission's position and the

case is pending on appeal in the Court of Appeals for the Ninth Circuit. 167

The Commission filed a second friend of the court brief involving the

pleading standard of the Reform Act in the Court of Appeals for the Ninth

Circuit in the pending appeal in Zeid v. Kimberley.168 In that brief the

Commission argued that the pleading standard in the Reform Act did not

eliminate recklessness as a standard for liability and that courts should rely

93
upon the Second Circuit tests in interpreting the pleading standard of the

Reform Act.

Forum Selection and Choice of Law Agreements

In two cases in which investors are suing Lloyd's of London, the

Commission appeared as friend of the court to argue that contractual forum

selection and choice of law clauses, which, taken together, require

investors to bring claims arising from their investments 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. In Richards v. Lloyd's of

London,169 a panel of the Court of Appeals for the Ninth Circuit agreed

and invalidated the choice clauses. Rehearing by the full court was granted

and the case is pending. In Haynsworth v. The Corporation,170 the Court

of Appeals for the Fifth Circuit upheld the choice clauses.

Requests for Access to Commission Records

The Commission received 96 subpoenas for documents and

testimony. 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 2,880 requests under the Freedom of

Information Act (FOIA) for access to agency records. There were 55

appeals to the Office of General Counsel from initial denials by the FOIA

Officer. Three actions were brought in federal courts challenging

Commission decisions to withhold, pursuant to FOIA Exemption 8,

documents related to Commission examinations. Exemption 8 protects

from disclosure matters that are "contained in or related to examination,

operating, or condition reports prepared by, on behalf of, or for the use of

an agency responsible for the regulation or supervision of financial

institutions." The courts upheld in each of the cases the Commission's

decision to withhold the requested materials.

94
Actions Against the Commission

In Solv-Ex Corp. v. SEC, 171 the bankruptcy court preliminarily

enjoined the Commission from disclosing any of Solv-Ex' s purported

confidential proprietary information in connection with the Commission's

ongoing investigation involving Solv-Ex. Among the issues under

investigation is whether Solv-Ex made material misstatements regarding

its technological processes. The court denied Solv-Ex's requests for notice

of and the right to attend the Commission's investigative testimony. The

Commission moved to dismiss the complaint or, altematively,for

summary judgment on a number of grounds, including that Solv-Ex

waived any right it may have had to confidentiality for its alleged propriety

information by providing that information to the Commission without an

agreement from the Commission to keep it confidential. The Commission

also appealed the preliminary injunction to the district court and sought a

stay from that court. Those motions are pending.

Challenges to NASD Arbitration Proceedings

Two lawsuits were filed against the Commission regarding NASD

arbitration proceedings. In Honn v. NASD, 172 a registered representative

alleged that the NASD did not provide a fair forum for a proceeding

against his former employer and that the Court should require the

Commission to oversee that proceeding. In Desiderio v. NASD, 173 the

plaintiff alleged that the arbitration clause of Form U-4 was improper and

that the Commission exceeded its statutory authority in permitting the

NASD to include the clause. The Commission moved to dismiss both

lawsuits for lack of jurisdiction and failure to state a claim. Those motions

are pending.

Actions Under the Right to Financial Privacy Act

In 1997, 19 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 staffhad complied with the procedural requirements of the RFPA.

95
Appeals From Subpoena Enforcement Actions

The Court of Appeals for the Second Circuit affirmed two district

court orders enforcing Commission administrative subpoenas. In Wells v.

SEC, 174 the court enforced a subpoena order of testimony holding, among

other things, that the Commission's omnibus formal order of investigation

authorized issuance of the subpoena despite the fact that the order did not

name the entity being investigated, predated the establishment of the entity

being investigated, and directed the staff to investigate an entire industry.

In SEC v. Waltzer & Associates, 175 the court enforced a subpoena seeking

insurance-related documents from a registered investment adviser. The

court rejected the investment adviser's arguments that production of the

documents would violate the McCarran-FergusonAct, which vests

primary regulatory authority over the sale of insurance products to the

states.

Significant Adjudication Developments

The staff submitted to the Commission 79 draft opinions and orders

resolving substantive motions. The Commission issued 43 opinions and

29 related orders, and the staff resolved by delegated authority an

additional 124 motions. Appeals from decisions of administrative law

judges continue to make up a high percentage of the Commission's docket.

Sanctions

Collateral or Industry-Wide Bars

The Commission considered whether it properly may impose on

respondents so-called "collateral" or industry-wide bars. In Meyer

Blinder,176the Commission determined that section 15(b)( 6) of the

Securities Exchange Act of 1934 (Exchange Act) authorizes the agency to

bar an associated person of a broker-dealer from securities activities other

than broker-dealer activities. The Commission stated that a collateral bar

appropriately may be imposed when it is against the public interest to

allow a person to serve in any capacity in the securities industry. Factors

bearing on the public interest include the nature and scope of a

96
respondent's misconduct. In light of the egregiousness of his conduct, the

Commission exercised its authority to bar Blinder, the president of a nowdefunct broker-dealer, not only from associating with any broker-dealer,

but also from associating with any municipal securities dealer, investment

adviser, or investment company.

In Robert 1Moses,177by contrast, the Commission found that it

lacked the authority to bar a respondent from activities unrelated to the

securities industry. It accordingly set aside an administrative law judge's

sanction barring an individual who had been associated with various

broker-dealers from engaging in the telecommunicationsbusiness.

Penny Stock Bars

In Benjamin G. Sprecher, 178 the Commission determined that the

sanction of a penny stock bar is remedial, not punitive, in nature. The

Commission barred Sprecher, a securities attorney, from participation in

any offering of penny stock based on a criminal conviction for misconduct

occurring before the effective date of the Securities Enforcement Remedies

and Penny Stock Reform Act of 1990 (Remedies Act). The Commission

concluded that the bar did not violate either the Ex Post Facto or Double

Jeopardy Clauses of the Constitution.

In Russell G. Koch,179the Commission rejected the claim that

imposing a penny stock bar on Koch, formerly a registered principal,

owner, and president of a broker-dealer, based on a permanent injunction

entered by a district court, was a retroactive application of the Remedies

Act. Although the injunction arose out of Koch' s pre-Remedies Act

conduct, it was entered more than three years after that Act became

effective and supplied an independent basis for the bar.

Disgorgement

In DonaldA. Roche, 180 the Commission found that Roche, a former

registered representative and branch manager of a broker-dealer, violated

the antifraud provisions of the securities laws when he made baseless price

predictions to customers, misled a reluctant customer to make a sale, and

churned three customer accounts. In ordering Roche to disgorge his illegal

profits from the churning, the Commission concluded that its order for

97
disgorgementwas not a "penalty" so as to trigger 28 U.S.C. ~ 2462's

general federal statute of limitations on proceedings in which a "fine,

penalty or forfeiture, pecuniary or otherwise" is sought.

Improper Professional Conduct

On remand from the United States Court of Appeals for the District of

Columbia Circuit, 181 in David J Checkosky and Norman A. Aldrich,182 the

Commission reaffirmed its earlier findings 183 that, under former rule 2(e)

of the Commission's Rules of Practice (now rule 102( e)), a partner and

audit manager for Coopers & Lybrand engaged in improper professional

conduct when their audit work deviated recklessly from the requirements

of Generally Accepted Auditing Standards and Generally Accepted

Accounting Principles. Responding to the District of Columbia Circuit's

directive that it address the mental state required for a finding of improper

professional conduct under rule 2(e), the Commission found that no

particular mental state is required.

Robert D. Potts, CPA 184 resolved the first litigated proceeding against

a concurring partner acting solely in that capacity. The Commission

determined that Potts' concurrence in the issuance of unqualified audit

opinions on a company's financial statements, which materially misstated

its income, recklessly deviated from professional standards and warranted

a suspension from practice before it.

Sales Practice Abuses/Fraud/Sale of Unregistered Securities

The Commission imposed sanctions ranging from a two-year brokerdealer bar to a permanent bar against two former principals, a regional

vice-president, and four branch managers of a broker-dealer in C. James

Padgett, et al. 185 The sanctions arose out of the respondents' abusive

practices, which included charging excessive markups, using telephone

sales scripts that contained misleading predictions of increases in the price

of speculative securities, discouraging customers from seIling certain

securities until another customer agreed to purchase them, and

conditioning customers' purchases of securities on their agreement to sell

those securities back to the firm.

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In Stephen ThorliefRangeni'" resolving an appeal from a New York

Stock Exchange (NYSE) disciplinary action, the Commission found that a

former registered representative of Shearson Lehman Brothers, Inc. made

unsuitable recommendations of securities to three customers, all

inexperienced investors, and excessively traded in the customers' accounts.

The Commission sustained the censure and four-year suspension in all

capacities that the NYSE had imposed.

In Prime Investors, Inc., Kenneth James Wright, and Michael Lyn

Johnson,187 the Commission found that a member firm of the NASD, its

president, and one of its registered representatives offered and sold

unregistered, non-exempt securities in violation of the Securities Act of

1933 (Securities Act), made materially misleading statements in

connection with those offers and sales, and misused investor funds. The

Commission also found that the firm violated Federal Reserve System

prompt -payment and margin requirements with respect to several dozen

security trades. The Commission sustained the NASD' s sanctions, which

included the firm's expulsion from membership in the NASD.

Legal Policy

During 1997, the General Counsel had a significant role in

implementing NSMIA, including (l) the adoption of rules mandating a

new system of federal-state investment adviser regulation, and (2) the

preparation of a report on technology mandated by NSMIA. In the

administrative area, the General Counsel took the lead role in

implementing new administrative and rulemaking requirements arising out

of the Small Business Regulatory Enforcement Faimess Act of 1996, Pub.

L. No. 104-121,110 Stat. 857.

The General Counsel also has substantial responsibility for carrying

out the Commission's legislati ve program, including drafting testimony,

developing the Commission's position on pending bills in Congress, and

providing technical assistance to Congress on legislative matters. The staff

prepared a report to the President and Congress regarding the impact of the

Reform Act.

99
Significant Legislative Developments

In 1997, only one minor piece of securities legislation was enacted

into law--a bill extending the effective date of certain provisions of

NSMIA that apply to the regulation of investment advisers. However,

Congress held hearings and actively considered a variety of other

legislative initiatives in areas of significant interest to the Commission,

including financial services reform, securities litigation reform, repeal of

the Public Utility Holding Company Act, decimal trading, and accounting

for derivatives.

Amendment to Securities Reform Legislation

On March 31,1997, President Clinton signed a bill into law extending

the effective date of Title III ofNSMIA from April 9, 1997 to July 8, 1997.

(Pub. L. No.1 05-8, 111 Stat. 15 (1997». Title III ofNSMIA, called the

Investment Advisers Supervision Coordination Act (Coordination Act),

was designed in large part to eliminate duplicative state and federal

securities regulation. Under the Coordination Act, regulation of

investment advisers is divided between the Commission and the states. In

general, the Commission regulates advisers to registered investment

companies and advisers with $25 million or more in assets under

management. The states regulate smaller advisers.

The Coordination Act gave the Commission only six months to

implement the rules effecting the division of investment adviser regulation

between the states and the Commission. Although the Commission moved

quickly after enactment to propose implementing rules on December 20,

1996, the Commission was concerned that the six-month implementation

period was too short, and that certain small advisers who did not return the

necessary paperwork in a timely fashion would not be identified for

regulation by the appropriate state by the Act's effective date.

Congress responded to the Commission's concerns and, in March

1997, extended the CoordinationAct's effective date by 90 days, to July 8,

1997. The Commission subsequently adopted final rules on May 15, 1997

implementing NSMIA. The Coordination Act took effect on July 8, 1997.

100
Decimalization

On March 13, 1997, H.R. 1053, the Common Cents Stock Pricing Act

of 1997, was introduced in the House of Representatives to require the

Commission to issue rules setting a timetable for introducing securities

trading in decimal intervals. S. 838, a companion bill identical to H.R.

1053, was introduced on June 5, 1997 in the Senate. For several years

commentators have urged the U. S. stock exchanges to make this change,

because they argue that relatively large increments of one-eighth of a dollar

pricing ( 12-1/2 cents) allow dealers to take larger profits from trading than

would be taken if trading were in decimals (hundredths of dollars) instead.

The Subcommittee on Finance and Hazardous Materials of the House

Commerce Committee held hearings on H.R. 1053 in April 1997. The

bills ultimately were put on hold by their sponsors because several SROs

decided to make the change voluntarily by the year 2000, if possible. On

March 13, 1997, the American Stock Exchange (AMEX) voted to move to

decimal pricing, and on May 7, 1997, it began trading in sixteenths rather

than eighths of a dollar. The Nasdaq Stock Market also began trading in

sixteenths on June 2, 1997. Despite opposition voiced less than one month

earlier, the NYSE voted on June 5, 1997, to begin trading in decimals

instead of fractions by January 2000, and on June 24, 1997, the NYSE

began trading in sixteenths as an interim measure.

The industry has continued to move towards decimal pricing. The

Commission's staffhas held meetings with the markets to work out an

orderly transition of industry systems to decimals.

Securities Activities of Banks

In 1997, Congress again devoted considerable attention to GlassSteagall reform. Three major legislative proposals on the subject were

introduced and actively considered: (1) H.R. 10, the Financial Services

Competitiveness Act of 1997, was introduced on January 7, 1997; (2) H.R.

268, the Depository Institution Affiliation and Thrift Charter Conversion

Act, also was introduced on January 7, 1997; and (3) S. 298, the

Depository Institution Affiliation Act, and its identical companion bill

H.R. 669, also the Depository Institution Affiliation Act, were introduced

on February 11, 1997. In addition, the Department of the Treasury

101
released a legislative proposal to overhaul the Glass-Steagall Act.

Although the Treasury Proposal was widely discussed in Congress, it was

not formally introduced as a bill in 1997.

After extensive consideration of the three Glass-Steagall bills before

the House Banking Committee, as well as the Treasury Proposal, the

Committee reported H.R. lOon June 20, 1997. The bill then was referred

to the House Commerce Committee for its consideration. At the end of

1997, this committee was working on its version of H.R. 10, which

ultimately was reported out of committee on October 30, 1997. At the end

of the first session of the 105th Congress, the House leadership was

working to craft a version ofH.R. 10 that could be supported by both the

House Banking and House Commerce Committees and the affected

regulators and industries.

The Commission testified several times regarding the various bills

under consideration and its views regarding Glass-Steagall reform. The

Commission testified before the Subcommittee on Financial Institutions

and Consumer Credit of the House Banking Committee regarding H.R.

268 on February 13, 1997. On May 22, 1997, the Commission testified

before the House Banking Committee regarding financial reform generally

and H.R. 10 specifically. The Commission testified before the

Subcommittee on Finance and Hazardous Materials of the House

Commerce Committee regarding H.R. lOon July 17, 1997.

In general, the Commission has supported Glass-Steagall reform,

provided that the resulting regulatory structure is established along

"functional" lines. The concept of "functional regulation" would require

that banks engage in most securities activities through a registered brokerdealer, fully subject to the federal securities regulatory scheme. The

Commission has testified that this is important because banking law does

not contain specific provisions that provide for investor protection; the

Commission believes that investors that purchase securities through banks

should receive the same investor protections as those that purchase

securities from broker-dealers. Functional regulation would achieve this

result. The Commission's testimony on Glass-Steagall issues generally (l)

supported the elimination of the bank exclusions from the federal securities

laws, (2) advocated the concept of a "two-way street" to allow equal

competitive opportunities to all financial services providers, (3) criticized

102
the application of bank -oriented safety and soundness regulation to

securities firms' activities, which would inhibit risk-taking by securities

firms affiliated with banks, and (4) opposed the additional layers of

bureaucracy imposed on the financial services industry in the form of a

National Financial Services Council.

Litigation Reform

Congress actively considered a range of issues arising out of the

Reform Act hearings. In response to a request from President Clinton, the

Commission undertook to study the impact of the Litigation Reform Act.

On April 15, 1997, the Report to the President and the Congress on the

First Year of Practice Under the Private Securities Litigation Reform Act

of 1995 (Staff Report) was delivered. This report discusses the first year's

experience with the Litigation Reform Act and concludes that it is too soon

to draw definitive conclusions about the impact of the Litigation Reform

Act on the effectiveness of the securities laws and on investor protection.

The report does, however, make some preliminary observations.

The Commission testified on July 24, 1997 before the Subcommittee

on Securities of the Senate Banking Committee to discuss the Staff Report.

The testimony suggested that preemption of state law at present would be

premature, pending more experience with implementation of the Litigation

Reform Act, and that any preemption proposals should be narrowly

tailored to address documented abuses. In addition to the Commission

testimony, Commissioner Wallman submitted a statement of his own

views, in which he agreed that it was too soon to assess the effects of the

Litigation Reform Act, but arguing that preemption was ready to be

debated on its own merits.

Three follow-up litigation reform bills have been introduced in

Congress. In the House of Representatives, H.R. 1653, the Securities

Litigation Improvement Act of 1997, was introduced on May 16,1997,

and H.R. 1689, the Securities Litigation Uniform Standards Act of 1997,

was introduced on May 21, 1997. These bills, in varying degrees, would

preempt state fraud actions in securities that are nationally traded. The

bills thus would create a uniform federal standard for fraud involving

securities of widely-traded companies, such as those traded, for example,

on the NYSE, the AMEX, and the Nasdaq. In addition, S. 1260, the

103
Securities Litigation Uniform Standards Act of 1997, was introduced in the

Senate on October 7, 1997.

The Public Utility Holding Company Act of 1935

In 1997, Congress considered a number of bills to repeal the Public

Utility Holding Company Act of 1935 (PUHCA). Repeal ofPUHCA has

been stalled as Congress debates whether to simply repeal PUHCA or to

repeal it as part of more sweeping electric utility deregulation.

Specifically, six bills were introduced in 1997 to repeal PUHCA. Three

bills regarding PUHCA repeal were introduced in the House: H.R. 655,

the Electric Consumers' Power to Choose Act of 1997, on February 10,

1997; H.R. 1230, the Consumers Electric Power Act of 1997, on April 8,

1997; and H.R. 1960, the Electric Power Competition and Consumer

Choice Act of 1997, on June 19, 1997. All of the House bills link PUHCA

repeal to electric utility deregulation. In addition, three Senate bills were

introduced: S. 237, the Electric Consumers Protection Act of 1997, on

January 30, 1997; S. 621, the Public Utility Holding Company Act of

1997, on April 22, 1997; and S. 722, the Electric Utility Restructuring

Empowerment and Competitiveness Act of 1997, on May 8, 1997.

Notably, four of the bills introduced in 1997 are almost identical to bills

introduced and considered in previous years.

On April 29, 1997, the CommissiontestifiedregardingPUHCA repeal

before the Senate Banking Committee. The testimony supported S. 621, a

bill that would largely implement conditional repeal ofPUHCA as

recommended by the Commission in its 1995 PUHCA study. The

testimony noted, however, that the bill does not adopt the Commission's

recommendation that the Federal Energy Regulatory Commission have

discretion to exercise jurisdiction over affiliate transactions of public utility

holding companies.

The Commission testified again regarding PUHCA repeal on June 24,

1997, during a series of workshops sponsored by the Senate Committee on

Energy and Natural Resources. These hearings focused on issues relating

to a more comprehensive energy reform, including deregulating the energy

power industry. The Commission's testimony restated support for

conditional PUHCA repeal, but did not take a position on the broader

issues involving comprehensive energy reform.

104
SEC-Commodity Futures Trading Commission Issues

During 1997, both the House and the Senate considered bills that

would substantially amend the Commodity Exchange Act (CEA)--S. 257

introduced on February 4, 1997, and H.R 467 introduced on January 21,

1997. Three elements of the bills are of particular interest to the

Commission as regulator of the securities exchanges and over-the-counter

(OTC) securities markets: (1) amendments and clarifications of the

Treasury Amendment (which excludes certain financial instruments from

the scope of the CEA); (2) the addition of a private transaction exemption

(which would codify in the CEA a swaps exemptive rule); and (3) addition

of a professional market exemption (which would essentially exempt from

most CEA regulation trading among institutional and wealthy individuals).

In a written statement dated March 14, 1997 to the Senate Agriculture

Committee, the Commission stated that it generally supported S. 257's

proposed amendments to the Treasury Amendment. With respect to the

private transaction exemption, the Commission stated that it was important

to enhance legal certainty for the market in privately-negotiatedOTC

swaps, but expressed a preference for an outright exclusion (rather than an

exemption) from the CEA for all institutional OTC transactions in

securities-based swaps. Finally, the Commission opposed the

professional-market exemption contained in S. 257. The Commission

stated that the broad exemption drafted in S. 257 would expose the futures

markets to additional risk of manipulation, call into question the validity of

the exchanges as price discovery mechanisms, and potentially could

undermine the Commission's ability to regulate trading and detect fraud

involving the securities underlying the futures and options traded in the

professional markets.

On April 15, 1997, the Commission testified before the Subcommittee

on Risk Management and Specialty Crops of the House Agriculture

Committee. In this testimony, the Commission expressed its support for

clarification of the Treasury Amendment, but continued to voice its strong

opposition to the professional-marketexemption. In addition, the

Commission explained again that an exception from the CEA for swaps

and other privately-negotiatedOTC derivative transactions would be the

105
most appropriate way to provide legal certainty to participants in that

market.

SEC Appropriations

On March 14, 1997, the Commission testified before the

Subcommittee on Commerce, Justice, and State, the Judiciary, and Related

Agencies of the House Appropriations Committee. The testimony

supported the President's 1998 budget request of$317.4 million for the

Commission. The Commission testified again in support of the

Commission's budget request on March 19, 1997 before the Subcommittee

on Commerce, Justice, and State, the Judiciary, and Related Agencies of

the Senate Appropriations Committee.

From October 1, 1997 until final signing of the bill on November 26,

1997, the Commission operated pursuant to six continuing resolutions,

which provided the Commission with authority to operate at its fiscal 1997

budget level, and to continue to collect fees at the rates set in fiscal 1997 .

On November 26, 1997, H.R. 2267, "a bill making appropriations for the

Departments of Commerce, Justice, and State, the Judiciary, and Related

Agencies for the year ending September 30, 1998" was enacted becoming

Pub. L. No. 105-119. It provides the SEC $315 million for 1998 and

includes language that provides offsetting fees in accord with the levels

authorized in NSMIA.

SEC Reauthorization

On March 6, 1997, the Commission testified before the Subcommittee

on Finance and Hazardous Materials of the House Commerce Committee

concerning the Commission's authorization request, seeking

appropriations of $320 million for 1998 and $342.7 million for 1999. In

response to questions posed at this hearing, Chairman Levitt agreed to

conduct a study of issues presented by bills that would require disclosure

of corporate charitable contributions and would give shareholders a role in

selecting recipients of corporate charity (H.R. 994 and H.R. 995 introduced

on March 5, 1997).

On April 9, 1997, H.R. 1262 was introduced in the House of

Representativesto reauthorize the Commission for 1998 and 1999. The

106
bill reflected the Commission's authorization request. On May 21, 1997,

the Subcommittee on Finance and Hazardous Materials approved the SEC

authorization bill for full committee action. The House Commerce

Committee reported the bill on July 23, 1997. An effort was made to pass

the bill in the House on suspension calendar on October 1, 1997, but it was

blocked due to an unrelated partisan political dispute. The bill was

subsequently passed by the House on November 13, 1997. No Senate

action took place before the recess.

Year 2000 Computer Issue

In response to an inquiry from Congressman Dingell of the House

Commerce Committee, the Commission staff prepared a report on the year

2000 issue and, on July 30, 1997, the Commission testified regarding this

issue before the Subcommittee on Financial Services and Technology of

the Senate Banking Committee. The report addressed the Commission's

readiness to deal with the year 2000 issue, the readiness of the securities

industry and public companies, the Commission's position regarding

corporate disclosure as it relates to the year 2000 issue, and actions the

Commission intends to take to reduce risks associated with the issue. The

Commission's testimony stated that the securities industry is preparing to

correct year 2000 problems, but that failure to correct the problems will

ultimately be dealt with by the markets. It also described the

Commission's cooperative efforts with the Securities Industry Association,

which is spearheading efforts to organize testing to ensure that market

participants are year 2000 compliant. Senator Bennett of the Senate

Banking Committee requested that all of the agencies at the hearing report

on an ongoing basis regarding year 2000 issues.

Other SEC Testimony

There was considerable congressional interest in issues relating to

disclosure and accounting for derivatives during the 105th Congress. The

Commission testified before the Subcommittee on Securities of the Senate

Banking Committee regarding derivatives issues on March 4, 1997.

Additional testimony on these issues was provided on October 1, 1997

before the Subcommittee on Capital Markets, Securities and Government

Sponsored Enterprises of the House Banking Committee.

107
The Commission also testified about micro-cap fraud issues involving

penny stocks and other small company securities on September 22, 1997

before the Permanent Subcommittee on Investigations of the Senate

Committee on Governmental Affairs.

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, the Commission entered a formal

appearance in 31 Chapter 11 cases involving companies with significant

public investor interest. The Commission, in order to protect the holders

of the orange county's public debt securities and the municipal bond

market generally, also was actively involved in the Orange County 188

Chapter 9 bankruptcy, which came to a successful conclusion during the

year.

Committees

Official committees negotiate with debtors on the formulation of

reorganization plans and generally participate 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 1997, the Commission, to assure that committees were not

hindered in their efforts to represent public investors, successfully objected

to attempts to prevent the retention of counsel by the official equity

• • T G 'B 189 d l' . f

committee InIn re rossman s ros an to irnit payment 0 attorneys

fees to counsel for the official equity committee in In re Edison Brothers

Stores, Inc.190 Committees were appointed in three cases as a result of

informal discussions with U.S. Trustees. 191

Estate Administration

The Commission protects the interests of public investors by

participating in selected matters involving administration of the debtor's

estate. In In re Sizzler Restaurants International, Inc. et al. 192, the debtor,

108
at the outset of the Chapter 11 case, sought court approval oflucrative

employment agreements for 19 key officers and personnel. The

Commission argued that the court should independently review the facts

and circumstances of the case, that the debtors had not presented sufficient

evidence in support of their position and that until they presented strong

evidence of the need for and reasonableness of the particular payments, the

motion should not be granted. Concurring with the Commission's

position, the court continued the motion so that a full evidentiary hearing

could be held and additional briefs filed. Prior to the continued hearing

date, the debtors withdrew the motion.

In In re Home Theater Products International, Inc., 193 the

Commission objected to the approval of a proposed settlement that

provided for a substantial payment to the estate by the debtor's former

principal (who allegedly had engaged in a massive securities fraud) in

exchange for the release of all of the debtor's claims against the principal.

The settlement also sought to enjoin and release claims of shareholders and

the Commission. The Commission argued that its claims, as well as

shareholder claims, against the non-debtor principal were non-derivative

and, therefore, could not be enjoined under section 105(a) of the

Bankruptcy Code, as the debtor had argued, because the claims were not

property of the estate and their prosecution did not interfere with the

administration of the estate. The Commission also argued that section

524( e) and its underlying policy prohibit the release of third-party claims

against non-debtors. The court agreed with the Commission's position that

the debtor had not satisfied the elements of section 105(a) and on that basis

denied the motion.

In Munfordv. Munford, Inc. ,194 a divided panel of the United States

Court of Appeals for the Eleventh Circuit held, contrary to the position

urged by the Commission, that the Bankruptcy Code does not protect

leveraged buyout (LBO) payments made by a company to its shareholders

from recovery under fraudulent conveyance laws when the company later

goes into bankruptcy. The Commission previously had argued

successfully in the Tenth Circuit Court of Appeals, the only other court of

appeals to address this issue, that section 546( e) of the Bankruptcy Code,

which shields securities settlement payments from recovery as a fraudulent

conveyance or preference, aR~lies to LBO payments. See Kaiser Steel

Corp. v. Pearl Brewing Co. 9 The Commission filed a petition with

109
suggestion for rehearing by the full Court of Appeals, which was denied on

July 9, 1997. Petitions for review by the Supreme Court are pending. 196

Disclosure Statements/ReorganizationPlans

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 1997, the Commission's bankruptcy staff

commented on 59 of the 64 plans and disclosure statements it reviewed. In

addition, the staff commented on 50 of the 65 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 staff's

comments were adopted by the debtors; formal Commission objections

were filed in five cases. 197 In addition, the Commission prevented the

un1awful iIssuance 0f securities secunnes Ini firve cases. 198

The Commission successfully objected to six plans of reorganization

that attempted to obtain a release from liability for certain of the debtors'

officers, directors, and other related persons. 199 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. Also, as a result of the Commission's comment

process for plan disclosure statements, im~roper third party release

provisions were abandoned in five cases.' °

In six cases the Commission successfully objected to attempts to

discharge claims of creditors and sell the remaining assetless public shell

corporations.i'" The trafficking in public company corporate shells-which

can lead to stock market manipulation--is specifically prohibited by the

Bankruptcy Code.

110
Enforcement Matters

Bankruptcy issues fre~uently arise in Commission enforcement

actions. In In re Bilzerian, 02 the district court reversed 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 disgorgementjudgment. The district court, in finding that

every element necessary to prove nondischargeabilityof the debt was

established by the prior criminal and civil proceedings against Bilzerian,

directed the bankruptcy judge to enter summary judgment for the

Commission that its disgorgementjudgment is nondischar~eable.

Bilzerian has appealed the decision to the Eleventh Circuit. 03 The matter

is pending.

In In re Cross,204the Commission appealed a bankruptcy court order

dismissing its adversary complaint seeking a determination that Cross'

$6.5 millionjudgment debt for disgorgementof proceeds from an illegal

offering of unregistered securities in the form of promissory notes is

nondischargeable under section 523( a)(2)( A) of the Bankruptcy Code as a

debt for money obtained by fraud. The bankruptcy court dismissed the

Commission's complaint, holding that the Commission lacked standing

under section 523 because it is not a creditor ofthe debtor, since the district

court in the Commission's action against the debtor directed payment of

the disgorgementaward to the court-appointedreceiver.i'" The

Commission appealed the decision to the Bankruptcy Appellate Panel for

the Ninth Circuit arguing that the Commission is the creditor with the right

to enforce its judgment and hence the appropriate creditor to bring a

nondischargeabilityaction.i'" The matter is pending.

In In re Hibbard Brown, 207 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 allegedly 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. The matter is pending.

111
In In re Absolute Resourceio8

the Commission successfully objected

to the debtor's plan that continued the employment of its managers who

were the subject of a Commission law enforcement investigation that

uncovered facts that established management's misconduct.

Ethical Conduct Program

In 1997, the staff responded to 1,420 counseling inquiries and

reviewed and cleared 161 speeches and articles submitted by SEC

employees. The staff assisted two nominees for Commissioner in the

nomination process, including, among other things, advising on fmancial

disclosure, resolving conflicts of interest, and formulating ethics

agreements.

112
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, dealers, municipal securities dealers, and other

professionals on issues relating to municipal securities.

Key 1997 Results

The Office of Municipal Securities coordinated the Commission's

efforts to end pay-to-play practices in the municipal securities markets,

promoting education and compliance with related rules of the Municipal

Securities Rulemaking Board (MSRB) and encouraging voluntary action

by national and local bar associations to end the practice. The office

provided the Division of Enforcement and the regional and district offices

with technical assistance in municipal securities investigations and

enforcement proceedings. In addition, the office consulted with the

Division of Market Regulation on rulemaking and interpretation of

Commission rules relating to the municipal securities market, and worked

with the Division of Investment Management on rulemaking relating to

municipal securities. The office provided interpretive and other guidance to

the municipal markets, including issuers, brokers, dealers, and municipal

securities dealers, in conjunction with the implementation of amendments

(concerning secondary market disclosure) to rule 15c2-12 of the Securities

Exchange Act of 1934. The staff also worked with the Division of Market

Regulation regarding the interpretation and implementationofMSRB rules

G-36, G-37, and G-38.

113
Municipal Securities Disclosure

The staff continued to educate municipal market participants in the

implementation of, and compliance with, amendments to rule 15c2-12,

concerning secondary market disclosure. The office provided guidance to

market participants regarding recent SEC enforcement decisions that apply

the antifraud provisions of the federal securities laws to municipal

securities. The staff assisted state and local government groups in

preparing materials to educate municipal market participants.

Technical Assistance

The Office of Municipal Securities worked with the Division of

Market Regulation on matters relating to the MSRB, including the

implementation of, amendments to, and interpretationofMSRB rules G37 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.

In addition, the staffworked with the Divisions of Market Regulation and

Corporation Finance on various issues surrounding the implementation of

amendments to rule 15c2-12 and certificates of participation in municipal

leases.

The municipal securities staff worked with the Office of General

Counsel on municipal bankruptcy and other municipal securities matters,

provided technical assistance to the Division of Enforcement in cases

involving municipal securities and the municipal securities market,

assisted the Office of Compliance Inspections and Examinations in

oversight of the municipal securities market and provided expertise for

training programs, and assisted the Office of Investor Education and

Assistance on issues pertaining to individual investors and municipal

securities price transparency.

114
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 were

the Government Finance Officers Association, National League of Cities,

National Association of Counties, U.S. Conference of Mayors, Council of

Infrastructure Financing Authorities, Bond Market Association, National

Association of Bond Lawyers, and a variety of regional and local

municipal government educational groups.

115
Economic Research and Analysis

The Office of Economic Analysis provides expertise infinancial 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 reviews

all rule proposals to assess their potential effects on: (1) small businesses

as required by the Regulatory Flexibility Act (RFA) and section 502 of the

Small Business Investment Incentives Act, both enacted in 1980; (2)

competition within the securities industry and competing securities

marke ts as required by the 1975 amendments to the Securities Exchange

Act of 1934; (3) efficiency, competition, and capitalformation pursuant to

section 106 of the National Securities Markets Improvement Act of 1996

(NSMIA); and (4) costs, prices, investment, innovation, and the economy

as required by the Small Business Regulatory Enforcement Fairness Act of

1996 (SBREFA).

Key 1997 Results

In 1997, the office analyzed the effects of preferencing on the

execution of customers' orders and competition among dealers and

markets. The analysis was incorporated into a study sent to Congress in

April, as required by NSMIA. The office also provided extensive analyses

of the impact of the new order handling rules on the Nasdaq market;

provided the Commission with data regarding the effects of new

Regulation M on issuers, underwriters, and securities offerings; and

analyzed how changes in rule 144 would impact resales of securities and

share prices.

116
Economic Analysis and Technical Assistance

The office analyzed 54 Commission and self-regulatory organization

rules to assess their costs and benefits, as well as their potential effects on

small entities, as required by the RFA.

The office provided substantial quantitative economic evidence to the

Division of Corporation Finance concerning the new holding periods for

the resale of private placements pursuant to rule 144 and analyzed over

200,000 filings of Form 144 that were made from January 1, 1988 through

April 30, 1996. This analysis provided data concerning the number of

companies using the rule to make private placements, the type and dollar

amount of securities sold, the price impact of resales of the securities into

the public markets, and the impact of resale restrictions. The Division of

Corporation Finance used the results of this analysis in crafting proposed

changes to the rule.

In April 1997, RegulationM replaced the Commission's trading

practice rules governing potentially manipulative trading during a

securities distribution. The economic analysis staff analyzed data to assess

the costs and benefits ofthe new rules and their likely effects on capital

formation and the economy. The office concluded that the rules would

promote capital formation and have no adverse effects on the economy.

The staff currently is studying the activities of underwriters in the period

immediately following securities distributions since Regulation M went

into effect.

The office participated in the program to monitor and assess the

impact of the Commission's new order handling rules, which were

implemented in January 1997, and provided data on the rules' effects on

bid-ask spreads, quotation depth, Small Order Execution System activity,

trade reporting practices, and the prices at which orders were executed

relative to contemporaneous price quotations. Prior to the implementation

of the new order handling rule, the office provided evidence that investors

often were confronted by artificially wide, inflexible spreads, and

frequently could not transact in the Nasdaq market at the best prices. The

office's analyses indicate that bid-ask spreads narrowed after the new order

handling rules went into effect and that investors have benefited from their

ability to trade at the improved price quotations.

117
Pursuant to section 51O(C) ofNSMIA, the office provided extensive

analysis and empirical data for the report to Congress on the practice of

preferencing. Preferencingprograms of exchanges allow a preferencing

dealer to take priority over same-priced orders or quotations entered prior

in time. Congress directed the Commission to examine whether retail

trades are disadvantaged by this practice.

As part of an evaluation of the Nasdaq Over-the-Counter(OTC)

Bulletin Board, the office continued to analyze the U.S. OTC market for

unregistered foreign equities. The 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 evaluation addressed concerns about the adequacy of price

transparency and potential harm to retail investors stemming from the lack

ofU .S. Generally Accepted Accounting Priniciples financial disclosure by

issuers of unregistered foreign equities. The study examined the degree of

retail participation, dealer concentration, and the size of the U.S. market

relative to worldwide trading in the same foreign equity.

In the enforcement area, the office assisted the Division of

Enforcement in many cases of insider trading, market manipulation,

fraudulent financial reporting, and other violations of securities laws. This

work generally involved the application of financial economics and

statistical techniques to determine whether the elements of fraud are

present and to estimate, where appropriate, the amount of disgorgementto

be sought. The economic analysis staff assisted in evaluating the

testimony of experts hired by opposing parties.

The office pursued a variety ofprojects designed to expand the

Commission's understanding of the capital markets. These projects are

long-term in nature and focus on the market impacts of unallocated shelf

offerings, the sale of unregistered securities, and restrictions on short sales.

The office worked with the Division of Investment Management on ways

to improve the formulation and display of mutual fund risk in disclosure

materials and designed a survey that will be administered to mutual fund

investors regarding their knowledge of fees and costs incurred in making

mutual fund purchase decisions.

118
Throughout the year, the economic analysis staff provided additional

advice and a variety of statistical analyses to the Commission and

operating divisions, including the extent of price improvement for New

York Stock Exchange SuperDot market orders, certain applications for

exemptions filed by public utilities, the accuracy of transaction fees

collected by the Commission, and certain applications by exchanges to

trade options and swaps contracts.

119
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

communicatingprogram policy, overseeing the allocation and expenditure

of agency funds, maintaining liaison with the Congress, disseminating

information to the press, and facilitating Commission meetings.

Administrative support includes services such as accounting,financial

management,fee collection, information technology management, data

processing, space andfacilities 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 1997 Results

The Commission held 57 meetings in 1997, during which it

considered 272 matters. Significant rules proposed or adopted and concept

releases issued by the Commission included:

• proposals to require plain English disclosure;

• a package of reforms, including amendments to the shareholder

proposal rule, to address concerns raised by shareholders and

corporate participants in the shareholder proposal process;

'. adoption of new anti-manipulation rules affecting securities

offering participants;

120
• adoption of rules relating to the reallocation of responsibilities for

regulating investment advisers between the SEC and the states;

and

• a concept release soliciting comment on alternative approaches to

regulation of exchanges.

The agency collected fees for the United States Treasury in excess of

its appropriation for the fifteenth straight year. In 1997, total SEC fees

collected as revenue were $990.4 million and the net gain to the Treasury

was $630.1 million.

Policy Management

Commission Activities

During 57 Commission meetings held in 1997, the Commission

considered 272 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 987 staff recommendations by seriatim vote.

Significant regulatory actions taken by the Commission included:

• proposals to require plain English disclosure;

• adoption of a new anti-manipulationregulation (Regulation M)

that simplifies, modifies, and eliminates provisions that restricted

the activities of securities offering participants;

• publication of a concept release soliciting comment on alternative

approaches to regulation of exchanges;

• proposals to address concerns raised by shareholders and corporate

participants in the shareholder proposals process; and

• adoption of rules and amendments to implement the provisions of

the Investment Advisers Supervision Coordination Act that

121
reallocates responsibilities for regulating investment advisers

between the SEC and the states.

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 Government Performance and Results Act of 1993 (GPRA),

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.

In early September, the SEC submitted a formal strategic plan to the

Office of Management and Budget and Congress, as required by the

GPRA. The plan presents strategic objectives and subobjectives used by

the SEC to accomplish its three major goals--protectinvestors, facilitate

capital formation, and maintain fair, honest, and efficient markets. Also

nearing completion is a performance plan that includes quantitative

performance indicators and targets to measure the SEC's success in

meeting its strategic goals.

Public Affairs

The Office of Public Affairs, Policy Evaluation and Research

communicated 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. The office also published a regular employee newsletter

and prepared a daily summary of news clips for agency employees. In

addition, the office provided support for the Chairman's investor education

initiatives, the SEC's internet website, and the agency's International

Institute for Securities Markets Developments.

122
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 109 press

releases on upcoming events, SEC programs, enforcement actions, and

special projects. The office also responded to 50,000 requests for specific

information on the SEC or its activities and coordinated visits of domestic

and foreign officials to the SEC. In total, programs for 816 foreign visitors

were coordinated during the year.

Equal Employment Opportunity

The Office of Equal Employment Opportunity (EEO) ensured the

agency's compliance with Title VII of the Civil Rights Act of 1964, as

amended, the Age Discrimination in Employment Act of 1967, the

RehabilitationAct of 1973, as amended, and the Equal Pay Act of 1963.

As required by these statutes, the SEC processed discrimination

complaints, publicized anti-discrimination policies, tracked the agency's

employee diversity statistics, and developed programs to increase agency

representation of minorities and women.

In 1997, the EEO office addressed formal and informal complaints of

discrimination through counseling, mediation and dispute resolution,

investigations, reports of investigation, and final agency decisions. The

office also met its affirmative employment responsibilities by training

employees and conducting special emphasis programs. Finally, working

with members of the industry, the SEC's EEO Director chaired the

Securities and Exchange Commission-Securities Industry Committee on

Equal Opportunity, an industry group dedicated to increasing the

representation of minority and women in the securities industry.

Freedom ofInformationAct and Privacy Act

The Office of Freedom ofInformationAct (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.

123
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 fifteenth consecutive year the SEC collected revenue in excess

of its appropriation. The SEC's total revenue was $990.4 million, 324

percent of its $305.4 million appropriation. The $990.4 million in total

revenue, minus the SEC's current year spending authority of $260.4

million ($305.4 million less $45 million from prior year offsetting

collections) and $99.9 million in excess offsetting collections, resulted in a

net gain to the United States Treasury of $630.1 million. Fee revenue

was collected from four basic sources: securities registrations (64 percent

of total 1997 fee collections), transactions of covered exchange-listed and

"off-exchange last sale reported" securities (28 percent), tender offer and

merger filings (6 percent), and miscellaneous filings (less than 2 percent).

Offsetting fee collections were generated from two of the sources. The

first source was an increase in the fee rate for registration statements under

section 6(b) of the Securities Act from one-fiftieth of one percent to onethirty-third of one percent. The second source was a new fee of one-threehundredth of one percent on transactions of "off-exchange" trades of

securities.

Financial Management

Throughout the year several financial initiatives occurred that will

have lasting impacts on SEC fees and administrative processes. For

example, the SEC:

• eliminated all regulatory fees previously adopted pursuant to the

Independent Officers Appropriations Act;

• received new offsetting collection authority in Title IV of the

National Securities Markets Improvement Act of 1996; and

124
• began a substantial effort to migrate its existing in-house payroll

system and operations to an outside service provider.

Information Resources Management

During the year, the SEC contracted with an outside consultant to

perform an independent review of the operations of the Office of

Information Technology. The goal of the study was to examine the

feasibility of outsourcing many of the operational activities currently

performed in-house and refocus information technology staff resources on

core functions and more strategic areas such as capital planning, technical

architecture, project management, security, technical engineering, contract

management, quality assurance, and customer service. Based in large part

on this review, a major restructuring of the Office ofInformation

Technology is underway. The new organization will be staffed through a

phased approach that will span up to a 12-15 month period beginning in

December 1997.

The Office ofInformation Technology continued to address the

critical data management problem presented by the year 2000. The project

team within the Office ofInformation Technology completed an inventory

and first level assessment of all central systems, and prioritized each

system into a mission-critical or non-mission-criticalcategory. The team

also conducted a second level assessment of the systems to identify those

that are already year 2000 compliant; should be eliminated, replaced, or

rewritten; or need further assessment and possible remediation. The SEC's

Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system is

among those systems that are compliant and therefore presents no

problems or issues to the filing community or to the users of EDGAR data.

The EDGAR System

In October 1996, the SEC issued a Request for Proposals (RFP) on

privatization and the continued operation and modernizationofthe

EDGAR system. All respondents were to address the two major

requirements of Phase I: (I) a comprehensive conceptual plan for the

privatization and modernization of EDGAR; and (2) the demonstrated

125
capability to operate, enhance, and maintain the existing system at a

reasonable cost during the transition to a modernized EDGAR system.

The SEC staff prepared an analysis of the responses to the RFP and

presented it to the Office of Management and Budget and Congress.

Subsequently, in September 1997, the SEC released a report entitled,

Report to the Congress on Section 107 of the National Securities Markets

Improvement Act of 1996 - Privatization of EDGAR. The report concluded

that, for a minimum of three years from the date of award of a new

contract, EDGAR privatization should remain as it currently stands:

offerors may construct and operate a privatized EDGAR dissemination

subsystem.

On October 10, 1997, the SEC released to all offerors in the Phase 1

competitive range, a Phase 2 RFP outlining the privatization ground rules.

The Phase 2 RFP also provided specific direction regarding EDGAR's

next generation document structure. The SEC anticipates a contract award

in the second quarter of 1998.

The agency's internet website (http://www.sec.gov)continued to

provide the public with 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.

The system continued to experience very heavy usage, servicing over 122

million files and 3.5 billion bytes of data to the public. This amounted to

nearly 1,100,000,000pages of text. The site averaged 335,000 files

downloaded per day.

Work continued on the agency's strategic automation initiatives. The

SEC implemented client-server based proceedings tracking systems;

developed correspondence tracking systems for internal office operations;

and began implementing a document management architecture for

Commission electronic materials. Work also progressed on the

development of an agency-wide casetracking system to track investigative

and legal matters.

The information technology staff made significant progress towards

implementing OMB Circular 96-02, Data Center Consolidation. The staff

126
prepared a cost analysis of four alternatives to the SEC's existing

mainframe operations and management. The replacement of the

Commission's existing mainframe with new technology was the most costeffective alternative. The Office of Management and Budget reviewed the

SEC's recommendations and approved a five-year experimental program.

Administrative and Personnel Management

The Office of Administrative and Personnel Management provided a

wide range of personnel and office support functions. For example, the

staff:

• developed and began implementing the agency's Welfare to Work

Program;

• coordinated the agency's first Balancing Work and Family Life

Resource Fair to provide employees with a wide range of

information on childcare and eldercare resources, stress and time

management, healthy lifestyles through nutrition and fitness,

transportation assistance, and other related topics;

• participated in job fairs and on-campus recruitment interviews at

law schools, produced a revised Legal Opportunities at the SEC

recruitment brochure, and used various hiring programs and

authorities to increase diversity in the agency (a total of26 percent

of new hires were minorities, including 19 percent of new

attorneys and law clerks, 11 percent of new accountants, and 29

percent of new securities compliance examiners);

• coordinated training programs for 2,139 employees, who attended

4,930 training events;

• participated actively in a consortium of federal agencies in

sponsoring a series of National Academy of Public Administration

studies focusing on innovative human resources practices; and

• administered 14 leases totaling approximately 828,500 square feet.

127
Public Reference

The SEC maintains public reference rooms in its offices in

Washington, D.C., New York, and Chicago. During the year, 34,930

visitors used the Commission's public reference rooms. A total of 160,366

paper documents and 645,438 microfiche records were added to the

existing library of information made available to the public. At these

facilities, the public can examine and review Commission rules, orders,

studies, reports, and speeches made by SEC officials.

128
Endnotes

ISEC v. Charles 0. Huttoe, Litigation Release No. 15154 (Nov. 7, 1996),

63 SEC Docket 528.

2SECv. MerleS. Finkel, Litigation Release No. 15286, (Mar. 12, 1997),63

SEC Docket 528.

3SEC v. George Chelekis, et al., Litigation Release No. 15264 (Mar. 12,

1997), 63 SEC Docket 2900.

4SEC v. First InterregionalAdvisors Corporation, Litigation Release No.

15276 (Mar. 7, 1997),64 SEC Docket 229.

5SEC v. Global Financial Traders, Ltd, Litigation Release No. 15291

(Mar. 14, 1997),64 SEC Docket 402.

6In the Matter of The City of Syracuse, New York, Release No. 34-39149

(Sept. 30, 1997),65 SEC Docket 1555.

7In the Matter of Smith Barney, Inc., Release No. 34-39118 (Sept. 23,

1997),65 SEC Docket 1338.

8SEC v. c.s. First Boston Corporation, Litigation Release No. 15160

(Nov. 20, 1996),63 SEC Docket 778.

9SEC v. Fabri-Centersof America, Inc., Litigation Release No. 15260

(Feb. 18, 1997),63 SEC Docket 2697.

10In the MatterofWR. Grace & Co., Release No. 34-39156 (Feb. 18,

1997), 65 SEC Docket 2697.

IIIn the Matter ofWR. Grace & Co., Release No. 34-39157 (Sept. 30,

1997),65 SEC Docket 1573.

129
12SECv. FerrojluidicsCorporation, Litigation Release No. 15508 (Sept.

25, 1997),65 SEC Docket 1451.

13SEC v. Montedison, S.p.A., Litigation Release No. 15164 (Nov. 21,

1996),63 SEC Docket 783.

14SECv. Triton Energy Corporation, Litigation Release No. 15266 (Feb.

27, 1997), 63 SEC Docket 2901.

15SEC v. Roy Handojo, Litigation Release No. 15492 (Sept. 15, 1997),65

SEC Docket 1235.

16SECv. Frederick Liu, Litigation Release No. 15397 (June 26, 1997),64

SEC Docket 2208.

17SEC v. One Unknown Purchaser of the Call Options of APL Limited,

Litigation Release No. 15334 (Apr. 15, 1997),64 SEC Docket 965.

18SECv. Emanuel Pinez, Litigation Release No. 15258 (Feb. 14, 1997),63

SEC Docket 2695.

19In the Matter of Stock Clearing Corp. of Philadelphia, Release No. 34-

38918 (Aug. 11, 1997),65 SEC Docket 464.

20In the MatterofTimothyJ. Guiheen, Release No. 34-38917 (Aug. 11,

1997),65 SEC Docket 459.

21Inthe MatterofWilliamN Briggs, Release No. 34-38919 (Aug. 11,

1997), 65 SEC Docket 481.

22Criminal and Public Administrative and Cease and desist Proceedings

Against 45 In Connection with KickbackSchemes, Release No. 34-37807

(Oct. 10, 1996),62 SEC Docket 3027.

23 In the Matter of John L. Banach, Release No. 34-38079 (Dec. 23, 1996),

63 SEC Docket 1431.

130
24In the Matter of Steven Ira Wertman, Release No. 34-38751 (June 20,

1997),64 SEC Docket 2119.

25In the Matter of Thomas John Cloutier, Release No. 34-38946 (Aug. 18,

1997),65 SEC Docket 563.

26In the Matter of H Beck, Inc., Release No. 34-38913 (Aug. 11, 1997),65

SEC Docket 457.

27SECv. Sterling Foster & Co" Inc., LitigationRelease 15261 (Feb. 18,

1997), 63 SEC Docket 2698.

28In the Matter of Royal Alliance Associates, Inc., Release No. 34-38174

(Jan. 15, 1997),63 SEC Docket 1843.

29In the Matter ofGKN Securities Corp., Release No. 34-38173 (Jan. 15,

1997), 63 SEC Docket 1834.

30In the Matter of Oakwood Counselors, Inc., Release No. IA-1614 (Feb.

10, 1997),63 SEC Docket 2485.

31In the Matter of Parnassus Investments, Release. No. IA-1634, (May 28,

1997), 64 SEC Docket 1830.

32SEC v. John Gardner Black, Litigation Release No. 15511 (Sept. 26,

1997), 65 SEC Docket 2048.

33In the Matter of Ronald V Speaker, Release No. IA-1605 (Jan. 13,

1997), 63 SEC Docket 1892.

34In the Matter of Alliance Capital Management, L.P., Release No. IA1630 (Apr. 28, 1997),64 SEC Docket 1276.

35 In the Matter of Fundamental Portfolio Advisors, Inc., Release No. 34-

39158 (Sept. 30,1997),65 SEC Docket 1593.

131
36In the Matter of Mitchell Hutchins Asset Management Inc., Release No.

34-39001 (Sept. 2, 1997),65 SEC Docket 838.

37Release No. 34-38672 (May 23, 1997),62 FR 30485 (June 4, 1997).

38Re1ease No. 34-39032 (Sept. 9, 1997), 62 FR 48683 (Sept. 16, 1997)

(regarding CBOE-96-79,PCX-97-09, and AMEX-96-19).

39Re1easeNos. 34-38710 (June 2, 1997),62 FR 31638 (June 10, 1997)

(regarding AMEX-97-21); 34-38709 (June 2, 1997),62 FR 31643 (June

10, 1997) (regarding CBOE-97-17); 34-38729 (June 10, 1997),62 FR

32669 (June 16,1997) (regardingNASD-97-14).

4oRe1easeNos. 34-38542 (Apr. 23, 1997),62 FR 23521 (Apr. 30, 1997)

(regarding NYSE-97-05); 34-38541 (Apr. 23, 1997),62 FR 23516 (Apr.

30,1997) (regardingCBOE-97-14).

41Release No. 34-39115 (Sept. 22, 1997),62 FR 50966 (Sept. 29, 1997)

(regarding CBOE-96-75).

42Re1easeNo. 34-39116 (Sept. 22, 1997),62 FR 50970 (Sept. 29, 1997)

(regarding CBOE-96-76).

43Release Nos. 34-38307 (Feb. 19, 1997),62 FR 8469 (Feb. 25, 1997)

(regarding AMEX-97-04); 34-38963 (May 29,1997),62 FR 30914 (June

5, 1997) (regarding AMEX-97-15); 34-38968 (Aug. 25, 1997),62 FR

46390 (Sept. 2,1997) (regardingAMEX-97-31);34-39253 (Oct. 17,

1997),62 FR 55442 (Oct. 24, 1997) (regardingAMEX-97-35); 34-38353

(Feb. 28, 1997),62 FR 10888 (Mar. 10, 1997) (regarding CBOE-96-59);

34-39244 (Oct. 15, 1997),62 FR 55289 (Oct. 23, 1997) (regarding CBOE97-25); 34-39011 (Sept. 3, 1997),62 FR 47840 (Sept. 11, 1997) (regarding

CBOE-97-26); 34-39012 (Sept. 3, 1997),62 FR 47850 (Sept. 11, 1997)

(regarding CBOE-97-27); 34-39013 (Sept. 3, 1997),62 FR 47845 (Sept.

11, 1997)(regarding CBOE-97-28); 34-39087 (Sept. 17, 1997),62 FR

50422 (Sept. 25, 1997) (regarding PCX-97-29); 34-38081 (Dec. 23, 1996),

62 FR 138 (Jan. 2, 1997) (regardingPCX-96-40); 34-38207 (Jan. 27,

1997),62 FR 5268 (Feb. 4, 1997) (regardingPHLX-97-02).

132
44Release No. 34-35124 (Dec. 20, 1994),59 FR 66702 (Dec. 28, 1994).

45Release Nos. 34-27445 (Nov. 16, 1989),54 FR 48703 (Nov. 24, 1989);

34-29185 (May 9, 1991),56 FR 22490 (May 15,1991).

46Lettersregarding: (1) TradeWebLLC (June 13, 1997), (2) Niphix

Investments Inc. (Dec. 19, 1996), and (3) Bloomberg TradebookLLC

(Dec. 3, 1996). The Niphix letter also provided relief with respect to

registration as a securities information processor under Section 11A of the

Exchange Act and as a clearing agency under Section 17A of the Exchange

Act.

47Letterregarding Intervest Financial Services, Inc., dated Jan. 13, 1997

(trading of U. S. Treasury and foreign government securities).

48Lettersregarding Chicago Board Brokerage, Inc., dated Sept. 12, 1997

and National Partnership Exchange, Inc., dated July 18, 1997.

49Letterregarding The Flamemaster Corporation, dated Oct. 29, 1996. The

staff noted in this no-action letter that it would no longer respond to noaction requests with respect to systems that were substantially similar to

the issues presented in the Flamemaster scenario or two other recent noaction letters for Real Goods Trading Corp. (June 24, 1996) and

PerfectDataCorp. (Aug. 5, 1996).

50Release No. 34-38139 (Jan. 8, 1997),62 FR 1385 (Jan. 10, 1997).

5IRelease Nos. 34-38246 (Feb. 5, 1997),62 FR 6468 (Feb. 12, 1997);

Release No. 34-38490 (Apr. 9, 1997),62 FR 18514 (Apr. 16, 1997);

Release No. 34-38870 (July 24, 1997),62 FR 40732 (July 30, 1997).

52Release No. 34-38067 (Dec. 20, 1996),62 FR 520 (Jan. 3, 1997),

effective Mar. 4, 1997. In March 1997, the Commission issued a release

making technical revisions to Regulation M. Release No. 34-38363 (Mar.

4,1997),62 FR 11321 (Mar. 12, 1997).

133
53Release No. 34-38068 (Dec. 20, 1996),61 FR 68587 (Dec. 30, 1996).

54Release No. 34-38793 (June 30, 1997),62 FR 36596 (July 8, 1997)

(regarding S7-24-89).

55Release No. 34-39076 (Sept. 15, 1997),62 FR 49270 (Sept. 19, 1997)

(regarding CHX -97-06).

56Letter regarding John M. McNally, Esq., dated July 3, 1997.

57Letter from Robert Colby, Deputy Director, Division of Market

Regulation, Securities and Exchange Commission, to Richard Shilts,

Acting Director, Market Analysis Section, Commodity Futures Trading

Commission, dated July 15, 1997.

58Letter from Howard Kramer, Senior Associate Director, Division of

Market Regulation, Securities and Exchange Commission, to David

Merrill, Deputy General Counsel, Office of the General Counsel,

Commodity Futures Trading Commission, dated July 30, 1997.

59Letter from Richard Lindsey, Director, Division of Market Regulation,

Securities and Exchange Commission, to Richard Shilts, Acting Director,

Market Analysis Section, Commodity Futures Trading Commission, dated

Aug. 28, 1997.

60Release No. 34-38245 (Feb. 5, 1997),62 FR 6469 (Feb. 12, 1997).

61Release No. 34-38248 (Feb. 6, 1997),62 FR 7474 (Feb. 12, 1997).

62Letter from Michael A. Macchiaroli, Associate Director, Division of

Market Regulation, Securities and Exchange Commission, to Raymond J.

Hennessy, Vice President, New York Stock Exchange, Inc., dated Dec. 30,

1996.

63Release No. 34-37850 (Oct. 22, 1996),61 FR 55593 (Oct. 28, 1996).

134
64Letterregarding Securities Activities of V.S.-Affiliated Foreign Dealers,

dated Apr. 9, 1997.

65Letter regarding Morgan Stanley India Pvt. Ld, dated Dec. 20, 1996.

6615 V.S.C. SS 6101-08 (1996).

67 1 Re ease No. 34-38480 (Apr. 7, 1997),62 FR 18666 (Apr. 16, 1997).

6gLetterregarding Angel Capital Electronic Network, dated Oct. 25, 1996.

69Letterregarding Charles Schwab & Co., Inc., dated Nov. 27, 1996.

70ReleaseNo. 34-38807 (July 1,1997),64 SEC Docket 2292.

71Release No. 34-38635 (May 14, 1997),64 SEC Docket 1498.

72See, e.g., letters regarding Boliden Limited, dated June 5, 1997;

Canadian Hotel Income Properties, dated June 24, 1997; Laidlaw Inc.,

dated July 2, 1997; Avista Real Estate Investment Trust, dated July 21,

1997; and Canadian FracmasterLtd, dated Aug. 15, 1997.

73Letterregarding V.S. Treasury Inflation Indexed Securities, dated Jan.

17,1997).

74Letterregarding Rule 1Ob-l 0/Average Price, Multiple Capacity

Confirmations, dated May 6, 1997.

75Letterregarding MBS Clearing Corporation, dated June 27, 1997.

76Release No. 34-39176 [File No. S7-21-96], 62 FR 52229 (Oct. 7, 1997).

77Release Nos. 34-38221 (Jan. 31, 1997),62 FR 5871 (Feb. 7, 1997)

(regardingPHLX-97-03); 34-38221 (Jan. 31, 1997),62 FR 5871 (Feb. 7,

1997) (regarding BSE-96-12); 34-38221 (Jan. 31, 1997),62 FR 5871 (Feb.

7, 1997)(regardingCHX-96-33);34-38221 (Jan. 31,1997),62 FR 5871

135
(Feb. 7, 1997)(regardingAMEX-96-49);34-38221 (Jan. 31,1997),62 FR

5871 (Feb. 7, 1997) (regarding NYSE-96-38).

78Release Nos. 34-38897 (Aug. 1, 1997),62 FR 42847 (Aug. 8, 1997)

(regardingNYSE-97-21);34-38704 (May 30, 1997),62 FR 31467 (June 9,

1997) (regarding CHX-97-11); 34-38590 (May 9, 1997),62 FR 26832

(May 15, 1997) (regarding CHX-97-08); 34-38779 (June 26, 1997),62 FR

36087 (July 3, 1997) (regarding PHLX-97-27); 34-38780 (June 26, 1997),

62 FR 36087 (July 3,1997) (regardingPCX-97-15).

79Release No. 34-39086 (Sept. 17, 1997),62 FR 50036 (Sept. 24, 1997)

(regarding PCX -97-18).

80Release No. 34-38960 (Aug. 22, 1997),62 FR 45904 (Aug. 29, 1997)

(regardingPHLX-97-31).

81Release No. 34-38961 (Aug. 22, 1997),62 FR 45895 (Aug. 29, 1997)

(regarding NASD-97-16).

82Release No. 34-38908 (Aug. 7, 1997),62 FR 43385 (Aug. 13, 1997)

(regarding NASD-97 -28).

83Release No. 34-388845 (July 17, 1997),62 FR 39564 (July 23, 1997)

(regardingNASD-97-37).

84ReleaseNo. 34-38890 (Aug. 25, 1997),62 FR 47096 (Sept. 5, 1997).

8sReleaseNo.34-39120,(Sept.15, 1997)62 FR51170(Sept. 30, 1997).

86Release No. 34-38456 (Mar. 31, 1997),62 FR 16635 (Apr. 7, 1997)

(regarding NASD-97 -7).

87Release No. 34-39285 (Oct. 29, 1997),62 FR 59932 (Nov. 5, 1997)

(regarding NASD-97-26).

88ReleaseNos. 34-38365 (Mar. 5,1997),62 FR 11235 (Mar. 11, 1997)

(regarding MSRB-97-2); 34-38162 (Jan. 13, 1997),62 FR 3069 (Jan. 21,

136
1997)(regarding MSRB-96-13); 34-37997 (Nov. 29, 1996),61 FR 64781

(Dec. 6, 1996) (regarding MSRB 96-11).

89Release No. 34-37998 (Nov. 29, 1996),61 FR 64782 (Dec. 6, 1996)

(regarding MSRB-96-1 0).

90Release No. 34-38810 (July 1, 1997),62 FR 37093 (July 10, 1997).

91Release Nos. 34-38328 (Feb. 24, 1997),62 FR 9225 (Feb. 28, 1997); 34-

38329 (Feb. 24, 1997) 62 FR 9222 (Feb. 28, 1997).

92Release No. 34-38589 (May 9, 1997),62 FR 26833 (May 15, 1997).

93Release No. 34-38564 (Apr. 30, 1997),62 FR 25008 (May 7, 1997).

94Release No. 34-39096 (May 14, 1997),62 FR 27821 (May 21,1997).

95Release No. IC-22528 (Feb. 27, 1997),62 FR 10898 (Mar. 10, 1997).

96Release No. IC-22529 (Feb. 27, 1997),62 FR 10943 (Mar. 10, 1997).

97Release No. IC-22530 (Feb. 27, 1997),62 FR 10955 (Mar. 10, 1997).

98Release No. IC-22405 (Dec. 18, 1996),6 I FR 68100 (Dec. 26, 1996);

Release No. IC-22597 (Apr. 3, 1997),62 FR 17512 (Apr. 9, 1997).

99Release No. IC-22775 (July 31, 1997), 62FR42401 (Aug. 7,1997).

100Release No. IC-22383 (Dec. 10, 1996),61 FR66621 (Dec. 18, 1996).

101Release No. IC-21837 (Mar. 21, 1996),61 FR 13956 (Mar. 28, 1996).

102ReleaseNo.IC-22383(Dec.1O, 1996),61 FR66621 (Dec. 18, 1996).

103ReleaseNo. IC-22658 (May 12, 1997),62 FR 26923 (May 16, 1997).

137
104ReleaseNo. IC-22747 (July 14, 1997),62 FR 38495 (July 18, 1997);

Release No. IC-22815 (Sept. 10, 1997), 62 FR 47934 (Sep. 12, 1997).

105ReleaseNo. IC-22835 (Sept. 26, 1997),62 FR 51762 (Oct. 3, 1997).

107See,e.g., The Park Avenue Portfolio, Release Nos. IC-22561 (Mar. 13,

1997),62 FR 13410 (Mar. 20, 1997) (notice) and IC-22607(Apr. 8, 1997)

(order); and The OjjitbankInvestment Fund, Release Nos. IC-22441 (Jan.

6, 1997),62 FR 1783 (Jan. 13, 1997)(notice) and IC-22489 (Feb. 3, 1997)

(order).

108See SBSF Funds, Inc., Release Nos. IC-22486 (Jan. 30, 1997),62 FR

5659 (Feb. 6, 1997) (notice) and IC-22526 (Feb. 25, 1997) (order).

109DeanWitter Discover & Co.; Morgan Stanley Group Inc. (pub. avail.

Apr. 18, 1997).

Il0Goodwin, Proctor & Hoar (pub. avail. Feb. 28, 1997).

11ICharles Schwab & Co., Inc. (pub. avail. July 7, 1997).

112LampTechnologies, Inc. (pub. avail. May 29, 1997).

I I 3Merrill Lynch Asset Management (pub. avail. Apr. 28, 1997).

114TheDessauer Global Equity Fund (pub. avail. Apr. 3, 1997).

115INVESCO(pub. avail. Aug. 5, 1997).

116ReleaseNo. 33-7438 (Aug. 20, 1997),62 FR 45359 (Aug. 27, 1997).

117Aetna Life Insurance and Annuity Company (pub. avail. Jan. 6, 1997).

118StateFarm Life Insurance Company (pub. avail. Oct. 24, 1997).

138
119ValleyForge Life Insurance Company (pub. avail. Jan. 30, 1997).

120ReleaseNo. IA-1633 (May 15, 1997),62 FR 28112 (May 22, 1997).

121Association for Investment Management and Research (pub. avail. Dec.

18, 1996).

I22Cambiar Investors, Inc. (pub. avail. Aug. 28, 1997).

123MorganLewis & Bockius (pub. avail. Apr. 16, 1997).

124TUCHolding Company, Release Nos. 35-26607 (Nov. 15, 1996),61 FR

59259 (Nov. 21, 1996) (notice) and 35-26749 (Aug. 1, 1997) (order).

125New Century Energies, Inc., Release Nos. 35-26497 (Mar. 22, 1996),61

FR 13901 (Mar. 28, 1996) (notice) and 35-26748 (Aug. 1, 1997)(order).

126Houston Industries Incorporated, Release Nos. 35-26594 (Oct. 18,

1996),61 FR 55331 (Oct. 25, 1996)(notice)and 35-26744 (July 24,1997)

(order).

127Central and South West Corporation, Release Nos. 35-26503 (Apr. 12,

1996),61 FR 17333 (Apr. 19, 1996) (notice) and 35-26653 (Jan. 24, 1997)

(order).

128ConsolidatedNatural Gas Company, Release Nos. 35-26470 (Feb. 9,

1996),61 FR 6046 (Feb. 15, 1996)(notice)and 35-26595 (Oct. 25,1996)

(order).

129ReleaseNo. 35-26667 (Feb. 14, 1997),62 FR 7900 (Feb. 20, 1997).

130Release No. 33-7431 (July 18,1997),65 SEC Docket 1.

131Release No. 33-7380 (Jan. 14, 1997),63 SEC Docket 14.

132Release No. 33-7419 (May 8, 1997),64 SEC Docket 10.

l~O
133ReleaseNo. 33-7392 (Feb. 20, 1997),63 SEC Docket 19.

134ReleaseNo. 33-7470 (Oct. 10, 1997),65 SEC Docket 13.

135ReleaseNo. 33-7393 (Feb. 20, 1997),63 SEC Docket 19.

136ReleaseNo. 33-7386 (Jan. 28, 1997),63 SEC Docket 17.

137ReleaseNo. 33-7390 (Feb. 20, 1997),63 SEC Docket 19.

138ReleaseNo. 33-7391 (Feb. 20, 1997),63 SEC Docket 19.

139ReleaseNo. 34-39093 (Sept. 18, 1997),65 SEC Docket 9.

140ReleaseNo. 33-7418 (Apr. 30, 1997),64 SEC Docket 9.

141ReleaseNo. 33-7427 (July 1, 1997),64 SEC Docket 18.

142ReleaseNo. 33-7424 (June 25, 1997),64 SEC Docket 17.

143ReleaseNo. 33-7386 (Jan. 31,1997),63 SEC Docket 2182.

144Questions and Answers about the New "Market Risk" Disclosure Rules

(July 31, 1997).

145Statement of Financial Accounting Standards No. 131, Disclosures

about Segments of an Enterprise and Related Information (June 1997).

146Statement of Financial Accounting Standards No. 128, Earnings Per

Share (Feb. 1997).

147StatementofFinanciai Accounting Standards No. 129, Disclosure of

Information About Capital Structure (Feb. 1997).

148DraftProposed Statement of Financial Accounting Standards,

Accountingfor Derivative and Similar Financial Instrumentsandfor

Hedging Activities (Aug. 29, 1997).

140
149Statement of Financial Accounting Standards No. 130, Reporting

Comprehensive Income (Feb. 1997).

150Proposed Statement of Financial Accounting Standards, Employers'

Disclosures About Pensions and Other Post-retirement Benefits (June 30,

1997).

151Statement on Auditing Standards No. 82, Consideration of Fraud in a

Financial Statement of Audit (Feb. 1997).

152Proposed Statement on Standards for Attestation Engagements,

Management's Discussion and Analysis (Mar. 7, 1997).

1 53Statement of Position 97-2, Software Revenue Recognition (Oct. 27,

1997).

154Leases(Approved Nov. 1997), Segment Reporting (Aug. 1997),

Presentation of Financial Statements (Aug. 1997), Earnings Per Share

(Feb. 1997), and Income Taxes (Oct. 1996).

155IntangibleAssets; Employee Benefits; Impairment of Assets; Interim

Financial Reporting; Discontinuing Operations; and Provisions,

Contingent Liabilities, and Contingent Assets.

156UnitedStates Securities and Exchange Commission Report on

Promoting Global Preeminence of American Securities Markets (Oct.

1997).

157117S.Ct. 2199 (1997).

15~ o. 96-6084 (11th Cir.).

159No.97-50137 (9th Cir.).

16~O. 97-1315 (4th Cir.).

141
161No.96-7794 (2d Cir.).

162No.96-9137 (2d Cir.).

163112F.3d 613 (2d Cir. 1997).

I~O. 96-7900 (2d Cir.).

165124F.3d 449 (3d Cir. 1997).

166970 F.Supp. 746 (N.D. Cal. 1997).

167No.97-16240(9thCir.).

16~O. 97-16070(9thCir.).

169107F.3d 1422, reh'g granted, 121 F.3d 565 (9th Cir. 1997).

17°121F.3d 956 (5th Cir. 1997).

171Solv-Ex Corp. v. SEC, Bankr. No. 11-97-14361 MA, Adversary No. 97-

1159 M (Bankr. N.M.), No. 97-1201 MV/RLP (D. N.M.).

172Honnv. NASD, Civ. No. 3-96-182 (D. Minn.),

173Desideriov. NASD, No. 97-CV-312 (S.D.N.Y.).

174Wellsv. SEC, No. 96-6237 (2nd Cir. Aug. 22, 1997).

175SECv. Waltzer & Associates, No. 96-6261 (2nd Cir. Sept. 10, 1997).

176MeyerBlinder, Release No. 34-39180 (Oct. 1, 1997),65 SEC Docket

1970.

142
177Robert 1Moses, Release No. 34-37795 (Oct. 8, 1996),62 SEC Docket

3046.

178Benjamin G. Sprecher, Release No. 34-38485 (Apr. 4, 1997),64 SEC

Docket 720.

179Russell G. Koch, Release No. 34-38658 (May 20, 1997),64 SEC

Docket 1617.

180DonaldA. Roche, Release No. 34-38742 (June 17, 1997),64 SEC

Docket 2042.

18lCheckoskyv. SEC, 23 F.3d452 (D.C. Cir. 1994).

182DavidJ. CheckoskyandNormanA. Aldrich, Release No. 34-38183,

Accounting and Auditing Enforcement Release No. 871 (Jan. 21, 1997),

63 SEC Docket 1948, appealjiled, No. 97-1137 (D.C. Cir. Mar. 17, 1997).

183DavidJ. Checkoskyand NormanA. Aldrich, 50 S.E.C. 1180 (1992).

I84Robert D. Potts, CPA, Release No. 34-39126, Accounting and Auditing

Enforcement Release No. 964 (Sept. 24, 1997),65 SEC Docket 1376,

appealjiled, No. 97-3710 (8th Cir. Oct. 21, 1997).

185C. James Padgett, et al., Release No. 34-38423 (Mar. 20,1997),64 SEC

Docket 319, appealjiled, No. 97-1361 (D.C. Cir. May 16, 1997).

186StephenThorliefRangen, Release No. 34-38486 (Apr. 8, 1997),64 SEC

Docket 731.

187Prime Investors, Inc., Kenneth James Wright, and Michael Lyn Johnson,

Release No. 34-38487 (Apr. 8, 1997),64 SEC Docket 742.

188InCounty of Orange, Case No. 94-22272-JR(Bankr. C.D. Calif.).

143
189In re Grossman's, Inc., Case No. 97-695 (PJW) (Bankr. D. Del.).

190In re Edison Brothers Stores, Inc., Case No. 96-177 (SLR) (D Del.).

191In re Grossman's Bros, Inc., Case No. 97-695 (PJW) (Bankr. D. Del.);

In re Marvel Entertainment Group, Inc., Case Nos. 96-2069 through 96-

2077 (Bankr. D. Del.); and In re Payless Cash ways Inc., Case No. 97-

50543-SJ-l1 (Bankr. W.D. Ohio).

192In re Sizzler Restaurants International, Inc. et al., Case No. SV 96-

16075-AG, Jointly Administered with Case Nos. SV 96-16076-AG

through SV 96-16079-AG(Bankr. C.D. Cal.).

193In re Home Theater Products International, Inc., Case No. SA 96-

13754-JR(Bankr. C.D. Cal.).

194Munford,Inc. v. Munford, 98 F.3d 604 (11th Cir. 1996), cert. denied,

118 S.Ct. 738 (1998).

195952 F.2d 1230 (10th Cir. 1991), cert. denied, 112 S. Ct. 3015 (1992).

196DFAInvestment Dimensions Group Inc., et. al v. Munford, Inc., No. 97-

550; Munfordv. Munford, Inc., No. 97-591.

197In re Advanced Promotion Technologies, Inc., Case No. 06-23875-

BKC-RBR(Bankr. S.D. Fla.); In re Baldwin Builders and In re Baldwin

Building Contractors, L.P., Case Nos. ND 95-13057RR and ND 95-13058

RR (jointly administered)(Bankr. C.D. Calif.); In re CliniCorp., Inc., Case

No. 96-32529-BKC-SHF(Bankr. S.D. Fla.); In re Reconversion

Technologies, Inc., Case No. 95-00821-M (Bankr. N.D. Okla.); and In re

Physicians Clinical Laboratory, Inc., Case No. SV 96-23185-GM (Bankr.

C.D. Calif.).

198Inre CliniCorp., Inc., Case No. 96-32529-BKC-SHF(Bankr. S.D. Fla.);

In re Marvel Entertainment Group, Inc., Case Nos. 96-2069 through 96-

144
2077 (Bankr. D. Del.); In re PCA Industries, Inc., No. 96-41374-293

(Bankr. E.D. Mo.); and In re Reconversion Technologies, Inc., Case No.

95-00821-M(Bankr. N.D. Okla.). In In re Audre Recognition Systems,

Inc., Case No. 95-10048-Bll (S.D. Calif.), the court overruled

Commission's objection but the offering, nevertheless, failed due to

Commission's announced opposition.

199In re Advanced Promotion Technologies, Inc., Case No. 96-23875-

BKC-RBR (Bankr. S.D. Fla.); In re Comptronix Corporation, Case No.

396-06840 (Bankr. M.D. Tn.); In re Baldwin Builders and In re Baldwin

Building Contractors, L.P., Case Nos. ND 95-13057 RR and ND 95-13058

RR (jointly administered)(Bankr. C.D. Calif.); In re JayhawkAcceptance

Corp., Case No. 397-31261-SAF-ll (Bankr. N.D. Tex.); In re Physicians

Clinical Laboratory, Inc., Case No. SV 96-23185-GM (Bankr. C.D.

Calif.); and In re Reconversion Technologies, Inc. Case No. 95-00821-M

(Bankr. N.D. Okla.).

200In re Automotive Credit Finance, Inc., Case No. 395-34981 RCM-l1

(Bankr. N.D. Tex.); In re North Atlantic Technologies, Inc., Case No. 96-

30526 (Bankr. D. Minn.); 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

(Bankr. N.D. 11.);and In re Rexon, Inc., Case No. 95-19439 CEM (Bankr.

D. Col.).

201 In re Apogee Robotics, Inc., Case No. 94-22193-CEM (Bankr. D.

Colo.); In re ComtronixCorp., Case No. 396-06840 (Bankr. M.D. Tenn.);

In re Packaging Research Corp., Case No. 97-12748-CEM(Bankr. D.

Colo.); In re peA Industries, Inc., Case No. 96-41374-293 (Bankr. E.D.

Mo.); In re Protech, Inc., Case No. 97-60905-LK(Bankr. D. Colo.); and In

re Sunrise Energy Services, Inc., Case No. 395-34176-SAF-l1 (Bankr.

N.D. Tex.).

202In re Bilzerian, No. 96-513-CIV-T-23B(M.D. FL).

203SECv. Bilzerian, No. 96-3634.

145
204In re Cross v. SEC, No. SA-95-15228-JB,Adv. No. SA-95-1975

(Bankr. C.D. Cal.).

205 SEC v. Cross, 203 B.R. 456 (Bankr. C.D. Cal. 1996).

206SEC v. Cross, BAP No. CC 96-2167 (1996).

207 In re Hibbard Brown & Co., Inc., Case No. 94 B 44809 (CB) (Bankr.

S.D. N.Y.).

208In re Absolute Resource Corp., Case No. 396-32263-11 (Bankr. N.D.

Tex.).

146
1"7
Table 1

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1997 IN VARIOUS PROGRAM AREAS

(Each case Initiated has been Included In only one category listed below, even though

many cases Involve multiple allegations and may fall under more than one category.

The number of defendants and respondents is noted parenthetically.)

Program Area In Which a % of

Civil Action or Administrative CIVil Admlnlslralive Total

Proceeding Was Inlliated Acnons 11 Proceedings Total Cases

Secunlies Offenng Cases 66 (246) 55 ( 99) 121 ( 345) 25%

Broker-dealer Cases

(a) Fraud Against Customer 10 ( 14) 60 ( 92) 70 ( 106)

(b) Failure to Supervise o ( 0) 6 ( 8) 6 ( 8)

(c) Govemment MUniCipal

Secunlies 4 ( 8) 9 ( 11) 13 ( 19)

(d) Books & Records 2 ( 4) 3 ( 6) 5 ( 10)

(e) Other 3 ( 6) 8 ( 11) 11 ( 17)

Total Broker-dealer Cases 19 ( 32) 86 (128) 105 ( 160) 21%

Issuer Financial Statement

and ReporungCases

(a) Issuer Financial

Disclosure 30 ( 83) 60 ( 79) 90 ( 162)

(b) Issuer Reporling Other o ( 0) 6 ( 6) 6 ( 6)

Total Issuer Financial Statement

and Reporting Cases 30 ( 83) 66 ( 85) 95 ( 168) 20%

Other Regulated Enlity Cases

(a) Investment Advisers 14 ( 45) 31 ( 59) 45 ( 104)

(b) Investment Companies 1 ( 4) 6 ( 23) 7 ( 27)

(c) Transfer Agent o ( 0) 1 ( 2) 1 ( 2)

(d) SROs o ( 0) 3 ( 4) 3 ( 4)

Total Other RegulatedEntity Cases 15 ( 49) 41 ( 88) 56 ( 137) 11%

InSiderTrading Cases 36 (126) 12 ( 12) 48 ( 148) 10%

Market Manipulation Cases 11 ( 47) 14 ( 28) 25 ( 75) 5%

Delinquent Filings

(a) Issuer Reporting 7 ( 7) o ( 0) 7 ( 7)

(b) Fonns 3/4/5 1 ( 1) 7( 10) 8 ( 11)

Total Delinquent FIlings Cases 8 ( 8) 7( 10) 15 ( 18) 3%

Contempt Proceedings 14 ( 18) o ( 0) 14 ( 18) 3%

Related Party Transaction Cases 2 ( 2) 2 ( 2) 4 ( 4) 1%

Miscellaneous 1 ( 3) 3 ( 5) 4 ( 8) 1%

corporate Control Cases 1 ( 1) o ( 0) 1 ( 1) 0%

GRANDTOTAL 203 (615) 286 (457) 489 (1072) 100%

11 This category Includes InJuncliveacnons and CIVIland cnrnmal contempt proceedings

148
Table 2

FISCAL 1997 ENFORCEMENT CASES

LISTED BY PROGRAM AREA

Name of Case Release No. Date Filed

Broker-Dealer: Books & Records

In the Matter of Howard F. Rubin 34.38264 02/11/97

In the Matter of James W Adams 34-38003 10/02/96

In the Matter of Marsh Block & Co., Inc. 34.38263 02/11/97

SEC v. J W Korth & Co. LR-15244 02/04/97

SEC v. W'S. Clearing, Inc. LR-15281 03/07/97

Broker-Dealer: Failure to Supervise

In the Matter of Christopher LaPorte 34.39171 09/30/97

In the Matter of First Montauk

Securities Corp. 34.38775 06/25/97

In the Matter of Frank Klaus 34.39165 09/30/97

In the Matter ofGKN Securities Corp. 34-38173 01/15/97

In the Matter of Lyle Moss 34-38258 02/07/97

In the Matter of Royal Alliance

Associates, Inc. 34-38174 01/15/97

Broker-Dealer: Fraud Against Customer

In the Matter of Alexander Ruge 34-37807 10/10/96

In the Matter of Alfred P. Avasso 34-37807 10/10/96

In the Matter of Andrew Scudiero 34-37807 10/10/96

In the Matter of Bertram Slutzky 34-37807 10/10/96

In the Matter of Brian J McCahery 34-38176 01/16/97

In the Matter of Carmel Equity Partners AAER858 11/18/96

In the Matter of Cary Cimino 34-37807 10/10/96

In the Matter of David Scott Rossman 34-38995 08/29/97

In the Matter of Dennis Lindsay Helliwell 34-38088 12/26/96

In the Matter of Dennis Murray Bissell 34-39108 09/22/97

In the Matter of Donald W Spinks 3438510 04/15/97

In the Matter of Edward S. Pad nos 34-37807 10/10/96

149
Name of ease Release No. Date Filed

In the Matter of Edward Williamson 34-37807 10/10/96

In the Matter of Euro-Atlantic

Securities, Inc. 34-39047 09/10/97

In the Matter of Gamal Marwan 34-37807 10/10/96

In the Matter of Gary J. Divall 34-38578 05/07/97

In the Matter of George A. Rotelli 34-27822 10/15/96

In the Matter of James Zimmerman 34-38227 02/03/97

In the Matter of Jeffrey D. Pokross 34-37807 10/10/96

In the Matter of Jeffrey Trenk 34-37807 10/10/96

In the Matter of Jocelyn Jane O'Rourke 34-39027 09/08/97

In the Matter of John Chapman 34-37807 10/10/96

In the Matter of John 1.Bridges, Jr. 34-38957 08121197

In the Matter of Joseph B. Johnson 34-39097 09/19/97

In the Matter of Joseph P. Brooks 34-28517 04/16/97

In the Matter of Mark Coleman Graves 34-39152 09/30/97

In the Matter of Michael J. Oberholzer 34-39127 09125/97

In the Matter of Michael Lapp 34-37807 10/10/96

In the Matter of Miron Leshem 34-37807 10/10/96

In the Matter of Nicholas Giandomenico 34-39003 09/02/97

In the Matter of Norman Lescht 34-37807 10/10/96

In the Matter of Paul D. Blasetti 34-38951 08/19/97

In the Matter of Paul Francis Mabry 34-39163 09/30/97

In the Matter of Penn Capital Financial

Services, Inc. 34-39168 09/30/97

In the Matter of Peter M Harrington 34-38055 10/03/96

In the Matter of R.E. Anderson Cain 34-38122 01106/97

In the Matter of Richard Cedrone 34-37807 10/10/96

In the Matter of Richard D. Henderson 34-39004 09/02/97

In the Matter of Richard Langley, Jr. 34-37807 10/10/96

In the Matter of Richard Mallion 34-37807 10/10/96

In the Matter of Robert Alan Denton 34-38970 08/26/97

In the Matter of Robert Albert Merrifield 34-38177 01116/97

In the Matter of Robert Mitchell 34-37807 10/10/96

In the Matter of Robert Thomas Beatty 34-38994 08/29/97

In the Matter of Roland Acevedo 34-37807 10/10/96

In the Matter of Ronald J. Viemont 34-39283 08/18/97

In the Matter of S Colin 34-38967 08/25/97

In the Matter of Sandra Simpson 34-39154 09/30/97

150
Name of Case Release No. Date Filed

In the Matter of Selheimer & Co. 34-38337 02/26/97

In the Matter of Stanley J Feminella 34-38529 04/21/97

In the Matter of Steve Bingaman 34-37807 10/10/96

In the Matter of Steven Ira Wertman 34-38751 06/20/97

In the Matter of Stuart Gregory Smith 34-38878 07/28/97

In the Matter of Sy Siegel 34-37807 10/10/96

In the Matter of Ted Harold Westerfield 34-38904 08/06/97

In the Matter of Theodore Heitzmann 34-37807 10/10/96

In the Matter of Thomas J Fox 34-38863 07/23/97

In the Matter of Thomas John Cloutier 34-38946 08/18/97

In the Matter of Vincent Poliseno 34-38327 02/24/97

In the Matter of William P. Carroll 33-7434 08/18/97

SEC v. Bernard Zelenka LR-15489 09/04/97

SEC v. Brett 1.Bouchy LR-15171 12/02/96

SEC v. Clyde Keith LaMonda LR-1541I 07/11/97

SEC v. First Interregional

Advisors Corp. LR-15276 03/06/97

SEC v. Frank S. Colin LR-15138 10/28/96

SEC v. Joseph C. Kane, Jr. LR-15348 04/24/97

SEC v. Michael J Oberholzer LR-15481 09/09/97

SEC v. R. E. Anderson Cain LR-15181 12/06/96

SEC v. Robert C. White LR-15238 01/30/97

SEC v. Stuart Gregory Smith LR-15420 07/07/97

Broker-Dealer: GovernmentlMunicipal Securities

In the Matter of Derek Washington 34-38978 08/27/97

In the Matter of Marion Bass Securities

Corp. 34-39170 09/30/97

In the Matter of Mark S. Ferber 34-38102 12/19/96

In the Matter of Michael Lissack 34-39119 09/23/97

In the Matter of Mitchell Hutchins Asset

Management, Inc. 34-39001 09/02/97

In the Matter of Peacock, Hislop, Staley

& Given, Inc. 34-37777 10/02/96

In the Matter of Robert D. Gersh 34-38459 04/01/97

In the Matter of Smith Barney, Inc. 34-39118 09/23/97

In the Matter of Willie Daniels 34-38977 08/27/97

151
Name of Case Release No. Date Filed

SEC v. First Boston Corp. LR-15160 11/20/96

SEC v. First California Capital

Markets Group, Inc. LR-15423 07/28/97

SEC v. Joseph P. Galluzzi LR-15211 01/09/97

SEC v. Mark S. Ferber LR-15193 12/19/96

Broker-Dealer: Other

In the Matter of Americorp

Securities, Inc. 34-38947 08/18/97

In the Matter of Dennis T Palmeri, Sr. 34-38497 04/10/97

In the Matter of Gerald P. Hirsch 34-39123 09/24/97

In the Matter of Jaron Equities Corp. 34-38475 04/03/97

In the Matter of Juergens Otto Winkler 34-39042 09/10/97

In the Matter of National Financial

Services Corp. 34-38150 01/10/97

In the Matter of Rodney B. Hedges 34-39078 09/15/97

In the Matter of Steven A. Lapper 34-38028 12/09/96

SEC v. Gerald P. Hirsch LR-15176 12/04/96

SEC v. Michelle P. Suppes LR-15316 04/04/97

SEC v. Timothy A. Hills LR-15313 04/02/97

Contempt-Civil

SEC v. Charles E. Smith None 09/30/97

SEC v. Frank J Custable None 01/31/97

SEC v. Geoffrey Adams None 12/11/96

SEC v. Gerald Hirsch None 03/25/97

SEC v. J Scott Eskind None 09/16/97

SEC v. James S. Faller None 06/04/97

SEC v. Jay R. Bishop LR-15347 04/21/97

SEC v. Kathryn Casperson None 03/03/97

SEC v. Machlene Soderquest None 11/12/96

SEC v. Michael J Colello LR-15142 10/22/96

SEC v. Michael J Randy LR-15463 08/05/97

SEC v. Robert J Carlo None 02/11/97

152
Name of Case Release No. Date Filed

SEC v. Robert 1. Gunther None 01/09/97

SEC v. Rolon Colon None 05/16/97

Corporate Control

SEC v. RBF International Inc. LR-15213 01/14/97

Delinquent Filings: Forms 3/4/5

In the Matter of Cortland First

Financial, Corp. 34-38192 01/22/97

In the Matter of Herbert G. Brown 34-38666 OS/22/97

In the Matter of Jerry Silva 34-328228 02/03/97

In the Matter of Mark S. Chanko 34-39146 09/29/97

In the Matter of Nycal Corp. 34-39125 09/24/97

In the Matter of Ronald W Daw 34-38477 04/04/97

In the Matter of Steven K Clark 34-38476 04/04/97

SEC v. Parris H Holmes, Jr. LR-15190 12/18/96

Delinquent Filings: Issuer Reporting

SEC v. Airship International Ltd LR-15454 08/21/97

SEC v. American Education Corp. LR-15167 11/26/96

SEC v. BioCoral Inc. LR-15422 07/25/97

SEC v. Digital Products Corp. LR-15252 02/11/97

SEC v. JR. Consulting Inc. LR-15350 04/24/97

SEC v. Nycal Corp. LR-15367 05/15/97

SEC v. Tianrong Building Material

Holdings Ltd LR-15165 11/22/96

Insider Trading

In the Matter of Cecil H Suter IA-161O 01/23/97

In the Matter of David P. Schwartz 34-38135 01/08/97

In the Matter of David Schaen 34-38347 02/27/97

In the Matter of Fox-Pitt, Kelton, Inc. 34-37940 11/12/96

In the Matter of James 1. D'Angelo 34-38524 04/18/97

In the Matter of Janak C. Patel 34-38496 04/10/97

153
Name of Case Release No. Date Filed

In the Matter of Jeffrey F Green

In the Matter of Joseph Latona

In the Matter of Joseph P. Greenwald

In the Matter of Michael P. Sweeney

In the Matter of Milton Weinger

In the Matter of Nir Kantor

SEC v. Ong Congqin Bobby

SEC v. Bruce Van Wagner

SEC v. Carmelo Blacconeri

SEC v. Cecil H Suter

SEC v. Dale J. Lange

SEC v. David A. Schmidt

SEC v. David E. Lipson

SEC v. David R. Pfister

SEC v. Dhirein Patel

SEC v. Emanuel Pinez

SEC v. Eunice J. Leigh

SEC v. Frederick Liu

SEC v. Gregg Michael Brenner

SEC v. Harry C. Morgan

SEC v. J. Bristow Anderson

SEC v. Jacob Y Terner

SEC v. James M Gleason

SEC v. Jay Marcus

SEC v. John C. Larrabee

SEC v. Judy Hockett

SEC v. Mark J. Aronds

SEC v. Michael Jonsson

SEC v. Milton Mutchnick

SEC v. Morris Debah

SEC v. Paul H Borg

SEC v. Raeburn Evans

SEC v. Rangarao Panguluri

SEC v. Richard Beckwitt

SEC v. Robert Hunter

SEC v. Roy Handojo

SEC v. Samir Traboulsi

SEC v. Shahryar Soroosh

154

34-38685

34-38684

34-39160

34-38436

34-38300

34-37834

LR-15334

LR-15537

LR-15449

LR-15207

LR-15509

LR-15352

LR-15337

LR-15519

LR-15444

LR-15258

LR-15323

LR-15397

LR-15280

LR-15203

LR-15473

LR-15401

LR-15131

LR-15230

LR-15306

LR-15377

LR-15128

LR-15126

LR-15322

LR-15189

LR-15497

LR-15309

LR-15322

LR-15158

LR-15413

LR-15492

LR-15429

LR-15141

OS/28/97

OS/28/97

09/30/97

03/25/97

02/18/97

10/17/96

04/15/97

09/30/97

08/19/97

01/06/97

09/25/97

04/29/97

04/17/97

09/30/97

08/13/97

02/14/97

04/09/97

06/26/97

03/10/97

01/02/97

09/04/97

07/02/97

10/22/96

01/29/97

03/25/97

05/30/97

10/21/96

10/17/96

04/09/97

12/18/96

09117/97

03/31/97

04/07/97

11/14/96

07/16/97

09/12/97

08/04/97

10/29/96
Name of Case Release No. Date Filed

SEC v. Susan 1. Hirsch LR-15302 03/20/97

SEC v. Susan S. Smirnoff LR-15302 03/20/97

SEC v. Walter E. Johnson LR-15289 02/05/97

SEC v. William M Fisher, Jr. LR-15439 08/08/97

Issuer Financial Disclosure

In the Matter of Alan D. Rosskamm AAER-885 OS/27/97

In the Matter of Alan G. Lewis AAER848 10/28/96

In the Matter of Aura Systems, Inc. AAER839 10/02/96

In the Matter of B.J Thomas, CPA AAER922 06/10/97

In the Matter of C. Langford, CPA AAER877 02/06/97

In the Matter of Calvin M Dyer AAER847 10/22/96

In the Matter of Cambridge Biotech Corp. AAER843 10/17/96

In the Matter of Century Technologies,

Inc. AAER-961 09/16/97

In the Matter of Combined Companies

International Corp. AAER-919 OS/29/97

In the Matter of Curtis 1. Dally AAER-967 09/29/97

In the Matter of David Gore AAER-889 02/27/97

In the Matter of David Hersh, CPA AAER-962 09/18/97

In the Matter of David Keery, CPA AAER-874 01/29/97

In the Matter of Dennis Klein AAER 937 07/17/97

In the Matter of Dorothea Bossio AAER909 04/29/97

In the Matter of Douglas R. Coates, CPA AAER-958 09/11/97

In the Matter of Duane V. Midgley, CPA AAER897 03/13/97

In the Matter of Elliot Stumacher AAER-963 09/24/97

In the Matter of Ernest W Grendi, CPA AAER864 12/16/96

In the Matter of Frederick R. Grant, CPA AAER876 02/05/97

In the Matter of Gary A. Prince, CPA AAER 927 06/24/97

In the Matter of Greg Steven Kaplan AAER844 10/21/96

In the Matter of Harry T. Couch, CPA AAER878 02/06/97

In the Matter of International Energy

Development Corp. AAER850 10/29/96

J In the Matter of J.M Levy and Co. AAER906 04/11/97

In the Matter of James P. Brown AAER944 08/05/97

In the Matter of James R. Bryan, CPA AAER-960 09/15/97

In the Matter of John R. Alfton AAER-972 09/30/97

155
Name of Case Release No. Date Filed

In the Matter of Karl G.

Wassman III, CPA AAER853 11/12/96

In the Matter of Kedar Gupta AAER-965 09/25/97

In the Matter of Kenneth F Richey, CPA AAER926 06/24/97

In the Matter of Laser Photonics Inc. AAER-971 09/30/97

In the Matter of Linda A. Hodge, CPA AAER-887 02/18/97

In the Matter ofLynn K. Blattman AAER 903 04/10/97

In the Matter of Lynn K. Ross AAER 954 09/10/97

In the Matter of Mary Brennan AAER-969 09/30/97

In the Matter of Matthew E.

Klenovic, CPA AAER-867 01/06/97

In the Matter of Merle S. Finkel, CPA AAER-895 03/12/97

In the Matter of Mickie E.

Higgins-Hallke, CPA AAER952 09/10/97

In the Matter of Midisoft Corp. AAER846 10/22/96

In the Matter ofNgai King Tak AAER 946 08/28/97

In the Matter of Nicholas J. Pace, CPA AAER913 05/02/97

In the Matter of Pace American

Group, Inc. AAER894 03/05/97

In the Matter of Philip McInnes AAER-968 09/30/97

In the Matter of Philip S. Present II, CPA AAER 904 04/10/97

In the Matter of Ponder Industries Inc. AAER-938 07/22/97

In the Matter of Quality Products, Inc. AAER857 11/14/96

In the Matter of Raymond J Bily AAER-883 02/18/97

In the Matter of Richard J Lajoie, Jr. AAER910 04/30/97

In the Matter of Robert Jarkow AAER-892 03/04/97

In the Matter of Robert L. Gresham, CPA AAER943 08/05/97

In the Matter of Ronald H Hoffman, CPA AAER 911 04/30/97

In the Matter of Steven F

Broadbent, CPA AAER-921 06/03/97

In the Matter of Timothy A. Ross, CPA AAER-957 09/11/97

In the Matter of Troy Lee Wood AAER852 10/31/96

In the Matter of William B.

Sanders, CPA AAER 955 09/10/97

In the Matter of William D. Kyle AAER 941 02/18/97

In the Matter of William T. Manak AAER 879 02/06/97

In the Matter of Wyatt Gene Ross AAER 953 09/10/97

SEC v. Alexandria Elizabeth AAER940 07/24/97

156
Name of ease Release No. Date Filed

AAER-956 09/11/97

AAER 939 07/23/97

None 07/22/97

AAER 905 04/10/97

AAER 945 08/27/97

AAER-890 02/27/97

AAER 951 09/04/97

AAER-908 04/22/97

AAER 928 06/24/97

AAER-901 04/01/97

AAER 845 10/21/96

AAER-862 12/11/96

AAER 886 02/18/97

AAER-966 09/25/97

AAER-976 09/30/97

AAER-973 09/30/97

05/13/97

09/16/97

08/28/97

01/21/97

09/30/97

03/28/97

06/11/97

09/04/97

09/08/97

03/12/97

06/19/97

07/25/97

11/21/96

06/11/97

AAER 914

None

AAER947

AAER872

AAER-974

LR-15345

AAER923

AAER950

AAER-959

AAER896

AAER 925

AAER-942

AAER859

AAER924

SEC v. Barry C. Nelsen

SEC v. Bruce A. Milliken

SEC v. Chester Holdings, Ltd.

SEC v. Don Haywood Pace

SEC v. Environmental Chemicals Group

SEC v. Fabri-Centers of America, Inc.

SEC v. Ferrofluidics Corporation

SEC v. Francis X Wazeter, III

SEC v. Fukuhara

SEC v. Greenway Environmental

Services, Inc.

SEC v. Guido Volante

SEC v. Irving M Mangel

SEC v. Jacob Adoni

SEC v. Jeffrey P. Sudikoff

SEC v. Jerry G. Kilgore

SEC v. Joseph C. Allegra

SEC v. Mark K. Curry

SEC v. Maury H Joseph

SEC v. Merle S. Finkel

SEC v. Michael Humphress

SEC v. Mitchell A. Hammer

SEC v. Montedison S.p.A.

SEC v. Patrick J. Leonard

SEC v. Policy Management

Systems, Corp.

SEC v. Ponder Industries, Inc.

SEC v. Scientific SoftwareIntercomp, Inc.

SEC v. Structural Dynamics

Research Corp.

SEC v. Timothy Ross

SEC v. Triton Energy

SEC v. Wyatt Gene Ross

157
Name of Case Release No. Date Filed

Issuer Reporting: Other

In the Matter of Gareis USA Inc. 34-38367 03/05/97

In the Matter of Halsey Drug Co., Inc. 34-38210 01128/97

In the Matter of Michael Goodbread, CPA AAER-861 12/10/96

In the Matter of Norman Gelman 34-38325 02/24/97

In the Matter of PaulL. Parshall 34-37814 10/11/96

In the Matter ofWR. Grace 34-39157 09/30/97

Market Manipulation

In the Matter of A.R. Baron and Co., Inc. 34-37831 10/17/96

In the Matter of Andrew Bressman 34-37832 10/18/96

In the Matter of Cortlandt Capital

Corp. 34-39138 09/26/97

In the Matter of Dale E. Barlage 34-38061 12/19/96

In the Matter of David M Carmichael 34-39130 09/25/97

In the Matter of Edward Christian Farni 34-39133 09/25/97

In the Matter of Joseph Riccio 34-38425 03120/97

In the Matter of Kent T Black 34-39134 09/26/97

In the Matter of Michael J Markonski 34-38424 03/20/97

In the Matter of Phillip S. Sindler 34-38004 12/02/96

In the Matter of Richard Cannistraro 34-37798 10/09/96

In the Matter of Robert Gann 34-37925 11/06/96

In the Matter of Sam Moore 34-39155 09/30/97

In the Matter of Stephen D. Gellas 34-39132 09/25/97

SEC v. Bradley J Simmons LR-15353 04/24/97

SEC v. Charles 0. Huttoe LR-15153 11/07/96

SEC v. Global Financial Traders, Ltd LR-15291 03/13/97

SEC v. Leonard Greer and Judah Wernick LR-15516 09/30/97

SEC v. Nicholas F. Coscia LR-15391 06/09/97

SEC v. Pan World Minerals

International, Inc. AAER 920 06/02/97

SEC v. Philip S. Sindler LR-15161 11/05/96

SEC v. Richard P. Brown LR-15233 01128/97

SEC v. Sam Moore LR-15515 09/30/97

SEC v. Sterling Foster & Co. LR-15261 02/14/97

SEC v. Steven H. Schiffer LR-15435 08/07/97

158
Name of Case Release No. Date Filed

Miscellaneous

In the Matter of Dickinson & Co. 34-38689 OS/28/97

In the Matter of Pendleton C. Waugh 34-38761 06/24/97

In the Matter of Sheldon S. Traube 34-38448 03/27/97

SEC v. John T. Hall LR-15255 02/13/97

Offering Violations

SEC v. George Chelekis LR-15264 02/25/97

In the Matter of Arthur Graves 34-38674 OS/27/97

In the Matter of Aubrey O'Connor 34-38714 06/04/97

In the Matter of Cary S. Greene 34-39141 09/29/97

In the Matter of Charles S. Christopher 34-37827 10/16/96

In the Matter of Christopher D. Jennings 34-38696 05/30/97

In the Matter of David Hengstler 34-39090 09/18/97

In the Matter of David P. Silver 34-38914 08/11/97

In the Matter of Desoto Broadcasting Inc. 34-37989 11/26/97

In the Matter of Diversified Capital

Resources 34-39161 09/30/97

In the Matter of Dominion Capital Corp. 34-38952 08/19/97

In the Matter of Douglas R. Damon 34-38579 05/07/97

In the Matter of Dwight Allen 34-39122 09/24/97

In the Matter of Edward M Collins 34-39062 09/12/97

In the Matter of Freddie Don Stewart 34-39085 09/17/97

In the Matter of Gary V. Lewellyn 34-37927 11/06/97

In the Matter of Gary W Berus 34-38944 08/18/97

In the Matter of George Garey 34-39091 09/18/97

In the Matter ofGFL Ultra Fund Ltd 33-7423 06/18/97

In the Matter of H Beck, Inc. 34-38913 08/11/97

In the Matter of Helen A. Roy 34-39169 09/30/97

In the Matter of Helen T. Chalut AAER-933 07/01/97

In the Matter of J.M Dickinson

Bransford 33-7454 09/22/97

In the Matter of James G. Freeman 34-38661 OS/21/97

In the Matter of John Banach 34-38079 12/23/96

In the Matter of Jon D. Aldrich 34-38382 03/11/97

In the Matter of Joseph F. Reese 33-7457 09/25/97

159
Name of ease Release No. Date Filed

In the Matter of Kyle Weston AAER-884 06/10/97

In the Matter of LDF Management Inc. 34-39142 09/29/97

In the Matter of Lloyd John Newton 34-39023 09/05/97

In the Matter of Mark A. Ritacco 34-39164 09/30/97

In the Matter of Mark Anthony Suppes 34-38171 01/15/97

In the Matter of Martin Kaiden 34-39050 09/11/97

In the Matter of Matt Matson 34-38433 03/24/97

In the Matter of Michael Donald

McGahee 34-38083 12/06/96

In the Matter of Michael L. Cooperstock 34-39151 09/30/97

In the Matter of National Partnership AAER-929 06/25/97

In the Matter of Neal B. Stein 34-38304 02/19/97

In the Matter of Paul Okuda AAER-934 07/01/97

In the Matter of Peter C. Tosto 34-38136 10/31/96

In the Matter of Raymond R. Newberg 34-39153 09/30/97

In the Matter of Richard K Steele, Sr. 34-37892 10/29/96

In the Matter of Richard Milbrodt 34-39121 09/24/97

In the Matter of Robert C. White 34-38441 03/26/97

In the Matter of Robert Tatarowicz 34-38036 12/10/96

In the Matter of Ronald A. Monzione 34-39135 09/26/97

In the Matter of Ronald J. Mitchellette IA-1646 07/29/97

In the Matter of Shaner & Company Inc. 34-38027 12/09/96

In the Matter of Sky Scientific Inc. AAER863 12/16/96

In the Matter of Spectrum Information

Technologies, Inc. AAER-930 06/25/97

In the Matter of Suppes Securities, Inc. 34-38172 01/15/97

In the Matter of The City of Syracuse,

New York AAER-970 09/30/97

In the Matter of Thomas Ehrlich 34-38652 05/19/97

In the Matter of Walter Herbert

Moore, Jr. 34-39006 09/03/97

In the Matter of William H Malek 34-39150 09/30/97

In the Matter of William Rossi 34-38677 05/17/97

SEC v. Kenneth P. Kasarjian LR-15324 04/10/97

SEC v. Affordable Prepaid Cellular, Inc. LR-15378 OS/20/97

SEC v. Alpha Diversified Industries Inc. LR-15493 09/10/97

SEC v. B.M C. Enterprises Inc. LR-15400 07/02/97

SEC v. Barnard Sackett LR-15504 09/22/97

160
Name of Case Release No. Date Filed

SEC v. Benefund, Inc. LR-15364 04/18/97

SEC v. Berbun Associates Inc. LR-15127 10/18/96

SEC v. Brian E. Willis LR-15517 09/30/97

SEC v. Charles Anthony Ferracone LR-15499 09/17/97

SEC v. Cihaco International, Inc. LR-15466 08/27/97

SEC v. Club Atlanta Travel, Inc. LR-15500 09/18/97

SEC v. Consumer Plus L.C. LR-15150 11/04/96

SEC v. David I Namer LR-15307 03/25/97

SEC v. Enserco, Inc. LR-15326 03/27/97

SEC v. Environmental Chemicals

Group, Inc. LR-15183 12/11/96

SEC v. Frank A. M Luca LR-15461 08/27/97

SEC v. Geneva Group LR-15496 09/15/97

SEC v. Georgia Pooley Helliwell LR-15184 12/17/96

SEC v. Gerard Burns LR-15224 09/29/97

SEC v. Gray Hawk Fund Company LR-15412 07/16/97

SEC v. Harold E. Tobin LR-15414 07/16/97

SEC v. Harold J Lee LR-15510 09/25/97

SEC v. I-Net Providers LR-15219 10/30/96

SEC v. Insnet World

Communications Inc. LR-15432 07/28/97

SEC v. Interactive Medical

Technologies Ltd. LR-15441 08/13/97

SEC v. James W Hall LR-15328 03/25/97

SEC v. Jason S. Wall LR-15471 09/04/97

SEC v. John C. Rockett LR-15378 03/27/97

SEC v. John F. Aptt LR-15361 05/07/97

SEC v. John Sebastian Ragazzo None 09/26/97

SEC v. Joseph A. Bremont LR-15163 11/21/96

SEC v. Keith Knuttson LR-15475 08/29/97

SEC v. Mark A. Ritacco LR-15483 09/10/97

SEC v. Mark E. Gatch LR-15394 06/24/97

SEC v. Mark S. Shaner LR-15149 10/21/96

SEC v. Marshall E. Melton LR-15267 02/24/97

SEC v. Martin Kaiden LR-15234 01/30/97

SEC v. Members Service Corp. AAER 915 OS/22/97

SEC v. Michael Snowhite LR-15434 08/06/97

SEC v. Micro West Industries, Inc. LR-15498 09/17/97

161
Name of Case Release No. Date Filed

SEC v. Mustang Development Corp. LR-15229 01/23/97

SEC v. Neil A. Liechty LR-15269 02/27/97

SEC v. Norman G. Cornelius LR-15369 05/01/97

SEC v. NVID International, Inc. LR-15317 04/03/97

SEC v. Omni International Trading, Inc. LR-15502 09/18/97

SEC v. Phoenix Continental Corp. LR-15480 05/15/97

SEC v. Phoenix Metals USA II, Inc. LR-15514 09/29/97

SEC v. Richard Simonson LR-15199 12/26/96

SEC v. Richard Warren & Associates, Inc. LR-15468 08/19/97

SEC v. Rob Nite LR-15472 09/03/97

SEC v. Ronald J. Mitchel/ette LR-15247 01/30/97

SEC v. Simon M Rosenfeld AAER893 03/05/97

SEC v. Southwest Income Trust LR-15360 05/05/97

SEC v. Stephen J. Murphy LR-15344 04/21/97

SEC v. Sunbelt Development Corp. LR-15416 07/15/97

SEC v. Terry Oneil Clifford LR-15503 09/17/97

SEC v. The Infinity Group Company LR-15462 08/27/97

SEC v. Theta Group, LLC LR-15201 12/06/96

SEC v. Thomas Mackie, Jr. LR-15179 11/27/96

SEC v. United Fire Technology, Inc. AAER936 07/16/97

SEC v. Walter Clarence Busby, Jr. LR-15494 09/11/97

SEC v. Wedgewood Financial Group, Inc. LR-15458 04/04/97

SEC v. Western Executive Group LR-15106 10/02/96

SEC v. Whitworth Energy Resources, Ltd LR-15505 09122/97

SEC v. William H Malek LR-15506 09119/97

Other Regulated Entity: Investment Adviser

In the Matter of Abraham and Sons

Capital, Inc. IA-1673 09/29/97

In the Matter of Alliance Capital

Management LP 1940 IA-1630 04/28/97

In the Matter of August Mezzetta IA-1656 09102/97

In the Matter of Barbara B. Nolan IA-1655 09/02/97

In the Matter of Benjamin Franklin

Bush, III IA-1612 01/31/97

In the Matter of Calamos Asset

Management, Inc. IA-1594 10/16/96

162
Name of Case Release No. Date Filed

In the Matter of Carol A. Hamby IA-1661 09/10/97

In the Matter of Consolidated Financial

Advisors, Inc. IA-1672 09/26/97

In the Matter of D.L. Gresty & Co., Inc. IA-1665 09/16/97

In the Matter of Donald Sussman AAER 948 09/02/97

In the Matter of First Capital

Strategists IA-1648 08/13/97

In the Matter of Gary L. Hamby IA-1668 09/22/97

In the Matter of HP. Hambrick Co., Inc. IA-1622 03/18/97

In the Matter of John D. Mackenzie IA-1662 09/15/97

In the Matter of Kent A. Ahrens IA-1615 02/18/97

In the Matter of LRS Capital

Management, Inc. IA-1644 07/18/97

In the Matter of Michael Anthony Pierce IA-1616 03/04/97

In the Matter of Norman L. Yu & Co. IA-1607 01/21/97

In the Matter of Oakwood

Counselors Inc. IA-1614 02/10/97

In the Matter of Parnassus Investments IA-1634 OS/28/97

In the Matter of Peter S. Alsop IA-1652 08/27/97

In the Matter of Profinancial

Advisors Inc. IA-1670 09/22/97

In the Matter of Profinancial Advisors,

Inc., et at. None 08-01-97

In the Matter of Robert Pierce IA-1620 03/17/97

In the Matter of Ronald V Speaker IA-1605 01/13/97

In the Matter of Russell William Stein IA-1632 05/09/97

In the Matter of Schuylkill Capital

Management Ltd. IA-1675 09/30/97

In the Matter of Stephens Inc. IA-1666 09/16/97

In the Matter of Teresa V Fernandez IA-1650 08/21/97

In the Matter of Virgil Dean Damhof IA-1671 09/26/97

In the Matter of Willy Kerzinger d/b/a

Commodity Pool Service IA-1658 09/04/97

SEC v. American Growth Capital Corp. LR-15440 08/12/97

SEC v. Carlo Dalelio None 09/26/97

SEC v. Channa Wickermeratne a/k1a

Channa Wick LR-15368 05/13/97

SEC v. Emmanuel A. Lagpacan LR-15430 08/01/97

163
Name of Case Release No. Date Filed

SEC v. George A. Rotelli LR-15123 10/15/96

SEC v. Hyannis Trading Advisors Inc. LR-15166 11/25/96

SEC v. J Scott Eskind LR-15395 06/20197

SEC v. John Garder Black LR-15511 09/26/97

SEC v. Kent A. Ahrens LR-15122 10/15/96

SEC v. Peter C. Bucchieri LR-15156 11/13/96

SEC v. Robert C. Cowan LR-15154 11/05/96

SEC v. Robert L. Gray LR-15427 08/01/97

SEC v. Teresa V Fernandez LR-15159 11/19/96

SEC v. Virgil Dean Damhof IA-1671 09/26/97

Other Regulated Entity: Investment Companies

In the Matter of Edward D. Jones Co. IC-22316 11/06/96

In the Matter of Fundamental Portfolio

Advisers, Inc. 34-39158 09/30/97

In the Matter of George W Meyers IC-22723 06/23/97

In the Matter of Hudson Investors

Fund Inc. IC-22799 08/26/97

In the Matter of Terence Michael Coxon IC-22460 01113/97

In the Matter of Vilis Pasts IC-22820 09/15/97

SEC v. Trustcap Financial Group, Inc. LR-15297 03/17/97

Other Regulated Entity: SRO

In the Matter of Stock Clearing Corp.

of Philadelphia 34-38918 08/11/97

In the Matter of Timothy J Guiheen 34-38917 08/11/97

In the Matter of William N Briggs 34-38919 08/11/97

Other Regulated Entity: Transfer Agent

In the Matter of Frank P. Meadows III 34-39034 09/09/97

Related Party Transactions

In the Matter of John Thomas Royall 34-38358 03/04/97

In the Matter Steven W Koinis AAER-917 OS/28/97

164
Name of Case

SEC v. John Thomas Royall

SEC v. Steven W Koinis

Release No. Date Filed

LR-15273 03/04/97

AAER-898 03/14/97

165
Table 3

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1, 1996 1,614

Opened In Fiscal Year 1997 408

Total 2,022

Closed In Fiscal Year 1997 289

Pending as of September 30, 1997 1,733

Formal Orders of Investigation

Issued in Fiscal Year 1997 265

Table 4

ADMINISTRATIVE PROCEEDINGS INSTITUTED

DURING FISCAL YEAR ENDING SEPTEMBER 30, 1997

Broker-dealer Proceedings 138

Investment Adviser, Investment Company and Transfer Agent Proceedings 52

Stop Order Proceedmgs 49

Rule 102 Proceedings , 29

Suspensions of Trading in Securities in Fiscal Year 1997 13

166
Table 5

INJUNCTIVE ACTIONS

Fiscal Year

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Actions Initiated

125

140

186

171

156

172

197

171

180

189

Defendants Named

401

422

557

503

487

571

620

549

588

597

Right to Financial Privacy

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 no applications for judicial orders pursuant to Section 21(h)(2). Set

forth below are the number of occasions on which the Commission

obtained customer records pursuant to the provisions of the RFPA:

Section 1104 (Customer Authorizations)

Section 1105 (Administrative Subpoenas)

Section 1107 (Judicial Subpoenas)

15

559

18

167
Table 6

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Violation of the federal secunties laws

Broker-dealer, municipal securities

dealer, government securities dealer,

transfer agent, investment adviser or

associated person

Willful violanon of secunties 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

aqamst certain cnmes or conduct

Registered securities association

Violanon of or Inability to comply with the

Exchange Act, rules thereunder, or rts own

rules, unjustifJed failure to enforce

compliance With the foregOing or with rules of

the MuniCipal Securities Rulemaklng Board

by a member or person associated With a

member.

Sanction

Cease-and-desist order, which may also

require a person to comply or take steps to

effect compliance With federal seeunnes

laws; accounting and dlsgorgement of illegal

profits. (Secunties Act, SeclJon 8A,

Exchange Act, Section 21 C(a); Investment

Company Act, Section 9(f); Investment

Advisers Act, Section 203(k))

Censure or limitation on activrties:

revocanon, suspension or denial of

registration, bar or suspension from

association (Exchange Act, Sections

15(b)(4)-(6), 15B(c)(2)-(5), 15(C)(c)(1 )-(2),

17A(c)(3)-(4); Investment Advisers Act,

SeclJon 203(e)-(f)).

Civil penalty up to $110,000' for a natural

person or $550,000' for any other person;

accounlJng and disgorgement of Illegal

profits Penalties are subject to other

limitations depending on the nature of the

viotanon, (Exchange Act, Secllon 21B,

Investment Company Act, Section 9;

Investment Advisers Act, Section 203)

Temporary cease-and-desist order, which

may, in appropnate cases, be issued ex

parte. (Exchange Act, Section 21 C).

Suspension or revocation of registration;

censure or limItatIon of activities, functions,

or operations (Exchange Act, SeclJon

19(h)(1 ))

'Adjusted for inflation under Debt Collection Improvement Act.

168
Member of registered securities

association, or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of secunties laws or rules

thereunder or rules of MUniCipal Secunties

Rulemaklflg Board; effecting transaction for

other person with reason to believe that

person was cornrrutnnq violations of

securities laws.

National securities exchange

Violation of or inability to comply with

Exchange Act, rules thereunder or Its own

rules, unjustified failure to enforce

compliance with the foregOing by a member

or person associated with a member

Member of national securities exchange,

or associated person

Entry of Commission order aqamst person

pursuant to Exchange Act, Section 15(b);

willful violation of secunties laws or rules

thereunder, effecting transaction for other

person with reason to believe that person

was committing violation of secunnss laws

Registered clearing agency

Violation of or inability to comply with

Exchange Act, rules thereunder, or ItSown

rules; failure to enforce compliance with ItS

own rules by participants

Participant in registered clearing agency

Entry of Commission order against

parttcipant pursuant to Exchange Act,

Section 15(b)(4), Willful violation of cleanng

agency rules, effecting transaction for other

person with reason to believe that person

was committing violations of secuntles laws.

Securities information processor

Violation of or mabihty to comply with

provisions 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 limitation of acnvmss, functions,

or operations (Exchange Act, Section 19(h)

(1 )).

Suspension or expulsion from exchange; bar

or suspension from association with member

(Exchange Act, Section 19(h)(2)-(3)).

Suspension or revocation of registration;

censure or limitation of activities, functions,

or operations (Exchange Act, Section

19(h)(1 ))

Suspension or expulsion from clearing

agency (Exchange Act, Section 19(h)(2))

Censure or limitation of actrvmes, suspension

or revocation of registration (Exchange Act,

Section 11A(b)(6)).

169
Any person

Willful violation of sacunnes 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 orqanrzanon'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

appointed

Securities Act registration statement

Statement materially Inaccurate or

Incomplete

Person subject to Sections 12, 13, 14 or

15(d) of the Exchange Act or associated

person

Failure to comply with such provisrons or

having caused such failure by an act or

orrussron 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

registration statement or required report;

filing matenally Incomplete or misleading

statement or report

Company has not attained $100.000 net

worth 90 days after Secunties Act registration

statement became effective.

170

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 refusmq to permit or suspending

effectiveness (Secuntles Act. Section 8(d».

Order directing compliance or steps

effecting compliance (Exchange Act. Section

15(c)(4))

Denial. suspension of effective date.

suspension or revocation of registration

(Exchange Act. Section 12(J))

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 Secuntles Act; suspension

or revocation of registration (Investment

Company Act. Section 14(a)).
Attorney, accountant, or other

professional or expert

Lack of rsqursite qualifications to represent

others; lacking In character or Integnty;

unethical or improper professional conduct;

willful violanon of secunnes laws or rules, or

aiding and abetting such violanon.

Attorney suspended or disbarred by court,

expert's license revoked or suspended,

conviction of a felony or of a misdemeanor

Involving moral turpitude

securmes violation In Cornrrussron-rnstmrted

actron, finding of secunnes 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 pnvllege of

appeanng or practicing before the Commission

(17 CFR secncn 201.1 02(e)(1 )).

Automatic suspension from appearance or

practice before the Commission (17 CFR

Section 201 102(e)(2)).

Temporary suspension from practicing before

the Commission, censure, permanent or

temporary disqualification from practicing

before the Oornmissron (17 CFR Section

201.102(e)(3)).

Censure or removal from office (Exchange

Act, SeclJon 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 vlolatJng secunnes laws, rules or

orders thereunder (Including rules of a

registered self-regulatory orqaruzanon).

Noncompliance with provisions of the laws,

rules, or regulations under Securities Act,

Exchange Act, or Holding Company Act,

orders Issued by Commission, rules of a

registered self-regulatory organization, or

undertaking In a registration statement.

Sanction

Injunction against acts or practices

consntunnq 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, Secbon

209(d); Trust Indenture Act, Section 321)

Wnt of mandamus, InJunction, or order

dlrecllng compliance (Secunties Act, Section

20(c), Exchange Act, Section 21 (e); Holding

Company Act, Section 18(f)).

171
Violating the secunnas laws or a cease-anddesist order (other than through insider

trading)

Trading while in possession of matenal nonpublic Information In a transaction on an

exchange or from or through a broker-dealer

(and transaction not part of a public offering);

aiding and abetting or directly or indirectly

controlling the person who engages In such

trading.

Violating Securities Act Secbon 17(a)(1) or

Exchange Act section 10(b), when conduct

demonstrates substanbal unfitness to serve

as an officer or director.

Issuer subjectto Section 12 or 15(d) of

the Exchange Act; officer, director,

employee or agent of issuer; stockholder

acting on behalf of issuer

Payment to foreign officral, 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 associanon.

Registered clearing agency

Failure to enforce compliance by its

parncipants With Its own rules

Civil penalty up to $110,000' for a natural

person or $550,000' for any other person m,

If greater, the gross gain to the defendant.

Penalties are subject to other limitations

dependent on nature of vlolanon. (Securities

Act, Section 20(d); Exchange Act, secnon

21(d) (3); Investment Company Act, Section

42(e); Investment Advisers Act, Section

209(e)).

Maximum civil penalty. three nmes profit

gained or loss avoided as a result of

transaction (Exchange Act, Section 21A(a)-

(b))

Prohibition from acting as an officer or

director of any public company. (Securities

Act, Section 20(e), Exchange Act, Secbon

21 (d)(2))

Maximum cIvil penalty $11,000' (Exchange

Act, Section 32(c))

Order directing discharge of obligations and

other appropnate relief (SIPA, Section 11(b)).

Wnt of mandamus, injunction or order

directing such exchange or assoclanon to

enforce compliance (Exchange Act, secnon

21(e)).

Wnt of mandamus, injunction or order

directing cleanng agency to enforce

compliance (Exchange Act, Section 21(e)) .

•Adjusted for inflation under Debt Collecbon Improvement Act.

172
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 secunty 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 $110' per day (Exchange Act,

Secbon 32(b))

Injunction against use of name (Investment

Company Act, Secbon 35(d)).

Injunction against acting In certain capacities

for investment company and other

appropnate relief (Investment Company Act,

secuon 36(a»

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Any person

Willful violation of securibes 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 self.

regulatory organization in connection with an

application for membership or assocrauon

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 officral, foreIgn political

party or official, or candidate for foreign

political office for purposes of seeking the

use of influence m order to assist Issuer In

obtaining or retaining business for or with, or

directing busmess to, any person

Sanction

Maximum penalties: $1,000,000 fine and ten

years irnpnsonmsnt for mdrvrduals,

$2,500,000 fine for non-natural persons

(Exchange Act, Sections 21(d), 32(a»,

$10,000 fine and five years impnsonrnent (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, Secbons 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 impnsonment (Issuer may not

pay fine for others) (Exchange Act, Section

32(c))

'Adjusted for mflanon under Debt Collection Improvement Act.

173
Self-Regulatory Organizations: Expenses, Pre-Tax Income, and

Balance Sheet Structure

In 1996, the total revenues of all self-regulatory organizations

(SROs) with marketplace jurisdiction rose approximately $211 million,

an increase of approximately 16% from 1995. The New York Stock

Exchange (NYSE), the National Association of Securities Dealers

(NASD), the American Stock Exchange (AMEX), and the Chicago

Board Options Exchange (CBOE) accounted for 89% of total SRO

revenues, unchanged from 1995. Revenues were earned primarily from

listing or issuer fees, trading fees, and market data fees. For example:

• The NYSE reported total revenue of $561 million, an increase of

12% from 1995, of which 41% consisted of listing fees, 17%

consisted of trading fees, and 15% consisted of market data fees.

• The NASD reported total revenue of $556 million, an increase of

27% from 1995, of which 20% consisted of listing fees, 40%

consisted of trading and market data fees.

• The AMEX reported total revenue of $170 million, an increase

of 11% from 1995, of which 9% consisted of listing fees.

The remaining SROs also reported increases in revenues as follows:

• The Boston Stock Exchange (BSE) reported a $275,000 decrease

(-2%) to $15.4 million.

• The CBOE reported a $1.4 million increase (1%) to $108.7

million.

• The Pacific Exchange (PCX) reported a $3.6 million increase

(6%) to $60.3 million.

• The Philadelphia Stock Exchange (PHLX) reported a $2.9

million increase (7%) to $45.7 million.

• The Chicago Stock Exchange (CHX) reported a $6.9 million

increase (23%) to $36.9 million.

174
• The Cincinnati Stock Exchange (CSE) reported a $752,000

increase (9%) to $8.6 million.

Of the SROs reporting financial information for a 12-month period

in fiscal year 1996, the NASD reported the largest percentage increase in

total revenues, 27% as well as the largest dollar volume increase in total

revenues, $118.5 million.

The total expenses of all marketplace SROs were $1.3 billion in

1996, an increase of$120 million, or 10%, over 1995. The NASD

incurred the largest percentage increase in expenses, 15%, as well as the

largest dollar volume increase in expenses, $62.8 million. Additionally,

the following SROs incurred the following increases in expenses:

• The AMEX incurred a $14.6 million increase (10%).

• The BSE incurred a $335,000 increase (2%).

• The NYSE incurred a $29.6 million increase (7%).

• The PCX incurred a $2.8 million increase (6%).

• The PHLX incurred a $2 million increase (5%).

• The CSE incurred a $261,000 million increase (6%).

• The CBOE incurred a $6.7 million increase (8%).

• The CHX incurred a $834,000 increase (2%).

Aggregate pre-tax income of the marketplace SROs rose to $260

million, an increase of$96.8 million (59%), from the $163.4 million

reported in 1995. The NASD experienced the largest dollar volume

increase in pre-tax income, $60.7 million, as well as the largest

percentage increase (225%). The remaining SROs reported positive pretax income in 1996 with the exception of the PHLX which reported a

pre-tax loss of $72,000. While PHLX reported a pre-tax loss, it did show

improvement from its 1995 pre-tax loss of$1 million. The BSE and the

175
CBOE were the only two SROs reporting a positive pre-tax income for

1996 that dropped from their 1995 levels.

The total assets of all marketplace SROs amounted to approximately

$2.1 billion in 1996, an increase of$332 million (19%) over 1995. The

NYSE showed the largest dollar volume increase in total assets, $149

million (17%), while the PHLX showed the largest percentage increase

in total assets, 61% ($41.4 million). The CSE also showed a significant

percentage increase in total assets, 30% ($2.5 million). The NASD,

AMEX, CBOE and PCX also reported increases in total assets equaling

$89.6 million (20%), $22.8 million (16%), $12.1 million (11%), and $4.7

million (9%) respectively.

In 1996, the total liabilities of marketplace SROs increased $174.4

million (23%) over 1995 levels. The PHLX showed the greatest

percentage increase, 94% ($41.3 million), while the NYSE reported the

greatest dollar volume increase, $74.7 million (18%). Increases in

liabilities were also reported by the AMEX ($16.3 million or 36%), BSE

($3.1 million or 19%), CHX ($4.3 million or 28%), and NASD ($34.8

million or 23%).

The aggregate net worth of the marketplace SROs rose $157.4

million in 1996 to.$1.178 billion, an increase of 15% over 1995. The

CSE incurred the largest percentage increase in net worth, 43% ($2.7

million), while the NYSE reported the largest dollar volume increase in

net worth, $74.4 million (17%). The PCX and NASD also reported

substantial increases in net worth of $6.3 million (21%) and $54.8

million (18%) respectively. Net worth increases were also reported by

CBOE ($10.6 million, (12%)) and AMEX ($6.5 million (6%)).

Clearing agency results have been presented in two tables by their

respective types: clearing corporations and depositories. In calendar year

1996, aggregate revenues from clearing agency services increased $70

million, or 12%, to $629 million from $560 million in 1995. Interest

income declined $90 million, or 62%, to $55 million in 1996. 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.

176
Service revenues at the depositories totaled $360 million, up $6

million or 2%, from 1995. In 1996, The Depository Trust Company

(DTC) increased its service revenues by 6% ($20 million) and increased

its pre-tax earnings from $21,000 to $301,000. The Philadelphia

Depository Trust Company's 1996 service revenues increased 18% ($1.8

million). Nevertheless, its pre-tax earnings decreased 105%, from

$263,000 in 1995 to a loss of$12,000 in 1996.

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 service. At year end 1996, DTC

alone had more than 1.3 million depository-eligible issues and a total

value of securities in its depository system of $12 trillion.

Service revenues of clearing corporations for 1996 increased 16% to

$206 million in 1996 from $177 million for 1995, and earnings for

clearing corporations decreased to $9.5 million in 1996 from $16

million in 1995, a decrease of 59%.

The results were mixed for individual clearing corporations' pre-tax

earnings. For example, the National Securities Clearing Corporation did

not report any earnings for 1996 compared with $3.7 million for 1995, a

decrease of 100%. The Government Securities Clearing Corporation

reported earnings of$3.9 million for 1996 compared with $5.5 million

for 1995, a decrease of28%. The Options Clearing Corporation reported

earnings of $3.3 million for 1996 compared with $3.2 million for 1995,

an increase of 3%. The Stock Clearing Corporation of Philadelphia

reported a 1996 gain of $986,000 compared with a loss of $717,000 in

1995, an increase of238%.

The aggregate shareholders' equity of all clearing corporations and

depositories decreased from $120 million to $117 million. Aggregate

participant clearing funds, which protect clearing agencies in the event of

a participant default, increased by $1.6 billion, or 44%, to $ 5.2 billion.

If a participant defaults and it losses exceed its deposit at a clearing

agency, the entire participants' fund of the clearing agency may be

assessed on a pro rata basis.

177
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180

Table 9

SELF-REGULATORY ORGANIZATIONS-DEPOSITORIES

1996 REVENUES and EXPENSES 11

($ in Thousands)

Philadelphia

Depository Participants Depository

Trust Trust Trust

Company Company Company

(12/31/96) (12/31/96) (12/31/96) Total

Revenues

Depository Services $332,345 $15,278 $12,191 $359,814

Interest Income 22,299 14,024 767 37,090

Total Revenues 21 $354,644 $29,302 $12,958 $396,904

~

Employee Costs $205,762 $11,249 $7,148 $224,159

Data Processing 19,359 3,954 3,200 26,513

Occupancy Costs 50,566 7,270 0 57,836

Depreciation and

Amortization of

Intangibles 16,788 1,151 0 17,939

All Other Expenses 61,868 4,738 2,622 69,228

Total Expense $354,343 $28,362 $12,970 $395,675

Excess of Revenues

Over Expenses 31 $301 $940 $(12) $1,229

Shareholders' EqUity $19,707 $20,073 $3,840 $43,620

Participant's Fund $675,171 $269,061 $2,223 $946,455

1/ Although efforts have been made to make the presentallons comparable, any Single revenue or expense

category may not be completely comparable between any two deposnones because of (I) the varying

claSSificatIOn methods employed by the deposnones In reporting operating results and (II) the grouping

methods employed by the SEC's staff due to these varying classification methods IndiVidual amounts are

shown to the nearest thousand Totals are the rounded result of the underlYing amounts and may not be

the arithmetiC sums of the parts

{j Revenues are net of refunds which have the effect of reducmq a clearing agency's base fee rates

31 This IS the result of operations and before the effect of Income taxes, which may Significantly Impact a

depOSitory'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 figures includes

Direct Mail by Agents and municipal bearer bonds. In 1996, the total

certificates withdrawn decreased by 15% from 1995, while the number of

book-entry deliveries increased by 14%. In 1996, the ratio was almost 4

times the 1992 ratio of book-entry deliveries rendered for every

certificate withdrawn.

Table 10

CERTIFICATE IMMOBILIZATION TRENDS

The Depository Trust Company

Book-entry Deliveries

at DTC (millions) 136.0 119.0 106.0 98.3 83.3

Total of All Certificates

(in thousands) 2,769 3,270 3,899 4,140 6,467

Book-entry Deliveries

per Certificates Withdrawn 49.0 36.4 27.1 23.7 12.9

181
Section 13(1)(1) Reports

Section 13(f)(1) of the Exchange Act and rule 13f-l require

"institutional investment managers" exercising investment discretion

over accounts holding certain equity securities with a fair market value

of at least $100 million to file quarterly reports on Form 13F. For the

quarter ended September 30, 1997, 1,925 managers filed Form 13F

reports. For the quarter ended June 30, 1997, the total market value of

holdings reported on Form 13F was approximately $6.1 trillion.

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. Three applications

were pending at the beginning of 1997, and one application was 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. A frequently used exemption is that contained in

subparagraph (b), which provides an exemption for certain foreign

issuers that furnish specified documents to the Commission on a current

basis. Such documents include information material to an investment

decision that the issuer has:

• made or is required to make public pursuant to the law of the

country in which it is incorporated or organized;

• 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

182
1

i,

• 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 current list

contains over 1,400 foreign issuers.

Rule 10b-6 and Regulation M Exemptions

During 1997, the Commission granted 8 written exemptions

pursuant to paragraph (h) of rule 10b-6. Also, the Commission granted 5

written exemptions pursuant to rule 101 (d) of Regulation M and 5

written exemptions pursuant to rule 102 (e) of Regulation M.

183
Corporate Reorganizations

During 1997, the Commission entered its appearance in 31

reorganization cases filed under Chapter 11 of the Bankruptcy Code

involving companies with aggregated stated assets of approximately $5

billion and 110,000 public investors. Counting these new cases, the

Commission was a party in a total of 95 Chapter 11 cases during the

year. In these cases, the stated assets totaled approximately $30 billion

and involved almost 725,000 public investors. During the year, 41 cases

were concluded through confirmation of a plan of reorganization,

dismissal, or liquidation, leaving 54 cases in which the Commission was

a party at year-end.

Table 11

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

50% Off Stores, Inc.j/ W. TX 1997 1997

ACI-HDT Supply Co.11 S.D. CA 1996 1997

Action Auto Rental, Inc. D. OH 1993

Advanced Promotion

Technologies, Inc. S.D. FL 1997

Aileen, Inc. S.D. NY 1994

Alexander's Inc.l! S.D. NY 1992 1997

Alliance Entertainment Corp. D. NY 1997

Alliant Computer Systems

Corp.j/ E.D. MA 1992 1997

American Microtel, Inc. D. NV 1995

Apogee Robotics, Inc.~ D. CO 1997 1997

Audre Recognition Systems, Inc. S.D. CA 1997

Autolend Group, Inc. D. NM 1997

184
~

Table 11 (continued)

REORGANIZA nON PROCEEDINGS UNDER CHAPTER 11

~

-'

, OF THE BANKRUPTCY CODE IN WHICH

~ THE SEC ENTERED APPEARANCE

~"

j FY FY -~

-'! Debtor District Opened Closed

~')

! Automobile Credit

i

1

Finance, Inc. et al.l! N.D. TX 1997 1997 ~

1 Baldwin Buildersj/ C.D. CA 1995 1997

i

Barry's Jewelers, Inc. C.D. CA 1997

Barton Industries, Inc.j/ W.D. OK 1991 1997

B-E Holdings, Inc. E.D. WI 1994

Ben Franklin Retail Stores, Inc. N.D. IL 1996

Best Products Co.11 E.D. VA 1997 1997

Bonneville Pacific Corp. D. UT 1992

Bradlees, Inc. S.D. NY 1996

Cambridge Biotech Corp.j/ D.M. MA 1994 1997

Carter Hawley Hale Stores, Inc. C.D. CA 1991

Cincinnati Microwave, Inc. S.D. OH 1997

Clinicorp, Inc.11 S.D. FI 1997 1997

Clothestime, Inc. C.D. CA 1996

College Bound, Inc.j/ S.D. FL 1993 1997

Comptronix Corp.j/ D. DE 1997 1997

CPT Corp. D. MN 1991

Craig Consumer Electronics, Inc. C.D. CA 1997

Crazy Eddie, Inc., et al.2/ S.D. NY 1989 1997

Dakota Minerals, Inc.Y D. WY 1986 1997

185
Table 11 (continued)

REORGANIZA nON PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Damson Oil Co.l! S.D. TX 1991 1997

Dest Corp.l/ N.D. CA 1989 1997

Eagle-Pitcher Industries, Inc.j/ S.D. OH 1991 1997

Eastern Air Lines, Inc., et al.l! S.D. NY 1989

Edison Brothers Stores, Inc.j/ D. DE 1996 1997

First City Bancorporation

of Texas, Inc. N.D. TX 1994

First Connecticut Small

Business Investments Company D. CT 1991 1997

First Merchants Acceptance Corp. D. DE 1997

First RepubIicbank Corp.j/ N.D. TX 1989 1997

Fruehauf Trailer Corp. D. DE 1997

Future Communications, Inc. W.D. OH 1994

Gander Mountain, Inc. E.D. WI 1996

Great American Recreation, Inc. D. NJ 1996

Grossman's Inc. D. DE 1997

The Group, Inc.J/ D. NY 1990 1997

Hamburger Hamlet

Restaurants, Inc. C.D. CA 1996

Home Theater Products

International, Inc. C.D. CA 1996

House of Fabrics, Inc.j/ C.D. CA 1995 1997

I C H Corp. N.D. TX 1996

Integra-A Hotel and

Restaurant, Co.11 D. CO 1993 1997

186
Table 11 (continued)

REORGANIZA nON PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

International Tourist

Entertainment Corp. W.D. MI 1996

Jayhawk Acceptance Corp. N.D. TX 1997

King of Video, Inc. D. NV 1989

Leslie Fay Companies, Inc.j/ S.D. NY 1993 1997

Library Bureau, Inc.Y N.D. NY 1993 1997

LifeCo Investment Group, Inc.11 D. GA 1995 1997

Marvel Entertainment

Group, Inc., et al. D. DE 1997

MCorp (MCorp Financial, Inc.

& MCorp Management) S.D. TX 1989

Media Vision Technology, Inc. N.D. CA 1994

Megafoods Stores, Inc. D. AZ 1995

Midwest Communications Corp.I/ E.D. KY 1991 1997

Monarch Capitol Corp.j/ D. MA 1991 1997

National Gypsum Co. N.D. TX 1991

Neostar Retail Group, Inc. N.D. TX 1997

NVF Company 11 D. DE 1994 1997

Omega Environmental, Inc. W. W 1997

Packaging Research Corp. D. CO 1997

PanAm Corporationj/ S.D. NY 1991 1997

Payless Cashways, Inc. W. MO 1997

PCA Industries, Inc. E.D. WI 1997

187
Table 11 (continued)

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Penn Pacific Corp. E.D. OK 1994

Phar-Mor, Inc.j/ N.D. OH 1994 1997

Physician Clinical Labortary, Inc. C.D. CA 1997

Protech Inc. d.b.a. Omega

Test Systems'[/ W. TX 1997 1997

Public Service Co. of New

Hampshirej/ D. NH 1988 1997

RDM Sports Group, Inc. N.D. GA 1997

Reconversion

Technologies, Inc., et al. N.D. OK 1997

Rymer Foods, Inc. N.D. IL 1993

Sizzler International, Inc.11 C.D. CA 1996 1997

Solv-ex Corp. D. NM 1997

Southland Corp. N.D. TX 1991

Spencer Cos., Inc.j/ D. MA 1987 1997

Standard Oil and Exploration

of Delaware, Inc. W.D. MI 1991

Stratosphere Corp. D. NY 1997

Sterling Optical Corp. S.D. NY 1992

Telstar Satellite Corp. of

Americaj/ C.D. CA 1989 1997

TSL Holdings, Inc.j/ S.D. CA 1993 1997

USA Classic, Inc.2/ S.D. NY 1994 1997

Value Merchants, Inc.21 B.D. WI 1994 1997

Wedgestone Financial D. MA 1991 1997

188
Table 11 (continued)

REORGANIZA nON PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Western Fidelity Funding, Inc. D. CO 1997

Westmoreland Coal Company D. CO 1997

WRT Energy Corp. W.D. LA 1996

Total Cases Opened (FY 1997) 31

Total Cases Closed (FY 1997) 41

1/ Chapter 11 plan confirmed.

'J./ Debtor liquidated under Chapter 7.

Jj Chapter 11 case dismissed.

11 Debtor's securities not registered under section 12(g) of the

Securities Exchange Act of 1934.

189
The Securities Industry

Revenues, Expenses, and Selected Balance Sheet Items

Broker-dealers registered with the Securities and Exchange

Commission earned a pre-tax profit of $17.0 billion in calendar year

1996. This was $5.6 billion more than that earned the previous year.

The pre-tax return on equity capital of27.3% was better than the average

results of the previous decade.

The most important factor affecting broker-dealer profits was record

transaction activity. Sales of mutual funds grew by 45% in 1996. Sales

of equity funds, which typically generate more revenues than bond funds,

contributed disproportionately to this growth. The dollar value of equity

trades executed on the exchanges and the Nasdaq increased by 30%. The

amount of margin debt outstanding grew proportionately. This increase

in transactions translated into revenue growth. Securities commissions

rose by $4.6 billion to $27.8 billion in 1996. Margin interest of $7.4

billion represented an increase of $0.9 billion. Revenues from retailing

mutual funds grew by $2.6 billion to $10.1 billion.

Investment banking also was an important profit center in 1996.

The value of new equity offerings increased by over 50% while that for

new debt offerings grew by over 30%. The result was a $3.8 billion

increase in profits from underwriting to $12.6 billion.

"All other revenues" grew by $15.8 billion to $84.3 billion in 1996.

These revenues are comprised primarily of interest income from

securities purchased under agreements to resell and fees from handling

private placements, mergers, and acquisitions. These underlying

business segments showed substantial growth in 1996. Announced

mergers and acquisitions deals rose by 25%, the dollar value of private

placements grew by almost 60%, and the dollar value of reverse

repurchase agreements rose 15%.

Proprietary trading gains were $30.7 billion in 1996. This was only

modestly larger than exceptionally high profits earned in 1995, when

declining interest rates drove up the value of the bond inventory

maintained by securities firms.

190
Expenses rose 18% to $156.0 billion in 1996, primarily due to

higher employee compensation. Interest expense, the largest expense

item in 1996, increased by $8.3 billion (14.6%) to $65.2 billion.

Employee compensation rose 22.9% to $51.1 billion. Total assets grew

by $255.1 billion to $1,748.8 billion. Equity capital increased by $6.9

billion to $65.6 billion.

191
Table 12

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS

1992 - 19961/

($ in Millions)

1992 1993 1994 1995' 1996"

Revenues

Securities Cornrmssrons $ 16,2489 $ 19.9048 $ 19.8467 $ 23,2148 $ 27,8368

Gams (Losses) m Trading and

Investment Accounts 21,8383 25,4272 20,2186 28,962.7 30.7016

Profits (Losses) from Underwrltmg

and Sellmg Groups 8.299 7 11,2487 6,8438 8,8652 12.6242

Margin Interest 2.6896 3,2352 4,6684 6,4702 7.390 1

Revenues from Sale of Investment

Company Shares 5,9501 8,1153 6.8872 7,4335 10,0793

All Other Revenues 35,5574 40,9126 54,2934 68,4676 84,2889

Total Revenues $ 90.584.0 $ 108,8437 $ 112.7581 $ 143,4140 $ 172.9211

Expenses

Registered Representatives'

Compensation (Par111Only) 21 $12,1111 $ 14,6960 $ 13,711 0 $ 15,5265 $ 18.803.5

Other Employee Compensation

and Benefits 17,0669 20.931 3 20,5522 22,2854 27,9010

Compensation to Partners and

Voling Stockholder Officers 2,8929 3,4980 3,3324 3,7293 4.3663

Cornrrnssrons and Clearance Paid

to Other Brokers 3,7221 5,3378 5,3603 5,700 2 7,350 6

Interest Expenses 24.5763 26,6156 40,2504 56,877 0 65.2041

Regulatory Fees and Expenses 6392 629.7 6278 6741 6711

All Other Expenses 21 20,4590 24,0967 25,431 8 27,2964 31.6719

Total Expenses $ 81,4674 $ 95.8051 $ 109,2659 $ 132,0889 $ 155,9684

Income and Profitability

Pre-tax Income $ 9.1166 $ 13.0386 $ 3,4922 $ 11,3251 $ 16,9527

Pre-tax Profit Margm 101 120 31 79 98

Pre-tax Return on EqUity 220 267 65 201 273

Assets Liabilities and Capital

Total Assets $978,6350 $1.240,1598 $1,251,7410 $1,493,643 9 $1,748,7804

lIabllllles

(a) Unsubordmated Liabilities 916,5453 1,160,4560 1,169,1366 1,403,6551 1.646,5579

(b) Subordinated liabilities 18,1558 25,7876 28,8097 31,2792 36,631 7

(c) Total Liabilities 934,7011 1,186.2436 1,197,9463 1,434,9343 1,683,1896

Ownership EqUity $ 43,9339 $ 53,9162 $ 53,7947 $ 58,7095 $ 65.5910

Number of Firms 7,793 7.674 7,632 7.722 7,776

Figures may not add due to roundmg

r = revised

p = preliminary

1/ Calendar, rather than fiscal, year data IS reported In thiS table

21 Registered representatives' compensation for firms that neither carry nor clear IS Included m "other expenses"

as thiS expense Item IS not reported separately on Par1I1Aof lhe FOCUS Report

Source FOCUS Report

192
Table 13

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1992 - 19961/

($ in Millions)

1992 1993 1994 1995' 1996"

Revenues

Securities Commissions $15,4997 $ 19,341 1 $19,2466 $ 22,616 7 $ 27,245 1

Gains (Losses) rn Tradrng and

Investment Accounts 20,7907 24.0425 18,9183 27,0881 28,3483

Profits (Losses) from Underwflling

and Seiling Groups 8,2028 11,2486 6,8405 8,8650 12,6150

Margin Interest 2,651 7 3,2291 4.651 1 6,4394 7.3579

Revenues from Sale of Investment

Company Shares 5.8519 8,1153 6,8764 7,4334 10.0793

All Other Revenues 34,7455 40,0863 53,121 4 67,4931 82,751 6

Total Revenues $87.742.2 $106,0629 $109.6543 $139.9356 $168.3973

~

Registered Representatives'

Compensation (Part II only) 21 $11,791 1 $ 14,6719 $13,6890 $ 15,5062 s 18,6767

Other Employee Compensation

and Benefits 16,6014 20,5149 20,0708 21.8606 27.4274

Compensation to Partners and

Voting Stockholder Officers 2.6955 3,2934 3,0961 3,511 3 4,1206

Commissions and Clearance Paid

to Other Brokers 3,5000 5,0833 5,0884 5,4574 7,1042

Interest Expenses 24.235 8 26.2229 39,5821 55,8233 63,603 6

Regulatory Fees and Expenses 5800 5733 5346 6162 6234

All Other Expenses 21 19,777 9 23.5482 24,832 5 26,6708 30,9984

Total Expenses $79.181 7 $ 93.9080 $106,8935 $129,4459 $152,5543

Income and Profitability

Pre-tax Income $ 8,5605 $12,1549 $ 2,7608 $ 10,4897 $ 15,8430

Pre-tax Profit Margin 98 115 25 75 94

Pre-tax Return on Equity 222 265 54 197 267

Number of Firms 5.091 5,139 5,237 5,310 5,402

Figures may not add due to rounding.

r = revised

p = preliminary

Y Calendar, rather than fiscal. year data ISreported In thiS table

21 Registered representatives' compensation for firms that neither carry nor clear ISIncluded rn "other expenses"

as thiS expense Item ISnot reported separately on Part IIA of the FOCUS Report

Source FOCUS Report

193
Table 14

UNCONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

YEAR-END, 1992-19961/

($ in Millions)

1992 1993 1994 1995' 1996'

Assets

Cash $ 11,0244 $ 13,1281 $ 13,5004 $ 14,8627 $ 16,8527

Receivables from Other

Broker -dealers 216,7937 289,1680 342,000 1 358,5569 477,8078

Receivables from Customers 49,3335 68,5261 66,9116 71,0042 87,0647

Receivables from Non-customers 4,3267 6,4125 7,2581 7,421 0 7,0796

Long Positions In Securities

and Commodities 294,2945 363,8643 317,6257 422,8687 448,6351

Securities and Investments

not Readily Marketable 2,3760 4,1244 4,4811 5,3662 5,4550

Securities Purchased Under Agreements

to Resell (Part II only) 21 350,4878 439,4314 437,8056 544,8323 624,3323

Exchange Membership 3153 3231 3537 4241 4646

Other Assets 21 26,5029 30,6158 33,8188 34,2061 36,2370

Total Assets $955,4548 $1,215,593 8 $1,233,7550 $1,459,542 3 $1,703,928 8

uaorhnes and Egulty Caortal

Bank Loans Payable $ 33,9088 $ 41,9919 $ 34,471 4 $ 45,7176 $ 58,2856

Payables to Other Broker-dealers 68,5690 105,1152 130,7364 152,3288 207,7378

Payables to Non-customers 6,6077 10,8360 11,9215 14,9438 18,2825

Payables to Customers 70,0897 90,9429 98,5344 111,4899 143,5161

Short Posmons In Securities

and Commodities 157,2956 199,5095 196,8075 195,1493 236,9177

Securrties Sold Under Repurchase

Agreements (Part II only) 21 500,7141 607,8271 591,423 1 767,6761 832,5320

Other Non-subordmated lrabihttes 21 59,5348 83,1244 80,8463 85,3894 107,8735

Subordinated liabilities 17,7265 25,3706 28.4935 30.931 3 36,2306

Total LiabllJlies $914,4461 $1,164,7176 $1.173,234 6 $1.403,6263 $1,641,3757

EqUity Capital $ 41,0087 $ 50,8762 $ 50,5204 $ 55.9160 $ 62,5531

Number of films 5,091 5,139 5,237 5,310 5,402

Figures may not add due to roundmg

r = revised

p = prehrmnary

1/ Calendar, rather than nscal, year data IS reported m thiS table

21 Resale agreements and repurchase agreements for firms that neither carry nor clear are mciuded m "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

194
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 1996.

Brokerage activity accounted for about 23 cents of each revenue dollar

in 1996, virtually identical to the level in 1995. Securities commissions

remained the most important component, producing 14 cents of each dollar

of revenue. Margin interest generated about 5 cents of each dollar of revenue, while revenues from mutual fund sales accounted for about 4 cents.

The dealer side produced 67 cents of each dollar of revenue in 1996,

down from 68 cents in 1995. Seventeen cents came from trading and

investments, an increase from 20 cents in 1995. Eight cents came from

underwriting, up one cent from 1995. Forty-one cents came from other

securities-related revenues, almost identical to that in 1995. This revenue

item is comprised primarily of interest income from securities purchased

under agreements to resell and fees from handling private placements,

mergers, and acquisitions.

Expenses accounted for 91 cents of each revenue dollar in 1996,

resulting in a pre-tax profit margin of 9 cents per revenue dollar, about 2

cents higher than that in 1995. Interest expense was the most important

expense item, accounting for 44 cents of each revenue dollar in 1996

compared to 46 cents in 1995. Employee-relatedexpenses--compensation

received by registered representatives, partners and other employees--

consumed 29 cents of each revenue dollar in 1996, compared to 28 cents in

1995.

Total assets of broker-dealers carrying and clearing customer accounts

were $1,651 billion at year-end 1996, a 16% increase from 1995. Relative

to other assets, the value of inventory on the books of broker-dealers

declined during 1996, while the value of receivables from customers and

other broker-dealers increased.

Total liabilities also increased by about 16% to $1,601 billion in 1996.

Owners' equity rose 10% to $50.1 billion.

195
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196
Table 16

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS 1/

($ in Millions)

1995' 1996"

Percent Percent Percent

of Total ofTotaJ Change

Dollars Revenues Dollars Revenues 1995-1996

Revenues

Securities Commissions $ 16,4243 138% $ 19,5613 138% 191%

Gams (Losses) m Tradmg and

Investment Accounts 23,2362 195 23,7434 167 2.2

Profits (Losses) from Underwrltmg and Seiling Groups 8,194.5 69 11,7651 83 43.6

Margm Interest 6,439.4 54 7,3579 52 143

Revenues from Sale of Investment Company Shares 4,3929 37 5,9014 4.1 34.3

Miscellaneous Fees 5,1769 43 6,3751 45 23.1

Revenues from Research 313 00 1117 01 256 9

Other Securities Related Revenues 49,3800 414 58,1334 409 177

Commodities Revenues (934) -01 1,6195 11 -1,833.9

All Other Revenues 6,0112 50 7,6494 54 27.3

Total Revenues $119,1933 1000% $142,2182 1000% 193%

Expenses

Registered Representatives'

Compensation s 15,5062 130% $ 18,6767 131% 204%

Other Employee Cornpensanon

and Benefits 16,301.1 137 20,5145 144 258

Compensation to Par1nersand

Votmg Stockholder OHlcers 2,1178 18 2,3689 17 11.9

Commissions and Clearance Paid

to Other Brokers 3,3220 28 3,8183 2.7 14.9

Cornmunrcatons 3,146.3 26 3,4368 2.4 92

Occupancy and EqUipment Costs 3,8148 32 4,0855 29 71

Data Processmg Costs 1,421.3 1.2 1,701 3 12 19.7

Interest Expenses 54,7575 459 62,3429 43.8 13.9

Regulatory Fees and Expenses 4812 04 4687 03 -2.6

Losses m Error Accounts and

Bad Debts 3059 0.3 3324 02 8.7

All Other Expenses 10,1041 85 11,8578 83 17.4

Total Expenses $111,2781 934% $129,6037 91.1% 16.5%

Income and Prolitability

Pre-tax Income $ 7,9152 66% $ 12,6144 89% 59.4%

Pre-tax Proht Margin 66 89

Pre-tax Return on EqUity 181 264

Number of Firms 773 761

Figures may not add due to roundmg

r = revised

p = prellmmary

1/ Calendar, rather than fiscal, year data ISreported m thiS table

Note Includes mformatlon for firms domg a public business that carry customer accounts or clear secunues transactions

Source FOCUS Report

197
Table 17

UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING

BROKER.DEALERS 11

($ in Millions)

1995' 1996'

Percent Percent Percent

oITotal oITotal Change

Dollars Assets Dollars Assets 1995-1996

Assets

Cash $ 13,5460 10% $ 15,3475 09% 133%

Receivables from Other Broker -deaters 349,2628 246 458,4470 278 313

(a) Secunnes failed to Deliver 6,0881 04 7,3813 04 212

(b) Securities Borrowed 324,9732 229 426,8846 259 314

(c) Other 18,2014 13 24,1811 15 329

Receivables from Customers 71,0042 50 87,0647 53 226

Receivables from Non-customers 6,8310 05 6,4751 04 -52

Long Posnons In Secunues and Ccmmomnes 401,7496 283 422,4498 256 52

(a) Bankers Acceptances, Certificates

of Deposn and Commercial Paper 19,610 1 14 20,9768 13 70

(b) U S and Canadian Government Obligations 248,8289 175 253,0708 153 17

(c) State and MUniCipal Government ObligatIOns 12,722,9 09 10,8296 07 -149

(d) Corporate Obhqauons 69,4454 49 83,8137 51 207

(e) Stocks and Warrants 33,7415 24 37,5353 23 112

(I) Options 5,5869 04 6,4767 04 159

(g) Arbitrage 9,1825 06 7,0894 04 -228

(h) Other Secunnes 2,0752 01 2,3037 01 110

(I) Spot Commodities 5564 00 3537 00 -364

Securities and Investments Not Readily Marketable 4,9903 04 4,877 3 03 -23

Securities Purchased Under Agreements

to Resell 544,8323 384 624,3323 378 146

Exchange Membership 3748 00 4041 00 78

Other Assets 27 880 2 20 31 8878 19 144

Total Assets $1,420,471 2 1000% $1,651,2857 1000% 162%

liabilities and EqUity CaMal

Bank Loans Payable $ 45,4409 32% $ 57,6308 35% 268%

Payables to Other Broker-dealers 141,2580 99 190,5101 115 349

(a) Securities Failed to Receive 6,3216 04 9,2169 06 458

(b) Securities Loaned 110,3963 78 158,1233 96 432

(e) Other 24,5401 17 23,1699 14 -56

Payables to Non-customers 14,6717 10 17,853

°

11 217

Payables to Customers 111,4899 78 143,5161 87 287

Short Positions In Securities

and Commodities 181,772 7 128 219,1927 133 206

Secuntres Sold Under Repurchase

Agreements (Part II Only) 767,676 1 540 832,5320 504 84

Other Non-subordinated

Liabilities 82,7624 58 104,8574 64 267

Subordinated lrabrhues 29,7688 21 35,1320 21 180

Total liabilities $1,374,840 6 968% $1,601,224 1 970% 165%

EqUity Capital $ 45,6306 32% $ 50,061 5 30% 97%

Number of firms 773 761

Figures may not add due to rounding

r = revsed

p = preliminary

1/ Calendar, rather than fiscal. year data IS reported In thiS table

Note Includes Information for firms dOing a publiC business that carry customer accounts or clear secunnes nsnsacnons

Source FOCUS Report

198
Securrnes Traded on Exchanges

Market Value and Volume

The market value of equity and option transactions (trading in

stocks, options, warrants, and rights) on registered exchanges totaled

$4.7 trillion in 1996. Of this total, approximately $4.5 trillion, or 96%,

represented the market value of transactions in stocks, rights, and

warrants; $208 billion, or 4%, were options transactions (including

exercises of options on listed stocks).

The value of equity and option transactions on the New York Stock

Exchange (NYSE) was $4.0 trillion, up 30.4% from the previous year.

The market value of such transactions on the American Stock Exchange

(AMEX) increased 24.5% to $131.2 billion and increased 16.3% to

$575.2 billion on all other exchanges. The volume of trading in stocks

(excluding rights and warrants) on all registered exchanges totaled 125.7

billion shares, an 18.2% increase from the previous year, with 86% of the

total accounted for by trading on the NYSE.

The volume of options contracts traded (excluding exercised

contracts) was 294.8 million contracts in 1996,2.6% greater than in

1995. The market value of these contracts increased 24.6% to $148.1

billion. The volume of contracts executed on the Chicago Board Options

Exchange decreased 2.6% to 173.9 million. Options trading on the

AMEX and Pacific Stock Exchange rose 17.4% and 9.6% respectively

while options trading on the Philadelphia Stock Exchange decreased

2.6%.

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 1996, there were

6,384 issues in the Nasdaq system, as compared to 5,955 a year earlier

and 3,050 at the end of 1980.

Share volume for 1996 was 138.1 billion, as compared to 101.2

billion in 1995 and 6.7 billion in 1980. The dollar volume of shares

traded in the Nasdaq system was $3.3 trillion during 1996, as compared

to $2.4 trillion in 1995 and 68.7 billion in 1980.

199
Share and Dollar Volume by Exchange

Share volume on all registered stock exchanges totaled 125.9 billion,

an increase of 17.6% from the previous year. The NYSE accounted for

86% of the 1996 share volume; the AMEX, 4%; the Chicago Stock

Exchange, 3%, and the Pacific Stock Exchange, 2%.

The dollar value of stocks, rights, and warrants traded was $4.5

trillion, 29% higher than the previous year. Trading on the NYSE

contributed 89% of the total. The Chicago Stock Exchange and Pacific

Stock Exchange contributed 3% and 2% respectively. The AMEX

accounted for 2% of dollar volume.

200
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Table 20

SHARE VOLUME BY EXCHANGES 1/

(In Percentage)

Total Share

Volume

Year (10 Thousands) NYSE AMEX CHIC PSE PHLX BSE CSE Others{j

1945 769,018 6587 21 31 177 2.98 1 06 066 005 630

1950 893,320 76.32 1354 216 311 097 065 009 316

1955 1,321,401 6885 1919 209 308 085 048 005 541

1960 1,441,120 6847 2227 220 311 088 038 004 265

1961 2,142,523 6499 2558 222 341 079 030 004 267

1962 1,711,945 71 31 2011 234 295 087 031 004 207

1963 1,880,793 72 93 18.83 232 282 083 029 004 1 94

,

1964 2,118,326 72 81 1942 243 265 093 029 003 1 44 j

1965 2,671,012 6990 2253 263 233 081 026 005 1 49

1966 3,313,899 6938 2284 2.56 268 086 040 005 1 23

1967 4,646,553 6440 2841 235 246 087 043 002 1 06

1968 5,407,923 61 98 2974 263 264 089 078 001 1 33

1969 5,134,856 6316 2761 284 347 1 22 051 000 1 19

1970 4,834,887 71 28 1903 316 368 163 051 002 069

i

1971 6,172,668 71 34 1842 352 372 1 91 043 003 063

! 1972 6,518,132 7047 1822 371 413 221 059 003 064 i

1973 5,899,678 7492 1375 4.09 368 219 071 004 062 1 1974 4,950,842 7847 1028 440 348 1 82 086 005 064

1975 6,376,094 8099 897 397 326 1 54 085 013 029

1976 7,129,132 8005 935 387 393 1 42 078 044 016

1977 7,124,640 79.71 956 396 372 1 49 066 064 026

1978 9,630,065 7953 10.65 356 384 1 49 060 016 017

1979 10,960,424 79.88 1085 330 327 1 64 055 028 023

1980 15,587,986 7994 1078 384 280 1 54 057 032 021

1981 15,969,186 8068 932 460 287 1 55 051 037 0.10

1982 22,491,935 81 22 696 509 362 218 048 038 007

1983 30,316,014 8037 745 5.48 356 220 065 019 010

1984 30,548,014 82.54 526 603 331 1 79 085 018 004

1985 37,187,567 81.52 578 612 366 1 47 1 27 015 003

1986 48,580,524 8112 628 5.73 368 1 53 1 33 030 002

1987 64,082,996 8309 557 5.19 323 1 30 1 28 030 004

1988 52,665,654 8374 495 5.26 303 1 29 1 32 039 002

1989 54,416,790 81 33 602 544 334 1 80 1 64 041 0.02

1990 53,746,087 81 86 623 468 316 1 82 1 71 053 001

1991 58,290,641 8201 552 4.66 3.59 1 60 1 77 086 001

1992 65,705,037 8134 5.74 462 319 172 157 1 83 001

1993 83,056,237 8290 553 457 281 1 55 147 117 000

1994 90,786,603 8455 496 388 2.37 1.42 139 1 42 001

1995 107,069,656 84.49 478 367 256 1.39 145 1 66 000

1996 125,922,577 85.95 429 337 2.40 1.28 129 1 42 000

11 Share volume for exchanges mcludes stocks, nghts and warrants, calendar, rather than fiscal. year data IS reported

10 thiS table

21 Includes all exchanges not "sled indiVidually

Source SEC Form R-31

203
Table 21

DOLLAR VOLUME BY EXCHANGES 11

(In Percentage)

Total Dollar

Volume

Year (In Thousands) NYSE AMEX CHIC PSE PHLX BSE CSE Others 2/

1945 $ 16,284,552 8275 081 200 178 096 116 006 048

1950 21,808,284 8591 685 235 219 103 112 011 044

1955 38,039,107 8631 698 2.44 190 103 078 009 047

1960 45,309,825 8380 935 272 194 103 060 007 049

1961 64,071,623 8243 1071 275 199 103 049 007 053

1962 54,855,293 8632 681 275 200 105 046 007 054

1963 64,437,900 8519 751 272 239 106 041 006 066

1964 72,461,584 8349 845 315 248 114 042 006 081

1965 89,549,093 8178 991 344 243 112 042 008 082

1966 123,697,737 7977 1184 314 284 110 056 007 068

1967 162,189,211 7729 1448 308 279 113 066 003 054

1968 197,116,367 7355 1799 312 2.65 113 104 001 051

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 7907 998 400 379 229 058 005 024

1972 205,956,263 7777 1037 429 394 256 075 005 027

1973 178,863,622 8207 606 454 355 245 100 006 027

1974 118,828,270 8363 440 490 350 203 124 0.06 024

1975 157,256,676 8520 367 464 326 173 119 017 014

1976 195,224,812 8435 388 476 383 169 094 053 002

1977 187,393,084 8396 460 479 353 162 074 075 001

1978 251,618,179 8367 613 416 364 162 061 017 000

1979 300,475,510 8372 694 383 278 180 056 035 002

1980 476,500,688 8353 733 4.33 227 161 052 040 001

1981 491,017,139 8474 541 504 232 160 049 040 000

1982 603,094,266 8532 327 583 305 159 051 043 000

1983 958,304,168 8513 332 628 286 155 066 016 0.04

1984 951,318,448 8561 226 657 293 158 085 019 000

1985 1,200,127,848 8525 223 659 306 1.49 120 018 000

1986 1,707,117,112 8502 256 600 300 157 144 041 000

1987 2,286,902,788 8679 232 532 253 135 1.33 035 000

1988 1,587,950,769 8681 196 546 262 133 134 0.49 000

1989 1,847,766,971 8549 235 546 284 177 1.56 054 000

1990 1,616,798,075 8615 233 458 277 179 163 074 000

1991 1,778,154,074 8620 231 4.34 305 154 172 083 001

1992 2,032,684,135 8647 207 428 287 170 152 109 000

1993 2,610,504,390 8721 208 4.10 2.38 1.52 1.35 137 000

1994 2,817,671,150 8808 201 349 209 1.34 131 168 000

1995 3,507,991,171 8771 210 326 224 1.27 143 199 000

1996 4,511,779,836 8891 1 91 301 203 119 1.32 163 000

1/ Dollar volume lor exchangesIncludes stocks, fights and warrants, calendar,ratherthan fiscal, year data ISreported In thiS

table

21 Includes all exchangesnot listed individually

204 Source' SECForm R-31
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Table 23

VALUE OF STOCKS LISTED ON EXCHANGES

($ in Billions)

New York American Exclusively

As 01 Stock Stock On Other

Dec 31 Exchange Exchange Exchanges Total

1938 $ 475 $ 10 8 $ $ 583

1940 465 101 566

1941 419 86 505

1942 358 74 432

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 670 119 30 819

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405

1953 117 3 153 28 1354

1954 1691 221 36 1948

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 441 7

1964 4743 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 612 60 7595

1969 6295 477 54 6826

1970 6364 395 48 6807

1971 7418 491 47 7956

1972 8715 556 56 9327

1973 7210 387 41 7638

1974 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 1,1438 894 50 1,2382

1982 1,3054 776 68 1,3897

1983 1,5222 801 66 1,6088

1984 1,5295 520 58 1,5873

1985 1,8827 632 59 1,9518

1986 2,1285 703 65 2,2053

1987 2,1322 670 59 2,2051

1988 2,3661 841 49 2,4551

1989 2,9035 1009 46 30090

1990 2,6921 699 39 2,7659

1991 3,5475 903 43 36421

1992 3,877 9 864 59 39702

1993 4,3149 981 72 4,4202

1994 4,2408 865 47 4,3320

1995 5,7555 1133 68 5,8756

1996 6,9477 1062 57 70596

206 Source SEC Form 1392
Table 24

APPROPRIATED FUNDS vs FEES* COLLECTED

1000

950

900

850

800

750

700

650

600

550

500

450

400

350

$ Millions

990

300

250

200

150

100

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o

FY1976 78 80 82 84 86 88 90 92 94 96

77 79 81 83 85 87 89 91 93 95 97

* Excludes disgorgements from fraud actions.

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