For sale by the Supermtendent of Documents. US Government Prmtmg Office

Washington, 0 C 20402
Table of Contents

Chairman's Letter of Transmittal vii

Enforcement Program 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Key 1989 Results 1

International Affairs 3

Program Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Penny Stock Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Corporate Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Securities Offerings 11

Regulated Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Sources for Further Inquiry. . . . . . . . . . . . . . . . . . . . . . . . . 15

Full Disclosure System 16

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Key 1989 Results ,........................ 16

Review of Filings ........• '. , .. '-'" . . . 17

Rulemaking, Interpretive, and Legislative Matters ". . . . 19

Scope of Registration Requirements .>, . . . 19

Multijurisdictional Disclosure System .. ,:-. '. .. 20

Resales to Institutional Investors . . . . . . . . . . . . . . . . . . . . 20

Change in Holding Period for Restricted Securities. . . . . . .. 21

Ownership Reports and Trading by Officers, Directors,

and Principal Security Holders 21

Management's Discussion and Analysis 21

Form S-8 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22

Change in Fiscal Year/Quarterly Reporting. . . . . . . . . . . . . .. 22

Beneficial Ownership Reporting. . . . . . . . . . . . . . . . . . . . .. 22

Disclosure of Significant Equity Participants '. . . . . . 23

Commodity Pool Disclosure .. . . . . . . . . . . . . . . . . . . . . .. 23

Regulation D Exemptions from Registration Requirements . . .. 23

Conferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24

SEC Government-Business Forum on Small Business

Capital Formation . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24

SEC/NASAA Conference Under Section 19(c) of the

Securities Act 24

Accounting and Auditing Matters 25

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 25

Key 1989 Results 25

" '

~
Accounting-Related Rules and Interpretations. . . . . . . . . . . .. 26

National Commission on Fraudulent Financial Reporting . . . .. 27

Changes in Registrants' Independent Accountants 27

Management Reports " 27

Timely Reviews by Auditors of Interim Information 27

Audit Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28

Enforcement Remedies . . . . . . . . . . . . . . . . . . . . . . . . .. 28

Oversight of Private Sector Standard-Setting . . . . . . . . . . . .. 28

FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28

Postemployment Benefits Other Than Pensions . . . . . . . .. 28

Income Taxes 29

Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . .. 29

Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 29

Timely Financial Reporting Guidance 29

AICPA 29

ASB 30

AcSEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 30

SECPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 30

International Accounting and Auditing Standards . . . . . . . . .. 31

Independence 31

The EDGAR Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 32

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 32

Key 1989 Results 32

Pilot System 32

Operational System. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 33

Rulemaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 34

Conclusion 34

Regulation of the Securities Markets . . . . . . . . . . . . . . . . . .. 35

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 35

Key 1989 Results 35

Securities Markets, Facilities, and Trading . . . . . . . . . . . . . . . 36

Market Reform Initiatives. . . . . . . . . . . . . . . . . . . . . . . .. 36

The National Market System .. . . . . . . . . . . . . . . . . . . .. 37

National System for Clearance and Settlement .. . . . . . . .. 39

Internationalization 40

Options and Other Derivative Products 42

Regulation of Brokers, Dealers, Municipal Securities

Dealers, and Transfer Agents . . . . . . . . . . . . . . . . . . . . . . 45

Penny Stock Task Force 45

Broker-Dealer Examination Program . . . . . . . . . . . . . . . . . 46

Municipal Securities Disclosures 47

Commission Dollar Practices . . . . . . . . . . . . . . . . . . . . . . 47

Exemption of Certain Securities by the Resolution

Funding Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Financial Responsibility Rules . . . . . . . . . . . . . . . 48

ii
Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . . .. 49

Oversight of Self-Regulatory Organizations . . . . . . . . . . . . .. 49

National Securities Exchanges . . . . . . . . . . . . . . . . . . . .. 49

National Association of Securities Dealers, Inc. . . . . . . . . .. 50

Clearing Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 51

Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . 51

SRO Sponsored Arbitration . . . . . . . . . . . . . . . . . . . . . .. 52

Inspections of SRO Surveillance and Regulatory

Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 52

Applications for Re-entry . . . . . . . . . . . . . . . . . . . . . . . .. 55

SRO Final Disciplinary Actions 56

Securities Investor Protection Corporation " 56

Investment Companies and Advisers 58

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 58

Key 1989 Results 59

Significant Legislative Developments . . . . . . . . . . . . . . . . .. 59

Disclosure Requirements 59

EDGAR Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 60

Regulatory Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 60

Significant Investment Company Act Developments . . . . . .. 60

Significant Public Utility Holding Company Developments .. 61

Significant Institutional Disclosure Program Developments . . 62

Significant Applications and Interpretations . . . . . . . . . . . . .. 62

Investment Company Matters . . . . . . . . . . . . . . . . . . . . .. 62

Insurance Products Matters . . . . . . . . . . . . . . . . . . . . . . . 64

Investment Advisers Act Matters . . . . . . . . . . . . . . . . . . .. 64

Holding Company Act Matters . . . . . . . . . . . . . . . . . . . . . 64

Other Litigation and Legal Activities . . . . . . . . . . . . . . . . . .. 67

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 67

Key 1989 Results 67

Litigation 68

Illegal Trading and Disgorgement . . . . . . . . . . . . . . . . . .. 68

Self-Regulatory Organizations 69

Definition of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Broker-Dealers and Market Professionals 71

Liability in Private Actions. . . . . . . . . . . . . . . . . . . . . . .. 72

International Application of the Securities Laws 73

Actions Under the Public Utility Holding Company Act

of 1935 (Holding Company Act) 73

Motions to Vacate Injunctions 74

Actions Involving Other Agencies. . . . . . . . . . . . . . . . . . . 74

Discovery Actions in Commission Enforcement Actions .... 75

Litigation Involving Requests for Access to Commission

Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Actions Against the Commission 76

iii
Actions Against Professionals Under Commission

Rule 2(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Actions Under the Right to Financial Privacy Act . . . . . . . . . 77

Significant Administrative Decisions 77

Broker-Dealers and Market Professionals . . . . . . . . . . . . . . 77

Significant Legislative Developments . . . . . . . . . . . . . . . . . . 78

Enforcement Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 78

International Enforcement . . . . . . . . . . . . . . . . . . . . . . . . 78

Internationalization 79

Market Reform Legislation , 79

Leveraged Buyouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Investment Adviser Self-Regulation . . . . . . . . . . . . . . . . . . 81

Shareholder Communications 81

Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 82

RICO Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Corporate Reorganizations . . . . . . . . . . . . . . . . .. 82

Committees 83

Estate Administration , 83

Disclosure Statements/Plans of Reorganization . . . . . . . . .. 85

Compliance with the Registration Requirements of the

Securities Act 86

Economic Research and Analysis 87

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 87

Key 1989 Results 87

Management and Program Support 89

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 89

Key 1989 Results 89

Policy Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 89

Consumer Affairs and Information Services . . . . . . . . . . . . .. 90

Public Reference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 91

Equal Employment Opportunity 91

Public Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 92

Administrative Support 93

Financial Management 93

Facilities Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Information Systems Management . . . . . . . . . . . . . . . . . . .. 94

Personnel Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Commission Operations 95

Commission and Principal Staff Officers . . . . . . . . . . . . . . . 96

Biographies of Commissioners 98

Richard C. Breeden 98

David S. Ruder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 99

Charles C. Cox 100

iv

"

"
Joseph A. Grundfest 100

Edward H. Fleischman 101

Mary Schapiro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 102

Philip R. Lochner, Jr. 102

Regional and Branch Offices and Administrators 104

Footnotes 107

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 120

Appendix Tables

1 Unconsolidated Financial Information for Broker-Dealers 121

2 Unconsolidated Annual Revenues and Expenses for

Broker-Dealers Doing a Public Business 122

3 Unconsolidated Balance Sheet for Broker-Dealers Doing a

Public Business 123

4 Securities Industry Dollar in 1988 125

5 Unconsolidated Revenues and Expenses for Carrying/

Clearing Broker-Dealers . . . . . . . . . . . . . . . . . . . . . . . .. 126

6 Unconsolidated Balance Sheet for Carrying/Clearing

Broker-Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 127

7 Consolidated Financial Information of Self-Regulatory

Organizations " 130

8 Self-Regulatory Organizations-Clearing Agencies, 1988

Revenues and Expenses . . . . . . . . . . . . . . . . . . . . . . . .. 131

9 Companies Registered Under the Investment Company Act

of 1940 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 133

10 Market Value of Equity/Options Sales of U.S. Securities

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 134

11 Volume of Equity/Options Sales on U.S. Securities

Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 135

12 Share Volume by Exchanges. . . . . . . . . . . . . . . . . . . . .. 137

13 Dollar Volume by Exchanges 138

14 Securities Listed On Exchanges " 139

15 Value of Stocks Listed on Exchanges . . . . . . . . . . . . . . .. 140

16 Certificate Immobilization Trends. . . . . . . . . . . . . . . . . .. 141

17 Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .. 142

18 Fiscal 1989 Enforcement Cases Listed by Program Area '" 146

19 Enforcment Cases Initiated by the Commission During

Fiscal 1989 in Various Program Areas 152

20 Investigations of Possible Violations of the Acts Administered

by the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . .. 153

21 Administrative Proceedings Instituted During Fiscal Year

Ending September 30, 1989 . . . . . . . . . . . . . . . . . . . . .. 153

22 Injunctive Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 153

v
23 Reorganization Proceedings Under Chapter 11

of the Bankruptcy Code in Which

Commission Entered Appearance 157

24 Appropriated Funds vs Fees Collected 161

25 Budget Estimates and Appropriations 162

vi
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC. 20549

THE CHAI RMAN

Hay 7, 1990

The Honorable Dan Quayle

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Thomas S. Foley

Speaker of the House

Washington, D.C. 20515

On behalf of the Securities and Exchange Commission, I have

the honor to transmit to you the fifty-fifth Annual Report of the

Securities and Exchange Commission covering the fiscal year October

1, 1988 to September 30, 1989. The annual report has been prepared

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

Securities Exchange Act of 1934, as amended; Section 23 of the

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

Investment Company Act of 1940; Section 216 of the Investment

Advisers Act of 1940; section 3 of the Act of June 29, 1949

amending the Bretton Woods Agreement Act; section 11 (b) of the

Inter-American Development Bank Act; and Section ll(b) of the ASlan

Development Bank Act.

Sincerely,

\C~~~(-

Richard C. Breeden

Chairman

vii

Enforcement Program

Introduction

An aggressive and comprehensive program to enforce the federal securities

laws is essential to investor protection and to investor confidence in the

integrity, fairness, and efficiency of the securities markets. The enforcement

program is designed to maintain a presence in all areas within the Commission's jurisdiction, to concentrate on particular problem areas, and to anticipate emerging problems.

Key 1989 Results

As a result of developments in the securities markets, the complexity of the

enforcement activities has increased. Over the past several years the number

of brokers, dealers, and investment advisers has grown, trading volume and

the volatility of the markets have increased, and new and more complex

trading vehicles and strategies are being offered.

Total Enforcement Actions Initiated

Total

Civil Injunctive Actions

Administrative Proceedings

Civil and Criminal Contempt Proceedings

Reports of Investigation

FY'85

269

143

122

3

1

FY'86

312

162

136

14

o

FY'87

303

144

146

13

o

FY'88

252

125

109

17

1

FY'89

310

140

155

15

o

In fiscal year 1989, the Commission obtained court orders requiring

defendants to return illicit profits amounting to approximately $421 million,

either as disgorgement or as restitution to defrauded investors or entities.

Disgorgement orders in insider trading cases amounted to approximately $32

million. Civil penalties under the Insider Trading Sanctions Act of 1984 (ITSA)

amounted to approximately $29 million.

The Commission granted access to its files to federal and state prosecutorial

authorities in 226 cases. An estimated 76 criminal indictments or informations and 72 convictions were obtained by criminal authorities during fiscal

year 1989 in Commission-related cases.

In response to the increasing globalization of the securities markets, the

Commission has thus far entered into a total of eight bilateral informationsharing agreements with various foreign authorities, including recent agreements entered into with France, Italy, and the Netherlands. In fiscal year 1989,

the staff made 101 formal requests to foreign authorities for assistance and

received 150 requests from foreign authorities.

Enforcement actions initiated by the Commission generally are preceded by

an examination pursuant to the Commission's inspection powers or an

1
investigation. The Commission is authorized to conduct investigations and

examinations of broker-dealers, municipal securities dealers, investment

advisers, investment companies, transfer agents, and self-regulatory organizations. Informal investigations are conducted on a voluntary basis, with the

Commission requesting persons with relevant information to cooperate by

providing documents and testifying before Commission staff. The federal

securities laws also empower the Commission to conduct formal investigations, providing the Commission with the authority to issue formal subpoenas

compelling the production of books and records and the appearance of

witnesses to testify. Both types of investigations are generally conducted on a

confidential, nonpublic basis.

The primary enforcement action utilized by the Commission is the injunctive action. The federal securities laws authorize the Commission to seek

temporary restraining orders and preliminary and permanent injunctions

against any person who is violating or about to violate any provision of the

federal securities laws. Conduct which violates an injunction is punishable by

civil or criminal contempt, and violators are subject to fines or imprisonment.

In addition to seeking orders prohibiting future violations, the Commission

often seeks other equitable relief in the form of an accounting and disgorgement of illegal profits, rescission or restitution. When seeking temporary

restraining orders, the Commission often requests an order freezing assets to

prevent concealment of assets or dissipation of the proceeds of illegal

conduct. The Commission is specifically authorized to seek civil penalties in

connection with insider trading violations.

Several types of administrative proceedings may be instituted by the

Commission. For example, Section 8(d) of the Securities Act of 1933

(Securities Act) enables the Commission to institute proceedings to suspend

the effectiveness of a registration statement that contains false and misleading

statements. Administrative proceedings pursuant to Section 15(cX4) of the

Securities Exchange Act of 1934 (Exchange Act) may be instituted against any

person who fails to comply and any person who is a cause of failure to comply

with the reporting, beneficial ownership, proxy, and tender offer provisions.

Respondents may be ordered to comply or effect compliance with the relevant

provisions. The Commission may also institute administrative proceedings

against regulated entities and associated persons. Sanctions include censures, limitations on activities, and the suspension or revocation of the

registration of such entities. Additionally, the Commission may impose

similar sanctions on persons associated with such entities and persons

affiliated with investment companies. Administrative proceedings may be

instituted against persons who appear and practice before the agency, such as

accountants and attorneys. Sanctions, including suspensions and bars, may

be imposed in these proceedings.

Under appropriate circumstances, matters are referred to other federal, state

or local authorities or to self-regulatory organizations such as the New York

Stock Exchange or the National Association of Securities Dealers. The staff

may render substantial assistance to criminal authorities, such as the Department of Justice, for the criminal prosecution of securities violations.

2
International Affairs

The increasing internationalization of the world's securities markets has

raised new issues that affect the enforcement of the federal securities laws. The

Commission has developed mutual lnforrnatlon-sharinq agreements on a

bilateral basis with various foreign authorities. These agreements allow the

Commission to obtain evidence located abroad while avoiding the conflicts

that may result from differences in legal systems. In addition, the staff

coordinates closely with the regulators with whom the Commission has

information-sharing agreements in order to develop ways to implement and

improve the agreements.

The Commission also cooperates on an informal basis with foreign regulators with whom it does not have explicit agreements by assisting them in

obtaining publicly available information on a voluntary basis, and, where

appropriate, granting them access to certain nonpublic investigative files.

Close consultation is maintained with the Departments of State and Justice

concerning the negotiation of Commission agreements and U.S. criminal

mutual legal assistance treaties to ensure that such treaties cover securities

offenses.

The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), which became effective November 19, 1988, amended the Exchange

Act to provide, among other things, that the Commission may use the full

range of its powers to assist foreign securities authorities. This provision

enabled the Commission to enter into recent information-sharing agreements

with France and the Netherlands. Other countries are following the U.S. lead

in this area by developing similar legislation that will allow the development

of additional agreements.

The staff has provided training and education in connection with programs

sponsored by the U.S. Department of Justice Securities and Commodities

Fraud Working Group, the North American Securities Administrators Association, the American Law Institute/American Bar Association, the International Bar Association, and other professional groups. In October 1988, the

Commission sponsored a conference on international market manipulation

that was attended by representatives from eleven countries.

The Commission has participated in the following international

organizations.

The International Organization of Securities Commissions (IOSCO). The

Commission currently chairs the Executive Committee and has been an active

participant in several of IOSCO's substantive technical committee meetings

and working groups.

The Organization for Economic Cooperation and Development (OECD). The

Commission staff has participated in discussions at the OECD regarding the

establishment of international standards governing foreign corrupt practices.

The Group of Negotiations on Services (GNS) to the General Agreements on

Tariff and Trade (GATT). The GATT involves representatives from 150 countries, including the United States. The Commission is an active participant in

3
the effort to establish a multilateral framework of principles and rules for trade

in services.

The Wilton Park Group. This organization is sponsored by the United

Kingdom Department of Trade and Industry. The staff participated in extensive discussions to facilitate methods for enhancing the exchange of information among securities regulators.

Program Areas

During 1989, the Commission maintained an aggressive enforcement

presence in each area within its jurisdiction. The Commission established new

programs and maintained existing programs to address particular problem

areas; these include the creation of the SEC Penny Stock Task Force in

October 1988 and the formation, as announced in December 1989, of a new

enforcement unit devoted primarily to detecting, investigating, and prosecuting securities fraud in the banking and thrift industries. Principal areas in

which enforcement actions were instituted in fiscal year 1989 include insider

trading and other violations related to contests for corporate control, securities offering violations, financial fraud, and violations by regulated entities.

(See Table 19 for a listing of enforcement actions instituted in fiscal year 1989.)

Unless otherwise noted, enforcement actions discussed below were settled

upon consent of defendants or respondents without admitting or denying the

factual allegations contained in the complaint or order for proceedings.

Penny Stock Cases

The Commission recently has focused increased attention on the problem

of fraud in the offer and sale of "penny stocks" (penny stocks are low priced

securities, usually offered below $5 per share when initially placed on the

market, and generally traded in the over-the-counter market). Penny stock

cases may involve various types of violative activities, such as market

manipulation and offering violations. Penny stocks have become the subject

of numerous manipulative schemes typically involving either newly formed

"blank check" companies (companies that conduct registered offerings

disclosing that the proposed use of proceeds is to seek generally unspecified

business opportunities) or existing companies with no assets or operations,

and small trading markets. These shell companies are then merged with

private companies purported by the promoters to have great growth potential,

and promoted and marketed to the investing public through the use of

extreme high pressure tactics. The securities may be manipulated to reach

highly inflated prices, at which point the promoters may dump shares they

own into the public market and move on.

These schemes have spread nationwide, and the Commission has initiated

active programs to deal with them. In October 1988, the Commission

established an in-house Penny Stock Task Force to: (1) increase coordination

and information-sharing with other federal, state and local regulators and

prosecutors; (2) step up enforcement activities, including criminal referrals

when appropriate; (3) target regulatory solutions; and (4) educate investors to

recognize and avoid penny stock fraud.

4
In fiscal year 1989, the Commission instituted an administrative proceeding

(In the Matter of the Stuart-James Co., Inc., et al.1

) against a broker-dealer

specializing in underwriting and trading speculative low priced over-thecounter securities, and against various associated persons of that brokerdealer. The allegations include excessive undisclosed markups on the first day

of trading in two new issues underwritten by the broker-dealer, use by the retail

sales force of false and misleading scripts predicting price increases in

speculative low priced securities, undisclosed policies permitting execution of

customer sell orders only if an offsetting buy from another customer could be

arranged, and tie-in sales agreements in some offices that conditioned

customer receipt of new stock issues on the customer's agreement to either

purchase more new issues in the aftermarket or to sell all or some of their new

issue on the first day of aftermarket trading. At the close of the fiscal year, the

proceeding was pending.

The Commission also filed an action, SEC v. Amold Kimmes, et al.,2 alleging

that Arnold Kimmes, Thomas Quinn, and Michael Wright, among others,

were engaged in an international scheme to defraud the public in the

registration, trading, and sale of two penny stocks, GSS Venture Capital

Corporation ("GSS") and Max, Inc. ("Max"). Both GSS and Max, it is alleged,

were sham corporations from their inception. The GSS scheme allegedly

included figurehead officers and directors, placement of stock in nominee

accounts, and stock price manipulations. The Commission's complaint

alleged that over 2,000 U.S. and foreign investors from at least 45 countries

lost in excess of $10 million through their investments in GSS securities. The

Commission also alleged that Max had its price artificially inflated through a

series of alleged manipulations-its price rose from $.15 per unit (which

consisted of one share of common stock and eight warrants) to over $4 per

share alone, and in Europe to as much as $6.50 per share. Kimmes, Wright,

and Quinn consented to the entry of preliminary injunctions against them;

permanent injunctions were entered against three other defendants. At

year-end, the case remained pending against certain defendants. In related

criminal proceedings, Arnold Kimmes and Michael Kimmes (also a defendant

in the Commission's action) pled guilty to criminal charges based on the

manipulation of penny stocks.

Other penny stock fraud cases include SEC v. Arthur Tuchinsky, et al.,3 in

which it is alleged that the defendants disseminated information about

mergers and acquisitions involving the issuer that had not in fact occurred. At

year-end this case was pending. In a case involving the manipulation of trading

in the securities of three blind pool issuers, defendants were enjoined and

ordered to disgorge $100,000. The registration of the broker-dealer involved

was revoked and its president was barred (SEC v. Brownstone-Smith Securities

Cotp., et al.4 and In the Matter of Brownstone-Smith Securities Cotp., et al.5

). In

SEC v. Habersheir Securities, Inc.,6 involving net capital violations by a penny

stock broker, the broker-dealer consented to entry of a permanent injunction

following issuance of a Temporary Restraining Order against it.

5
Insider Trading

Insider trading refers generally to the purchase or sale of securities in breach

of a fiduciary duty or a relationship of trust or confidence, while in possession

of material nonpublic information about an issuer or the trading market for an

issuer's securities. The federal securities laws prohibit such trading not only by

corporate officers and directors and other persons having a relationship of

trust or confidence with the issuer or its shareholders, but also by persons who

misappropriate material nonpublic information from the issuer or sources

other than the issuer. Tippees of such persons may also be subject to the

prohibition. Insider trading in the context of tender offers is also specifically

prohibited.

With respect to insider trading cases, the Commission generally seeks

permanent injunctions and other equitable relief, including disgorgement of

profits gained or losses avoided, and civil penalties under the Insider Trading

Sanctions Act of 1984 (ITSA),which authorizes the courts to impose penalties

up to three times the profits gained or losses avoided through insider trading.

The Commission generally institutes administrative proceedings and seeks

suspensions or bars from further association with the securities industry

against broker-dealers or investment advisers or persons associated with

entities engaged in insider trading violations.

The ITSFEA, effective in November 1988, supplemented the Commission's

ability to respond to insider trading violations. The ITSFEA, among other

things, (1) expands the scope of civil penalties to include liability of "controlling persons" who fail to take appropriate measures to prevent insider

trading by their employees; (2) gives the Commission discretionary authority

to award bounty payments to persons who provide information leading to the

recovery of civil penalties in insider trading cases; (3) requires brokers,

dealers, and investment advisers to establish, maintain, and enforce written

policies designed to prevent misuse of material nonpublic information; (4)

increases the maximum jail term and fine for those convicted of criminal

securities law violations; and (5) codifies a private right of action for contemporaneous traders.

Considerable staff resources are used in insider trading investigations and

subsequent litigation. This past fiscal year, the Commission brought 39

enforcement actions based primarily on insider trading violations and four

other actions that included insider trading allegations. Cases involving insider

trading are only one component of the Commission's comprehensive enforcement program. The magnitude and gravity of the cases recently brought by

the Commission and the criminal prosecutions initiated by the U.S. Attorney's

Office for the Southern District of New York, however, reflect the continuing

importance of this issue.

The Commission brought a number of cases involving insider trading in

connection with mergers, acquisitions, leveraged buyouts and other extraordinary corporate developments. For example, in SEC v. GLenn GoLenberg, et

aL.,7 the Commission alleged, among other things, that the principal of an

investment banking firm that was the investment adviser to the management

6
of Revco D.S., Inc., during leveraged buyout negotiations, disclosed material

nonpublic information regarding the buyout to three of the other defendants

who traded in Revco common stock and options. After the public announcement, this individual continued to disclose material nonpublic information

regarding the status, timing, and price of the transaction to other defendants

who continued to trade Revco stock and options. The defendants were

enjoined and ordered to disgorge a total of $794,780.44 and to pay a total of

$1,125,946.62 in ITSA penalties. The investment banker was barred (In the

Matter of Glenn Golenberg 8).

The Commission also brought an action, SEC v. William S. Banowsky,9

against a member of the board of directors of a corporation involved in a

potential merger. In this action, the Commission alleged that the defendant

had tipped information concerning the merger to his secretary and two

relatives. As a result of this tipping, 18 persons traded stocks and call options

for an aggregate profit of $442,837.54. The defendant consented to the entry

of an order enjoining and ordering him to disgorge an amount equal to the

profits of those who traded and to pay a civil penalty of $311,613.71.

Other cases involving insider trading while in possession of material

nonpublic information regarding extraordinary corporate developments

include SEC v. David Hellberg, et al.,10 in which the Commission's complaint

alleges that a person traded on information obtained from his son concerning

a proposed tender offer by the son's employer. The father allegedly realized a

profit of approximately $328,844 on an investment of $15,049.81. An

injunction was entered against the son, and at year-end the action was pending

against the father. In SEC v. Kerry A. Huston, et ai.,ll the Commission's

complaint alleges that a paralegal provided information obtained during the

course of her employment with a law firm concerning a proposed merger and

leveraged buyout contemplated by a client of the law firm to others who traded

on the information. This case was pending at the end of the year.

The Commission instituted actions against an editor of BusinessWeek

magazine, a- salesman for a company that printed the magazine, and others

who allegedly traded while in possession of pre-publication information about

the content of articles that were to appear in the magazine. In SEC v. Seymour

G. Rudermen.t? the Commission's complaint alleged that the defendant, the

magazine's editor of broadcast operations, purchased the securities of over 50

companies that he knew were to be the subject of favorable articles. Ruderman

consented to entry of an injunction and agreed to disgorge $20,734.89

representing his profits, and to pay an equal amount as a civil penalty.

In SEC v. Shayne A. Waiters, 13 the Commission's complaint alleged that the

salesman obtained copies of BusinessWeek from his employer's plant before

the magazine was available to the public generally. While in possession of

material nonpubllc information, Walters allegedly purchased securities of at

least thirteen companies that were favorably discussed in the magazine, and

communicated this information to his broker. Beginning in May 1987, Walters'

broker allegedly gave Walters large cash payments in exchange for nonpublic

editions of Business Week, purchased securities of more than 40 companies,

and communicated information to others who purchased securities of over 60

7
companies. Walters admitted to the Commission's allegations and consented

to the entry of an injunction and an order requiring him to disgorge

$31,033.11, representing his profits, and to pay an equal amount as a civil

penalty. In SEC v. William J. Dillon, et ai.,14 the Commission's complaint

charges five defendants, including a former registered representative and a

lawyer, with insider trading while in possession of information to be published

in the magazine. At the end of the fiscal year, this action was pending (SEC v.

Stephen Sui-Kuen Wang, et aI.15).

On August 2, 1989, a settlement was reached with Fred Lee, who the

Commission had previously alleged to have made more than $19 million

through trading in more than 20 securities based on material nonpublic

information, using overseas accounts in more that 30 different names. Lee was

enjoined and paid $25,150,000 to the court appointed receiver in the action.

In the first insider trading case tried to a jury, the Commission was successful

in obtaining an order requiring the defendant to pay a civil penalty. Previously,

civil penalties recovered by the Commission had been paid pursuant to

settlements of Commission injunctive actions. In SEC u. John Naylor Clark

111,16 a federal jury found the defendant, Clark, liable for insider trading, and

the court thereafter ordered him to pay a civil penalty of $75,000. At trial, the

jury found that Clark had misappropriated material nonpublic information

from his employer regarding the employer's plan to acquire another corporation and had violated Section 1O(b)of the Exchange Act and Rule 10b-5 by

purchasing stock of the target corporation while in possession of this

information. The defendant sold the stock after the public announcement of

the acquisition. In addition to the requirement that he pay a civil penalty, Clark

was also enjoined and ordered to disgorge $57,025.82, representing profits

realized by him, his wife and his broker, and to pay prejudgment interest.

Financial Disclosure

Actions involving false and misleading disclosures concerning the financial

condition of companies and the issuance of false financial statements are

often complex and require more resources than other types of cases, but their

effective prosecution is essential to preserving the integrity of the disclosure

system. In fiscal year 1989, the Commission brought 30 cases containing

significant allegations of financial disclosure violations against issuers, regulated entities or their employees (including four actions in which financial

disclosure violations were alleged in addition to other primary violations).

Many of these cases included alleged violations of the accounting provisions

of the Foreign Corrupt Practices Act. The Commission also brought 12 cases

alleging misconduct by accounting firms or their partners or employees.

The Commission filed an action against the founder and chairman of Crazy

Eddie, Inc. and six other officers, directors, and employees of Crazy Eddie.

The Commission's complaint alleges that the employees, at the chairman's

direction, falsified financial records to overstate the company's pretax income

by $2 million in 1986 and to show pretax earnings of $20.6 million instead of

a net loss in 1987. Four defendants also allegedly sold over $60 million of

Crazy Eddie stock while aware that the price of the stock did not reflect the

8
actual value of the company. Three defendants (not charged with insider

trading) consented to the entry of injunctions against them. At the close of the

year the case was pending against the remaining defendants (SEC v. Eddie

Antar, et aIY).

A number of cases involved the improper recognition of revenue or income.

InSEC v. Donald D. Sheelen, et al., 16 the Commission's complaint alleged that

the former chairman, chief executive officer and president of Regina Company, Inc., and the former chief financial officer of Regina, with the assistance

of other corporate employees, devised and implemented a scheme to inflate

the revenue and profits of Regina to meet predetermined sales and profit

targets and permit Regina to report steadily increasing sales and earnings.

Among other things, the alleged scheme involved a failure to record at least

$13 miIlion of product returns, the recording of more than $5 miIlion of

fictitious revenue from false invoices, and inflation of profits by falsely

lowering the costs of goods sold on Regina's books. The two defendants

consented to the entry of injunctions against them.

Injunctive and administrative proceedings were also instituted against

employees of Matrix Science Corporation who were allegedly engaged in

improper accounting practices, including holding quarterly financial records

open beyond the last calendar day of the quarter to record additional sales

revenue, preprinting invoices for orders that had not been shipped to permit

the improper recording of such orders as sales, and delaying the issuance of

credit memoranda for orders that had been returned. The company and seven

officers and employees consented to the entry of the Commission's order to

comply in the future with applicable provisions of the Exchange Act. In

addition, the Commission filed and settled a civil action resulting in injunctions against three former officers of the company (In the Matter of Matrix

Science Corp. et al.19 and SEC v. Ronald A. Hammond, et al.20).

InSEC v. Frederick S. Plotkin, et al.,21 the Commission alleged, among other

things, that Intex Software Systems International Ltd. failed to disclose the

unauthorized use of over $1 million in corporate funds and certain compensation paid to underwriters in connection with an initial public offering,

inflated revenue and accounts receivable in its financial statements, and failed

to disclose uncertainties surrounding the validity of contracts and orders for

Intex products. In SEC v. Information Solutions, et al.,22 the Commission

alleged that the issuer overstated its revenue for fiscal years 1985 and 1986 by

prematurely recording a total of 20 transactions as sales even though the sales

had not been completed. InSEC v. David N. Hanania, et aI.,23 the Commission

alleged that the defendants failed to disclose properly or account for a material

contingent liability. In SEC v. Wilderness Electronics, lnc., et al.,24 the Commission alleged that the issuer failed to disclose the cancellation of a major

government contract for radarscopes and demands for reimbursement that

had been made under other contracts. Injunctions were entered against all

defendants named in these actions.

The Commission alleged that certain corporate officers engaged in conduct

that materially overstated a reporting company's 1985 net income and

inventories by inflating quantity and cost figures on inventory count sheets

9
and by arranging for a supplier to send a false confirmation to the auditors.

The company, its officers, its supplier, and the supplier's president all

consented to the entry of permanent injunctions (SEC u. Rocky Mount

Undergarment Co., lnc., et ae5

).

In SEC u. Timothy L. Sasak, et al.,26 the Commission filed and the

defendants consented to an injunctive action that alleged inadequate disclosure of related party transactions. Additionally, the company's auditor was

suspended from practice before the Commission pursuant to an administrative proceeding brought pursuant to Rule 2(e) in which the Commission

alleged that he failed to conduct his 1985 audit of the company in accordance

with generally accepted auditing standards (In the Matter of Richard P. Franke,

CPA27).

A number of accountants were suspended from practicing before the

Commission in Rule 2(e) proceedings based on allegations of significant audit

failures (In the Matter of Lynne K. Mercer, CPA;28 In the Matter of Jack M.

Portney, CPA; 29 and In the Matter of Edmon A. Morrison, IIpo). Accountants

enjoined for aiding and abetting violations of the registration and antifraud

provisions in connection with securities offerings by their preparation and

audit of financial statements were also the subject of suspension orders (In the

Matter of John L. VanHom;31 In the Matter of Larry A. Dixon;32 and In the Matter

of Noemi L. Rodriguez Santos33).

An accountant caught in an FBI sting operation and who pled guilty to a

criminal charge in connection with certifying that he had performed an audit

when he had not done so consented to a permanent suspension from

practicing as an accountant before the Commission (In the Matter of Marvin D.

Haney, CPA34). Additionally, a chief financial officer was suspended from

practice before the Commission after consenting to administrative proceedings brought pursuant to Rule 2(e), subsequent to his consent to an injunction

from future violations of the federal securities laws(In the Matter of Sheldon M.

BLazar35).

Corporate Control

Sections 13 and 14 of the Exchange Act require, among other things,

disclosures in connection with the acquisition of more than five percent of a

class of equity securities registered with the Commission, proxy solicitations

and tender offers for more than five percent of a class of equity securities

registered with the Commission. These requirements are intended to ensure

that investors have material information needed to make informed investment

or voting decisions concerning potential changes in the control of a corporation. The Commission instituted a number of actions in fiscal year 1989

relating to required disclosures under these provisions.

The Commission filed an action against Paul A. Bilzerian and others

alleging, among other things, failure to disclose the acquisition of significant

beneficial interests in corporations. Settlements reached with three of the four

defendants resulted in disgorgement totalling over $3 million. At the end of

the year,the caseagainst Bilzerian remained pending (SEC v. Paul A. BiLzerian,

10
et al.36). In a related criminal action, Mr.Bilzerian was sentenced to four years

in prison and fined $1.5 million.

The Commission brought cases that involved alleged false statements

concerning the investment purposes of persons who made filings under

Section 13. The Commission's complaint against a registered broker-dealer

and three of its partners alleged that the defendants filed false, misleading

and untimely statements concerning the purpose of their investment in

Graphic Scanning Corporation, in particular with respect to their plan for a

proxy contest to take control of Graphic. In addition to injunctive relief, the

Commission's complaint seeks disgorgement of illegal discounts allegedly

received as a result of purchasing Graphic stock after the proxy contest was

planned but before the plan was disclosed to the public. At the close of the

fiscal year, this action was pending (SEC v. Amster & CO.37). In related

administrative proceedings, In the Matter of William R. Grant,38 a partner of

Amster & Co.was ordered to comply with Section 13(d)of the Exchange Act.

A similar compliance order was entered against Merry Land & Investment

Company, Inc., in a proceeding based on allegations that it had failed

accurately to disclose its intent to control or influence the management of

Bankers First Corporation (In the Matter of Merry Land & Investment Co.,

Inc.39

).

The Commission also brought actions against persons who made false and

misleading statements regarding proposed transactions that they were financially or otherwise incapable of completing. These include SEC v. Rana

Research, Inc., et al.,40 a pending case involvlnq a leveraged buyout of

Superior Industries International, Inc., and SEC v. Frederick J. Ball, Jr.,41

involving an acquisition offer for Fieldcrest Cannon, Inc. and Kellwood

Company. In this case the defendant consented to the entry of an injunction.

Securities Offering Cases

Securities offering cases represent a significant portion of the Commission's

enforcement activities. These cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act and may also

involve material misrepresentations concerning risks involved, return on

investment, and the uses of proceeds of the offering. A number of securities

offering cases are filed on an emergency basis. In addition to seeking

injunctive relief, the Commission may also seek asset freezes, accountings,

disgorgement of profits, and the appointment of receivers.

The Commission filed an action against Louisiana Real Estate Equity, Ltd.

and other corporate and individual defendants alleging that the defendants, in

the offer and sale of investment contracts totalling approximately $65 million

and involving condominiums in several states, misrepresented or omitted

material facts concerning, among other matters, the financial condition of the

issuer, use of monies, costs of the condominiums, their occupancy rates,

profits, and commissions. Injunctions were entered against all defendants

(SEC v. Louisiana Real Estate Equity, Ltd., et al.42).

In SEC v. Arthur Miller,43 the Commission instituted both injunctive and

administrative proceedings against a person who, as an associated person of

11
an investment adviser and a registered representative of a broker-dealer. was

alleged to have sold unregistered securities in the form of interests in a

mortgage account. This person. who raised $4.3 million through material

misrepresentations and omissions concerning the nature of the investment,

the use of investor funds. the returns investors would receive. and the risks

associated with the investment. was enjoined and barred from the securities

industry.

The Commission's complaint in SEC v. William A. Bartlett, et al.44 alleged

that the defendants. between 1981 and 1985. raised more than $8 million

from more than 200 investors residing in 23 states through the offer and sale

of unregistered securities in the form of investment contracts in a dairy cattle

leasing program. Among other things. the investors were allegedly told that

their investment was safe. with a guaranteed net return of 15.3% per year,

when in fact the program was not safe and had experienced substantial losses

and severe operational difficulties that were not disclosed to investors. The

defendants consented to injunctions.

The Commission also brought actions against securities professionals for

their involvement in offering violations. For example. an action was filed

against a registered investment adviser who made material misrepresentations and/or omissions in the offer and sale of securities in two funds sold to

approximately 50 investors (SEC v. Frank R. Breitweiser45). The defendant

allegedly failed to disclose. among other things, that he borrowed $111.000

from one of the funds to purchase property for use as a business residence.

and that the interest rate on the mortgage to be paid to the fund was below

market. The defendant was enjoined and ordered to disgorge $151.369.30.

Regulated Entities

A major segment of the Commission's enforcement program involves

broker-dealers and investment advisers. Other regulated entities. such as

investment companies. transfer agents and securities exchanges. may also be

the subject of Commission proceedings. Allegations in broker-dealer cases

typically include violations of the financial responsibility and the brokerdealer books and records provisions. or involve fraudulent sales practices.

Recent enforcement actions filed against investment advisers include allegations of commingling or appropriation of client assets. misleading performance advertising claims, and non-disclosure of material information to clients.

In April 1989. following extensive negotiations. the Commission entered

into a settlement as to defendant Drexel Burnham in SEC v. Drexel Burnham

Lambert Incorporated, et al .•46 an injunctive action that alleged that Drexel

Burnham. Michael R. Milken. and other named defendants devised and carried

out a fraudulent scheme involving insider trading. stock manipulation. fraud

on Drexel's own clients. failure to make required disclosures of beneficial

ownership of securities. and violations of the books and records and margin

rules. as well as other violations. Included in the alleged scheme were

transactions based on a secret arrangement with former stock trader Ivan F.

Boesky. Drexel Burnham consented to. among other things. a permanent

injunction with respect to the alleged violations. including the antifraud

12
provisions; payment of $350 million into a fund for the benefit of persons

injured in the transactions; $300 million in civil and criminal penalties; and

compliance with sweeping remedial undertakings. Drexel Burnham also

consented to entry of a Commission order placing the firm on administrative

probation for three years (In the Matter of Drexel Burnham Lambert

Incorporated47). At the close of the fiscal year, the case against Michael R.

Milken and five other defendants remained pending. The related criminal

investigation conducted by the U.S. Attorney for the Southern District of New

York resulted in, among other things, Drexel Burnham's agreement to plead

guilty to six felony counts.

Injunctions were entered against a registered broker-dealer and investment

adviser, along with its principals, in an action involving the alleged embezzlement of approximately $2 million from customers. The funds were allegedly used to pay operating costs and to finance unrelated personal

investments of the principals of the firm. In addition to entry of the injunctions, the firm's broker-dealer and investment adviser registrations were

revoked, and the principals were barred (SEC v. Waddell Jenmar Securities,

Inc., et ai.48 and In the Matter of Waddell Jenmar Securities, Inc., et ai.49). Bar

orders were also entered in other cases involving misappropriation and

dissipation of hundreds of thousands of dollars of investor funds (In the Matter

of Gary M. Wozniak 50 and In the Matter of William S. Hoglund51).

Bars were entered against two brokers who allegedly engaged in excessive

and unsuitable trading in the accounts of their customers, which included

several small municipalities and local government agencies. The president

and sales supervisor of one of the broker-dealers employing them were

suspended (In the Matter of William E. Parodi, Sr., et ai.52). The registration of

a broker-dealer was revoked and three principals were barred following a

conviction based on a 47-count indictment for failure to file currency

transaction reports upon receipt of cash totalling approximately $2.3 million

(In the Matter of American Investors of Pittsburgh, et aI.53).

The Commission alleged that a registered broker-dealer specializing in

municipal securities engaged in over $1.3 million in invalid closings in

municipal bond underwritings as part of an effort to avoid the effects of

scheduled changes in the tax laws.The broker-dealer and two of its principals

were enjoined; the registration of the broker-dealer was revoked and bar

orders were entered against the two principals. At the close of the fiscal year,

the proceeding was pending against two remaining defendants (SEC v.

Matthews & Wright Group, Inc., et ai.54 and In the Matter of Matthews, Inc.55).

The Commission instituted proceedings involving the trading of approximately $12.5 million in unmarked short-sale transactions during the market

break of October 19, 1987. The broker-dealer was censured and ordered to

comply with certain remedial undertakings (In the Matter of Salomon Brothers,

Inc.56).

The Commission censured a broker-dealer based on alleged violations of,

among other things, the requirements for maintaining possession and control

of securities pledged as collateral for "hold in custody" repurchase transactions. The broker-dealer was ordered to comply with undertakings to maintain

13
additional reserves for such transactions for a two-year period (In the Matter of

Prudeniiel-Beche Securities, Inc.57).

Among the enforcement actions instituted against investment advisers in

1989 was an injunction obtained against an investment adviser alleged to

have commingled and diverted approximately $3.5 miIlion in customer funds

obtained through the fraudulent sale of securities. The adviser's registration

was revoked, and its principals were enjoined and barred (SEC v. Thomas E.

Bemhoft, et al.58 and In the Matter of Forbes Portfolio Management, et aI.59). A

bar order was entered against an investment adviser for failure to maintain any

books and records (In the Matter of Roberto C. Pol06o).

Two investment advisers alleged to have made misleading performance

claims in advertisements were the subject of administrative proceedings.

Each was censured, subjected to limitations on new business, and ordered to

comply with certain remedial undertakings (In the Matter of Managed Advisory

Seroices, lnc., et aI.,61and In the Matter of Haroest Finsncisl Group, lnc., et aI.62).

An investment adviser and its president were enjoined based on allegations

that they received "kickbacks" of brokerage commissions paid by clients in

exchange for securities transaction business directed through those brokerage

firms. The firm was enjoined and its registration with the Commission

revoked; the president was both enjoined and barred (SEC v. Dave Mason, et

al.63 and In the Matter of Dave Mason, R.I.A., lnc., et aI.64). In a related

proceeding, the independent auditor for the investment adviser was suspended from practice before the Commission based on, among other things,

his alleged lack of independence from the firm (In the Matter of Frederick D.

Woodside, CPA 65).

In proceedings instituted against an investment adviser to three affiliated

investment companies, the Commission alleged that the adviser did not fully

disclose its receipt of 50 percent of the commissions paid by the client to a

broker-dealer with whom the adviser's officers were registered representatives

(In the Matter of Heine Securities Corp.66). The Commission also instituted

proceedings against advisers to other investment companies alleging that

they had engaged in a variety of internal controls and compliance violations

(In the Matter of United Seniices Advisors, et aI.67 and In the Matter of Sea

Investment Management, lnc., et aI.68). In each of these proceedings, the

investment adviser was censured and ordered to comply with certain remedial

undertakings.

Defendants were enjoined in a Commission action against John Peter

Galanis and others. The Commission alleged that Galanis, who had been

enjoined in two previous Commission actions and was barred from association

with investment companies, had, through others, acquired control of a

registered investment adviser to three investment companies. Following the

acquisition, the adviser executed certain investments in worthless securities

that caused losses to the funds totalling $6 million (SEC v. John Peter Galanis,

et aI.69).

The Commission instituted administrative proceedings against the Chicago

Board Options Exchange (CBOE), a registered national securities exchange,

for failure to enforce compliance with its trading rules. The proceeding alleged

14
that the decision of the CBOE's Business Conduct Committee not to initiate

charges against various members and persons associated with members for

trading certain multiple-listed over-the-counter options and the S&P 250

Index primarily for the purpose of "creating an appearance of activity" and

through pre-arrangement was without reasonable justification or excuse. The

CBOE was censured and ordered to comply in all material respects with the

Exchange Act provision requiring that each self-regulatory organization,

including an exchange, enforce compliance, absent reasonable justification or

excuse, with its rules. The CBOE was also ordered to comply with its

undertakings to strengthen its market surveillance activities and disciplinary

process (In the Matter of Chicago Board Options Exchange 70).

Sources for Further Inquiry

The Commission publishes in the SEC Docket litigation releases that

describe its civil injunctive actions and criminal proceedings involving

securities-related violations. Among other things, these releases report the

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

disposition or status of the case. Commission orders that institute administrative proceedings or provide remedial relief also are published in the SEC

Docket.

15
Full Disclosure System 


Introduction 

The full disclosure system is administered by the Division of Corporation 

Finance (Division). 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 1989 Results 

A number of economic and legal developments affected the full disclosure 

system during fiscal year 1989. The decline inthe number of registered public 

offerings filed with the Commission, beginning in the months immediately 

following the October 1987 market break, continued throughout 1989. A total 

of 3,139 registration statements were filed in fiscal year 1989 (exclusive of 

post-effective amendments and filings that become effective without staff 

action), representing a 10 percent decrease from fiscal year 1988. The number 

of initial public offerings (IPOs) also decreased 18 percent infiscal year 1989, 

including a 25 percent decline inregistration statements filed on Form S-18 

(869 in 1988 versus 648 in 1989). 

Form S-18 registration statements, including home office filings, were 

reassigned to the regional offices most closely associated with the business or 

proposed business of the issuer. This reassignment was done to permit better 

oversight of blank check and other promotional offerings in order to identify 

common, potentially abusive practices and to minimize the risk that certain 

persons/involved with such offerings would avoid recognition of the extent of 

their activities. About 50 percent of the regional Form S-18 filings were blank 

check offerings, compared to 56 percent of the filings in the prior year. Total 

regional blank check offerings between fiscal years 1988 and 1989 declined 

27 percent (384 versus 280). Regional offices also continued to receive and 

review substantial numbers of post-effective amendments containing new 

financial statements and descriptions of properties and businesses acquired 

with the proceeds of such blank check offerings. 

The Division staff continued its special review of registrants' disclosures in 

the Management's Discussion and Analysis of Financial Condition and 

Results of Operations (MDGA). The first two phases of this special review were 

completed during 1989. The Division also undertook a study of leveraged 

buyouts, including management buyouts, and reverse leverage buyouts, in 

which public companies are taken private and subsequently taken public 

again. 

The implications of the increasing internationalization of the securities 

markets continued to be a major focus of the program. Securities markets are 

changing worldwide as an increasing number of issuers offer both debt and 

16 
equity across national boundaries and in offerings inseveral markets at one 

time. As a result, the lines of demarcation between domesticand international 

capital markets are beginning to blur, and'domestic markets face serious ! 

competition from a largely unregulated, intern'ational financial market. Inter. 

nationalization of the markets raises numerous issues under United States 

securities laws for domestic issuers raising capital offshore and for foreign 

issuers selling to United States investors, at home or abroad. The Commission 

took action to address the internationalization of the securities markets, 

including reproposing Regulation S to govern the transnational scope of the 

registration requirements of the Securities Act. The Commission also pro. 

posed and reproposed Rule 144A, a safe harbor from the registration 

requirements for resales of securities to institutions, which may afford foreign 

issuers greater access to United States capital markets. The Commission also 

proposed rules and forms to permit development of a coordinated registration 

process for multijurisdictional securities offerings and tender offers with 

Canada. 

Inother rulemaking activity, the Commission (1)proposed and reproposed 

rules comprehensively revising the regulatory scheme governing ownership 

reporting and trading by officers, directors, and principal security holders, (2) 

proposed and reproposed rules providing a change in holding period for 

restricted securities, (3) proposed changes to the manner of registering 

employee benefit plan securities, and (4)adopted rules addressin changes in 

fiscal year end and related reporting requirements. In the area 1f beneficial 

ownership and change incontrol transactions, the Commission published two 

proposals-one would modify the reporting requirements applicable to 

greater than five percent beneficial owners of securities by permitting passive 

investors to file short-form Schedule 13G rather than Schedule 13D, and the 

other would require Increased disclosure concerning significant equity participants inchange incontrol transactions. Inorder to facilitate capital formation 

by small businesses, the Commission proposed and adopted amendments to 

Regulation D that revised the definition of accredited Investor and provided 

that an exemption would not be lost for certain deviations from regulatory 

conditions when there wasa good faith and reasonableattempt to comply with 

the requirements. In addition, the Commission issued two interpretive 

releases for the guidance of the public-one addresses MDGA and the other 

commodity pool disclosure. 

The staff is heavily involved in planning the transition from paper to 

electronic filing under the operational Electronic Data Gathering, Analysis 

and Retrieval (EDGAR)system. The conversion will begin during 1991 and will 

continue for a period of 36 to 48 months. During the next year, significant 

resources will be dedicated to EDGAR rulemaking, training, planning, and 

coordination. 

Review of Filings 

Accounting expertise is essential to the review process, and the level of 

issuer and transactional filing reviews is directly related to the number of 
accountants in the Division. During fiscal year 1989, the Division continued its

efforts to increase the percentage of accountants in the review process to at

least 50 percent. However, those efforts fell far short of the goal, as the

recruitment and retention of accountants has been extremely difficult due to

hiring limitations as well as the competition from public accounting firms,

private industry, and other government agencies.

The first two phases of a special review of registrants' MD&A disclosures

were completed during the year. The purpose of MD&A is to provide material

historical and prospective disclosure enabling investors and other users to

assess the registrant's financial condition and results of operations with

particular emphasis on the registrant's prospects for the future. A total of 359

registrants in 24 industries were reviewed and, as a result, 126 registrants filed

amendments to their reports. More than one-half of these amendments

substantially expanded the MD&A discussions. In addition, work began on a

third phase of this special review involving 180 registrants in 12 new industries

and will be completed in fiscal year 1990.

During fiscal year 1989, the staff reviewed 2,615 reporting issuers' financial

statements and related MD&A disclosures. Reporting issuers are registrants

who file reports under the Exchange Act. The reporting issuer reviews were

accomplished through the full review of 884 registration statements filed

under the Securities Act, 1,949 annual and subsequent periodic reports, and

291 merger and going-private proxies. In addition, the staff completed 388 full

financial reviews of annual reports. The staff reviewed 1,177 and 136 registration statements filed by new issuers under the Securities Act and the

Exchange Act, respectively, proxy material relating to 84 contested proxy

solicitations, 176 going-private schedules, and 191 Schedules 14D-1 with

respect to third-party tender offers for 175 issuers and a roll-up of three limited

partnerships. The table below sets forth the number of selected filings

reviewed during the last five fiscal years.

Full Disclosure Reviews

FY'85 FY'86 FY'87 FY'88 FY'89

Reporting Issuer

Reviews * (Data Not Available) 1,729 2,941 2,615

Total Filings

Reviewed 9,571 10,526 10,797 10,985 10,424

Major Filing Reviews

Securities Act

Registrations

New Issuers 1,171 1,775 1,949 1,444 1,177

Repeat Issuers 597 807 775 640 604

Post-Effective

Amendments * * 617 695 707 1,045 929

18
(Not Applicable)

Annual Reports

Full Reviews ** *

Full Financial

Reviews

Tender Offers

(140-1) ****

Going-Private

Schedules

Contested Proxy

Solicitations

Proxy Statements

Merger/GoingPrivate

Other *****

2,135

148

256

86

255

792

1,741

146

210

68

240

992

1,389

60

201

230

65

248

2,563

2,166

567

254

276

93

314

790

1,949

388

188

176

84

291

428

*

**

Reporting issuers reviewed includes those issuers filing Exchange Act

reports whose financial statements and MD&Adisclosures were reviewed in

Securities Act and Exchange Act registration statements, annual reports,

and merger and going-private proxy statements. It does not include issuers

whose financial statements were reviewed in tender offer filings.

In fiscal years 1987, 1988 and 1989, filings are included only if they contain

new financial statements.

* ** Includes reports reviewed in connection with other filings.

* ** * Excludes limited partnership roll-up transactions. In fiscal year 1989, there

was one roll-up transaction involving three limited partnerships.

* .. * * Excludes reviews of revised and additional preliminary proxy material.

Rulemaking, Interpretive, and Legislative Matters

Scope of Registration Requirements

In fiscal year 1988, the Commission published for comment proposed

Regulation S, a series of rules intended to clarify the extraterritorial application of the registration provisions of the Securities Act. In light of comments

received on the proposal, Regulation S was reproposed for comment during

fiscal year 1989.71 Proposed Regulation S consists of: (1) a general statement

that the registration provisions apply to offers and sales that occur within the

United States but do not apply to offers and sales that occur outside the United

States; and (2) safe harbor provisions designed to protect against an indirect

offering in the United States. One safe harbor (the issuer safe harbor) would

apply to offers and sales by issuers, securities professionals participating in

the distribution process, and their affiliates. The other safe harbor (the resale

safe harbor) would apply to resales by other persons. Two general conditions

would apply to the safe harbors. First, the sale must be made in an "offshore

transaction," and second, no directed selling effort could be made in the

United States.

The issuer safe harbor would establish several classes of securities based on

19
the nationality and reporting status of the issuer and the degree of United

States market interest in the issuer's securities. In addition to the general

requirements, a class would be subject to specific restrictions on sales,

depending on the degree of likelihood that the securities sold would "flow

back" to the United States. The resale safe harbor would permit non-dealers

not affiliated with either the issuer or professionals involved in the distribution

process to resell securities with no restrictions other than those imposed by

the general conditions. Specific restrictions would be applied to dealers'

resales of certain classes of securities.

Multijurisdictional Disclosure System

The Commission published for comment proposed rules. forms, and

schedules intended to facilitate cross-border offerings of securities by specified Canadian issuers.72 The rules, forms. and schedules would provide a

foundation for a multijurisdictional disclosure system that could be expanded

to encompass a wider class of issuers and be extended to additional jurisdictions. The Canadian securities regulators in Ontario and Quebec concurrently

published proposals that would facilitate offerings by United States issuers in

Canada.

The multijurisdictional disclosure system would permit Canadian issuers

that, depending on the nature of the offering, met tests of market value, public

float, and Canadian reporting history to register securities in the United States

using disclosure documents prepared according to the requirements of

Canadian regulatory authorities. Issuers meeting tests of market value and

public float also would be able to use such documents to meet United States

periodic disclosure requirements. Companies subject to United States proxy

requirements could use their Canadian documents for certain solicitations. In

addition, insiders of companies subject to Section 16 of the Exchange Act

could meet the reporting requirements of that section by filing Canadian

forms. The multijurisdictional system further would permit third-party and

issuer exchange and cash tender offers for Canadian securities to be made in

compliance with the provisions of applicable Canadian tender offer regulation

where less than 20 percent of the class of securities subject to the offer were

held of record by United States residents.

Resales to Institutional Investors

The Commission published for comment a proposed new Rule 144A that

would provide a non-exclusive safe harbor from the registration provisions of

the Securities Act for resales to Instltutlons.P In light of comments received

on the proposal, Rule 144A was reproposed for public cornrnent.?" As

reproposed, Rule 144A would permit unlimited resales of any securities other

than those of the same class as securities listed on a United States stock

exchange or quoted on the National Association of Securities Dealers'

automated quotations system, provided the purchaser was a specified institution with more than $ 100 million invested in securities. In the case of

securities of private issuers that did not report under the Exchange Act and

20
had not established the exemption from reporting provided by Rule 12g3-2(b)

under the Exchange Act, the seller, or a person acting on its behalf, would be

required to provide the buyer upon request with limited financial information.

Change in Holding Period for Restricted Securities

In the same releases as the proposal and reproposal for Rule 144A, the

Commission proposed amendments to the rules concerning the required

holding period for public resale of restricted securltles.P To sell securities

under current Rules 144 and 145, a person must have owned beneficially the

securities for at least two years, no matter how long a period has transpired

since the issuer or any affiliate thereof originally sold the securities. Requiring

the securities to be held for two years by each successive holder before

permitting public resales, without regard to the time elapsed from the actual

offering by the issuer or affiliate, appears unnecessarily restrictive. Accordingly, the amendments would redefine the two-year holding period to commence on the date the securities were acquired from an issuer or affiliate, and

to run continuously from the date of the acquisition. A comparable change

would be made in the calculation of the three-year period prescribed by Rule

144(k). As reproposed, the amendments to Rules 144 and 145 would not

permit such "tacking" of holding periods for securities of non-reporting

foreign private issuers.

Ownership Reports and Trading by Officers, Directors, and Principal

Security Holders

The Commission published for comment a proposal to revise the rules and

forms regarding the filing of ownership reports by corporate officers, directors,

and principal shareholders (Tnstders"), and the exemption of certain transactions by those persons from the short-swing profit recovery provisions of

Section 16 of the Exchange Act and related provisions of the Investment

Company Act and the Holding Company Act.76 The Commission proposed to

revise these rules to achieve greater clarity, enhance consistency with the

statutory purposes, rescind unnecessary requirements, streamline mandated

procedures, and enhance compliance with the reporting provisions of the

rules.

These proposals were revised and republished for cornrnent " The proposals, as revised, include: several definitions to provide greater clarity; a new

Form 5 for the annual reporting of transactions that are exempted from

short-swing profit recovery; a comprehensive approach to derivative securities

such as options and warrants changing the reporting date to the date of

acquisition, rather than the date derivative securities become exercisable, and

exempting most exercises and conversions of derivative securities from

short-swing profit recovery; and an amendment to the proxy rules to require

issuers to disclose late reporting by their insiders in the annual proxy

statement and annual report on Form 10-K.

Management's Discussion and Analysis

The Commission published an interpretive release that reports the results of

21
the first two phases of the MD&A review project. The release sets forth the

Commission's views regarding several disclosure matters that should be

considered by registrants in preparing MO&As.78 It provides guidance regarding: prospective information required in MO&A; long and short-term liquidity

and capital resources analysis; material changes in financial statement line

items; required interim period disclosure; MO&Aanalysis on a segment basis;

participation in high yield financing, highly leveraged transactions or noninvestment grade loans and investments; the effects of federal financial

assistance upon the operations of financial institutions; and preliminary

merger negotiations.

Form 8-8

The Commission issued a release proposing major revisions to the procedures for registering employee benefit plan securities on Form S_8.79

Primarily, the proposals are intended to reduce registrant costs by eliminating

the need to prepare and file separate documents for federal securities law

purposes that duplicate information otherwise provided to plan participants,

while assuring timely delivery of information necessary for participants to

make informed investment decisions. Under the proposed approach, the plan

information (excluding plan financial statements) and a statement of documents available upon request by plan participants would be required to be

delivered to participants but would not be included in the Form S-8 and would

not be filed with the Commission. Plan information would not have to be in the

form of a customary prospectus; rather, it could be provided in one or several

documents prepared by registrants in the ordinary course of employee

communications. The proposals also would simplify the process of registering

and reporting on plan interests that constitute separate securities.

Change in Fiscal Year/Quarterly Reporting

The Commission issued a release adopting amendments that revise the

reporting requirements applicable when issuers change their fiscal

year-end.P? The amendments update these requirements and integrate them

with other current periodic requirements, codify staff rule interpretations, and

clarify issuers' quarterly reporting obligations when they change their fiscal

year. The Commission also adopted related amendments to Form 8-K and the

accounting and proxy rules relating to financial reporting, as well as to the

quarterly reporting rules to modify the timing requirements for a new

registrant's first quarterly report.

Beneficial Ownership Reporting

The Commission published for comment amendments to Regulation 130/G

that would allow any person who acquires more than five percent of a class of

equity securities with a passive investment purpose to file a short-form

Schedule 13G rather than a Schedule 130.81 The Schedule 13G would be

filed within ten days of acquiring beneficial ownership of more than five

percent of a class of equity securities, except that institutional investors

22
currently permitted to use Schedule 13G would continue to file 45 days after

the calendar year's end. Another significant change in the beneficial ownership reporting system would be a limitation of the percentage of ownership

that could be reported on a Schedule 13G. The Commission proposed a 20

percent cap for all Schedule 13G filers. The proposed amendments also would

revise substantially the cooling-off period currently applicable only to institutional investors; filing persons would be restricted in purchasing or voting

the stock after the conditions for filing on Schedule 13G are no longer

satisfied.

Disclosure of Significant Equity Participants

The Commission issued a release proposing to amend the instructions to

Schedules 13D, 13E-3, 148, and 14D-1-the principal schedules filed in

connection with acquisitions of securities, going-private transactions, proxy

contests, and tender offers-to require disclosure concerning the significant

participants in those transactions.V The revised instructions would require

responses to specified items of the schedules relating to the identity, background, funding, and purposes of the filing person with respect to each person

who (1) contributes more than ten percent of the equity capital or (2) has the

right to receive, in the aggregate, more than ten percent of the profits or assets

upon liquidation or dissolution of the filing person. The revised instructions

would not apply if the filing person has a class of equity securities registered

under Section 12 of the Exchange Act.

Commodity Pool Disclosure

Simultaneously with the issuance of an interpretive statement and request

for comments by the Commodity Futures Trading Commission (CFTC), the

Commission issued an interpretive statement and request for comments

regarding disclosure by issuers of interests in publicly offered commodity

pools.83The statement sets forth the Commission's views regarding disclosure

of the performance history of commodity pool operators and commodity

trading advisers, as well as disclosure of fees,commissions and expenses,and

also reminds issuers of their disclosure obligations under the antifraud

provisions. The companion statements reflect a continuing effort on behalf of

the CFTC and the Commission to maintain consistent coordinated requirements for publicly offered commodity pools.

Regulation D Exemptions from Registration Requirements

The Commission adopted several amendments and additions to the rules

comprising Regulation D, which had been published for comment earlier in

the fiscal year.84Regulation D provides certain exemptions for the registration

requirements of the Securities Act. The amendments revised the definition of

accredited investor to include plans established and maintained by the

governments of the states and their political subdivisions, as well as their

agencies and instrumentalities, for the benefit of their employees if the plans

havetotal assets in excessof $5 million. Other amendments and the new rules

23
provide that an exemption from registration requirements will be available for

an offer or sale to a particular individual or entity, despite failure to comply

with a requirement of Regulation D, if the requirement is not designed to

protect specifically the complaining person; the failure to comply is insignificant to the offering as a whole; and there has been a good faith and

reasonable attempt to comply with the requirements of the regulation.

Conferences

SEC Government-Business Forum on Small Business Capital Formation

The eighth annual SEC Government-Business Forum on Small Business

Capital Formation was held in Washington, D.C. on September 21-22, 1989.

Approximately 200 small business executives, accountants, attorneys, government officials, and other small business representatives were in attendance. The format of the forum combined brief panel presentations by experts

followed by discussion groups comprised of the panel members and forum

attendees. The topics discussed included Seed Capital and Early Stage

Financing, Enactment of a Capital Gains Tax Differential for Investments in

Small Business, Recent Developments in the Securities Laws Affecting Small

Business, and the Use of Leveraged Buyouts by Small Business. A final report

setting forth a list of recommendations for legislative and regulatory changes

approved by the forum participants will be prepared and provided to interested

persons, including Congress and regulatory agencies.

A study by Karen V.Pincus of the University of Southern California entitled

Reporting Requirements under the Securities Exchange Act of 1934 as they

Affect Small Businesses: Defining the "Small Public Company" was distributed

at the forum pursuant to the Commission's obligation under Section 502 of

the Omnibus Small Business Capital Formation Act of 1980. This section

requires the Commission to gather, analyze, and make available to the public

information with respect to the problems and costs to small businesses of

meeting their capital formation needs. The study was undertaken by Professor

Pincus in response to a request made by the Division to the SEC and Financial

Reporting Institute in December 1986. The primary goal of the study was to

explore alternative possible definitions of "small public companies" for

purposes of establishing reporting thresholds or exceptions for small

businesses.

SEC/NASAA Conference under Section 19(c) of the Securities Act

On April 26, 1989, approximately 40 senior staff officials of the Commission met with approximately 40 representatives of the North American

Securities Administrators Association in Washington, D.C. to discuss methods of effecting greater uniformity in federal and state securities matters. After

the conference, a final report was prepared and distributed to interested

persons describing several resolutions of the participants, summarizing the

discussions and identifying the participants.

24
Accounting and Auditing Matters

Introduction

The Chief Accountant is responsible for all Commission accounting and

auditing matters arising from the administration of the various securities laws.

Specific responsibilities include; (1) establishing accounting policy to enhance

the reliability of financial reporting and to improve the work performed by

public company auditors; (2) assisting in the preparation of formal Commission opinions involving accounting and auditing matters; (3) overseeing

private sector activities related to accounting and auditing matters; (4)

supervising the procedures followed by Commission staff in conducting

auditing or accounting investigations; (5) recommending that administrative

proceedings be instituted to disqualify accountants from practicing before the

Commission; and (6) assisting in such administrative proceedings.

Key 1989 Results

Fiscal year 1989 was highlighted by a number of significant public and

private sector initiatives intended to enhance the reliability of financial

reporting and to ensure that the accounting profession meets its important

public responsibilities imposed under the federal securities laws. For example,

the Commission adopted rules to accelerate disclosures concerning changes

in independent accountants. In a related private sector effort, the Commission

worked with the SEC Practice Section (SECPS) of the American Institute of

Certified Public Accountants (AICPA) to establish a reporting mechanism

under which SECPS member firms are required to notify the Commission

whenever an SEC client relationship has ended. The staff uses these notification letters to ensure that prompt and accurate reporting is made of these

changes in accountants. The Commission also issued a concept release

seeking comment on the costs and benefits of requiring auditors to review

quarterly financial data before it is filed with the Commission. In another

private sector initiative, the AICPA requested its members to vote on whether

membership in the SECPS (and its related requirement to undergo peer

review) should be mandatory for all firms with AICPAmembers that audit SEC

registrants. This requirement was adopted subsequent to year-end.

The Commission has identified differences in disclosure requirements,

accounting principles, auditing standards, and auditor independence standards between countries as impediments to multijurisdictional securities

offerings. Accordingly, the staff participated in a number of initiatives by

international bodies to establish appropriate international accounting and

auditing standards that might be considered for use in multinational offerings.

The staff also undertook a broad review of the Commission's independence

requirements as they relate both to U.S. and to foreign auditors. These actions

reflect a comprehensive system of public and private sector initiatives25
Commission rulemaking and oversight activities, private sector standardsetting, peer reviewprograms, state licensing, and judicial and administrative

litigation-through which the integrity of financial reporting for public

companies is constantly being reviewed, modified, and improved.

The following are the primary Commission activities designed to achieve

compliance with the accounting and financial disclosure requirements of the

federal securities laws:

ruLemaking that supplements private sector accounting standards,

implements financial disclosure requirements, and establishes

independence criteria for accountants;

reoieui and comment process that results in improving disclosures in

filings, identifying emerging accounting issues (which may result in

rulemaking or private sector standard-setting), 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 private sector efforts, principally by the Financial

Accounting Standards Board (FASB)and the AICPA,which establish

accounting and auditing standards and improve the quality of audit

practice.

The Commission's review and comment process and enforcement actions

are discussed elsewhere in this report. The remainder of this section summarizes the Commission's accounting-related rulemaking initiatives and its

oversight of private sector activities. In addition, this section comments on

several initiatives addressing issues arising out of the continued internatlonalization of the securities markets.

Accounting-Related Rules and Interpretations

Regulation S-X sets forth requirements as to the form and content of

financial statements filed with the Commission. Also, the Commission has

adopted various rules that require disclosure of specific financial information

in addition to that provided in the financial statements. For example, certain

supplementary financial information, selected financial data, and management's discussion and analysis of a company's financial condition and results

of operations are required to be disclosed by Regulation S-K. In addition to

requiring financial disclosure by registrants, Commission rules also address

the qualifications of accountants, including their independence, and accountants' reports on financial statements.

To address significant accounting issues, the Commission may issue

interpretive releases and, when announcing rule changes, may provide

guidance for compliance with new or amended rules. In addition, the

Commission staff periodically issues Staff Accounting Bulletins (SABs) to

inform the financial community of the staffs views on accounting and

disclosure issues.

In fiscal year 1989, a number of SABs were issued to address various

26

•

•

•

•
accounting and financial disclosure issues. Particularly significant bulletins

dealt with the appropriateness of gain recognition on the sale of a business or

operating assets to a highly leveraged entity and with the appropriate financial

reporting of transfers of nonperforming assets by financial lnstitutlons.P?

Other SABs addressed topics such as: (a) financial statement requirements for

significant acquired businesses; (b) the calculation of earnings per share and

stock compensation expense in an initial public offering; (c) accounting for

sales of stock by a subsidiary; (d) various oil and gas accounting issues; and

(e) accounting issues related to quasi-reorqanlzatlons.P" Subsequent to yearend, a SAB was issued to provide guidance on the appropriate disclosures of

loss contingencies related to property and casualty insurance reserves.V The

staff also sent a letter to the United States Department of the Treasury setting

forth its views on the accounting and financial disclosure issues involved in certain

foreign loan restructurings involving debt and debt service reductton.P"

National Commission on Fraudulent Financial Reporting

The Commission continued to pursue various initiatives that were suggested in the report of the National Commission on Fraudulent Financial

Reporting.89

Changes in Registrants' Independent Accountants. The Commission previously adopted rules to enhance auditor independence by substantially

strengthening the requirements for disclosure related to a change in a

registrant's independent eccountants. 90 During fiscal year 1989, the Commission reduced the timing for these disclosures from a possible 45 calendar day

period to a 15 business day period.?' In a related action, with strong

encouragement from the Commission, the SECPS adopted a membership

requirement that firms must notify the Commission's Office of the Chief

Accountant whenever an audit engagement with a SEC client has ended. The

staff uses these notification letters to ensure that prompt and accurate

reporting is made of changes in accountants. This system has resulted in the

identification of a number of potential violations of registrants' reporting

obligations that are being pursued by the staff.

Management Reports. The Commission received over 190 comments on a

rule proposal that, if adopted, would require a company's report on Form

10-K and its annual report to shareholders to include a report from management. The proposed report would describe management's responsibilities for

preparing the financial statement and for establishing and maintaining a

system of internal control directly related to financial reporting. In addition,

the report would provide management's assessment of the effectiveness of

that internal control system.92 The staff has analyzed the comments and is

preparing its recommendation to the Commission.

Tunely Reviews by Auditors of Interim lniormetion. The Commission published a concept release to examine the costs and benefits of requiring

auditors to review quarterly financial data before it is filed with the Commission. The release also solicited comments on other initiatives related to

interim financial data, such as expanding the number of registrants subject to

27
Item 302(a) of Regulation S_K,93 which currently requires larger, more widely

traded companies to disclose certain quarterly data in their annual audited

financial staternents.?" Under Item 302(a), auditor review of these data may be

delayed until the year-end audit. The staff is analyzing the approximately 175

comments received.

Audit Committees. In December 1988, the Commission wrote to the

securities exchanges (other than the New York Stock Exchange which already

has a requirement for an independent audit committee) and the National

Association of Securities Dealers asking them to review their requirements

regarding audit committees. These letters have resulted in (1) a petition by the

American Stock Exchange to amend its rules to require listed companies to

have audit committees with a majority of independent directors,95 and (2) the

initiation of studies by other exchanges to examine their audit committee

requirements.

Enforcement Remedies. The Commission reproposed legislation for

enhanced enforcement tools, such as the imposition of civil monetary

penalties, that may be useful in deterring fraudulent financial reporting.96

Oversight of Private Sector Standard-Setting

Through active oversight, the Commission monitors the structure, activity,

and decisions of the private sector standard-setting organizations.

FASB. Financial statements filed with the Commission are presumed to be

misleading unless they are prepared in accordance with accounting principles

that have substantial authoritative support. In this regard, the Commission's

approach has been to look to the FASB to establish and improve accounting

principles, and the FASB's performance continues to be generally satisfactory.

Oversight of the process involves reviewing the standards established by the

FASB and participating directly in the development of standards. The staff

monitors the progress of FASB projects and developments closely, maintains

frequent contact with the FASB to discuss topical issues, and participates in

meetings, public hearings, and task forces.

The staff continued working closely with the FASB and the Financial

Accounting Foundation (FAF)to explore ways to improve the standard-setting

process. In this connection, the FASB has taken a number of initiatives to

enhance its outreach programs, including task forces and field testing, and

has exhibited continued willingness to respond to legitimate requests for

fine-tuning new standards as a result of problems identified during the

implementation phase. The FAF has formed an oversight committee to

monitor operations of the FASB and to suggest improvements on an ongoing

basis. The FAF also is considering other possible changes to improve the

standard-setting process. The Commission has and will continue to monitor

carefully these activities, and continues to believe that the FASB's independence and the openness of its processes are vital to the FASB's ability to serve

the public interest and perform its tasks well.

A brief discussion of FASB activities follows.

Post-employment Benefits Other Than Pensions. The FASB held public

hearings on its exposure draft of a standard on employers' accounting for

28
post-employment benefits other than penslons.r" Presenters at the public

hearings, as welI as most of the approximately 470 commentators on the

exposure draft, have generalIy agreed that post-retirement health care benefits

represent a form of deferred compensation and that an obligation should be

recognized as services are rendered. However, key issues affecting the measurement of the obligation remain contentious. The FASB is considering these

issues and expects to issue a final standard in late 1990.

Income Taxes.The FASB issued a statement that defers the effective date for

two years of its statement on accounting for income taxes. The new effective

date applies to fiscal years beginning after December 15, 1991.98 This action

was taken to provide sufficient time to consider requests to (1) change the

criteria for recognition and measurement of deferred tax assets to anticipate,

under certain circumstances, the tax consequences of future income, and (2)

reduce complexity by changing the requirement for scheduling and consideration of tax-planning strategies.

Finenciel lnstrumenis. The FASB continues to work on its major long-term

project to address financial instruments and off-balance sheet financing

issues. A final standard is expected to be issued in 1990 that would require

certain disclosures about financial instruments not recognized currently in the

financial statements. Subsequent parts of the project will include issues

related to: (1) accounting for risk-transfer instruments such as guarantees and

interest rate hedging instruments; (2) off-balance sheet financing arrangements; (3) the appropriate measurement basis for financial instruments; and

(4) accounting for securities with both debt and equity characteristics.

Other Activities. The FASB also issued statements during the fiscal year

dealing with (1) accounting for discontinuations of the application of FASB

Statement 71 affecting regulated enterprises, and (2) amendments to its cash

flow standard to exempt certain enterprises and to address the appropriate

reporting of certain securities acquired for resale.99 The FASB held task force

meetings on major projects involving consolidations and the reporting entity,

discounting, and impairment of long lived assets.

Tunely Financial Reporting Guidance. The FASB's efforts to provide more

timely guidance on emerging issues resulted in the issuance of technical

bulletins dealing with the right of setoff and accounting for leases.IOO

The FASB's Emerging Issues Task Force (ElTF), in which the Commission's

Chief Accountant participates, continues to perform an important and useful

role in identifying and resolving accounting issues. Since its inception in

1984, the ElTF has considered over 200 issues covering a broad range of

topics including financial instruments, business combinations, accounting for

leveraged buyouts, and income taxes. The ElTF addressed a number of

financial reporting issues relating to employee stock ownership plans, including questions arising from the recent use of convertible preferred stocks.

Registrants are expected to folIow the positions agreed upon by the ElTF.

Those that do not follow these positions will be asked to justify departure from

any consensus reached.

AICPA. In addition to oversight of the private sector process for setting

accounting standards, the Commission also oversees various activities of the

29
accounting profession conducted primarily through the AICPA. These

include: the Auditing Standards Board (ASB), which establishes generally

accepted auditing standards; the Accounting Standards Executive Committee

(AcSEC), which provides guidance on specific industry practices through its

issuance of statements of position and practice bulletins and prepares issue

papers on accounting topics for consideration by the FASB; and the SECPS,

which seeks to improve the quality of audit practice by member accounting

firms that audit public companies through various requirements, including

peer review.

ASB. The Commission's Chief Accountant suggested that the AICPA playa

more visible role in focusing auditor attention on high risk areas. The ASB

responded by initiating a procedure of issuing Audit Risk Alerts to provide

auditors with an overview of recent economic, professional, and regulatory

developments that may affect audits they perform. The series was inaugurated

in December as an aid in performing 1989 year-end audits and includes

guidance both on audits generally and in four specific industries (savings and

loans, credit unions, property and liability insurance, and health care).

AcSEC. The AcSEC has a key role in identifying accounting practices, with

an emphasis on those in specialized industries. The Commission staff

encouraged the AcSEC to initiate a project to develop improved accounting

guidance for investments in debt securities with market values that are below

cost. In a December 1989 letter to the AcSEC, the staff specified the kind of

disclosures that the staff expects pending issuance of such gUidance.101 This

is a controversial issue where practice is mixed, and the accounting guidance

differs to some extent among industries. The AcSEC has approved the

issuance of an exposure draft of a statement of position for public comment

that would provide improved guidance in this area. 102 During fiscal year 1989,

the AcSEC issued a practice bulletin to provide guidance on accounting for

amortization of discounts on certain acquired loans. 103 Finally, at the request

of the Commission's Chief Accountant, the AcSEC is working on a project to

address accounting issues related to the recognition of interest received in

connection with various kinds of lending activities by financial institutions and

others.

SEepS. The membership requirements of the SECPS are designed to

strengthen the quality control systems of member firms, thus enhancing the

consistency and quality of practice before the Commission. According to the

1989 SECPS annual report, 88 percent of public companies are audited by

SECPS member firms, and the revenues of those companies constitute 99

percent of the total revenues of all public companles.l?" Member firms are

committed to a triennial peer review under the close scrutiny of the Public

Oversight Board (POB). The SECPS also reviews and makes inquiries regarding the quality control implications of alleged audit failures involving public

clients of SECPS member firms. In January 1990, the AICPAvoted to require

membership in the SECPS for al/ firms with AICPA members that audit SEC

registrants. The Commission staff is continuing to review the impact of this

initiative on the SEC's mandatory peer review proposal. 105

The Commission exercises oversight of the SECPS through frequent

30
contact with the POB and members of the executive and peer review

committees of the SECPS. In addition, the staff reviews POB files and selected

working papers of the peer reviewers. This oversight has shown that the peer

review process contributes significantly to improving the quality control

systems of member firms and, therefore, that it should enhance the consistency and quality of practice before the Commission.

International Accounting and Auditing Standards

Significant differences in accounting and auditing standards currently exist

between countries. These differences serve as an impediment to multinational

offerings of securities. The Commission, in cooperation with other members

of the International Organization of Securities Commissions (I0SCO), has

actively participated in initiatives by international bodies of professional

accountants to establish appropriate international standards that might be

considered for use in multinational offerings. For example, Commission staff

has worked with the International Accounting Standards Committee (IASC), a

body of accountants with membership in 71 countries, to reduce accounting

alternatives as an initial movement toward appropriate international accounting standards.U" Over 150 comment letters were received, the majority of

which expressed support for the initiative. Issues of completeness and lack of

specificity in international accounting standards still need to be addressed,

and the IASC has undertaken to address them.

Commission staff also continued working with the International Federation

of Accountants (IFAC)to revise international auditing guidelines. Auditors in

different countries are subject to different independence standards, perform

different procedures, gather varying amounts of evidence to support their

conclusions, and report the results of their work differently. The Commission

staff, as part of an IOSCO working group, worked closely with IFACto expand

and revise international auditing guidelines to narrow these differences.

Independence

Commission staff also is studying the various national and international

requirements for auditor independence. In this connection, they have solicited

detailed information about the nature and extent of such requirements in a

number of major countries and have encouraged the IFAC to enhance

international guidelines in this area. The staff has undertaken a broad review

of the Commission's own auditor independence requirements. This review was

prompted by three factors: (1) the increasing globalization of the capital

markets; (2) the changes in the size and structure of certain accounting firms

during the past decade; and (3) a petition filed by the largest accounting firms

seeking a reconsideration of the Commission's views regarding the ability of

accounting firms to engage in prime and subcontractor relationships with

registrants that the firms concurrently audit.

31
The EDGAR Project

Introduction

The primary purpose of the Electronic Data Gathering, Analysis and

Retrieval (EDGAR) system is to increase the efficiency and fairness of the

securities markets for the benefit of investors, securities issuers, and the

economy. Under EDGAR, information currently submitted to the SEC on

paper will be transmitted and stored electronically using electronic communication and data management systems. Once the electronic filing is

accepted, public information will be available quickly to investors, the media,

and others on computer screens via the Commission's public reference rooms

and through electronic subscription services. When fully operational, EDGAR

will accelerate dramatically the filing, processing, dissemination, and analysis

of time-sensitive corporate information filed with the Commission.

Key 1989 Results

The EDGAR pilot system completed its fifth full year of successful operation

on September 24, 1989. It has demonstrated clearly the feasibility of

receiving, processing, storing and retrieving electronic filings. Since the pilot's

beginning, over 63,000 filings have been transmitted electronically to the

Commission.

The Commission also proceeded with its plan to develop an operational

EDGAR system. On January 3, 1989, the Commission awarded the operational system contract to 8DM International (8DM), with Mead Data Central,

Inc., Sorg Incorporated, and 8echtellnformation Services as subcontractors.

The Commission has formed numerous work groups to assist in the detailed

design of the operational system. The first draft of the EDGAR Requirements

Description Report was completed by 8DM in May 1989. The Commission

staff and 8DM are continuing work on developing both the receipt and

acceptance (R&A) subsystem, and the analysis and review (A&R) subsystem.

Pilot System

The EDGAR pilot serves a group of volunteer companies whose filings are

processed by staff in the Office of Applications and Reports Services and

Divisions of Corporation Finance and Investment Management. At the end of

fiscal year 1989, there were 580 registrants fully participating in the pilot. In

addition, numerous other registrants participated partially in the pilot by

submitting electronically filings of certain forms. This group of partial

participants includes:

978 investment companies submitting annual and semi-annual reports

on Form N-SAR;

72 registered public utility holding company systems or subsidiaries

32

•

•
submitting forms required under the Public Utility Holding Company

Act; and

15 institutional investment managers submitting Form 13F-E to

report securities held in their managed accounts.

No enhancements were added to the EDGAR pilot due to the award of the

operational system contract and the transfer of the pilot operations to BDM

International.

Operational System

The eight-year contract to design and operate the EDGAR system was

awarded January 3, 1989, for approximately $52 million, to BDM International, with Mead Data Central, Inc., Sorg Incorporated, and Bechtel Inforrnation Services as subcontractors. BDM, a subsidiary of Ford Aerospace

Corporation, will develop and operate the EDGAR system. Mead Data Central,

provider of the world's largest full-text electronic library of legal, news,

business, and general information, will provide the Commission with a

LEXIS-Iike full-text search and retrieval capability for the EDGAR database.

Sorg, a leading financial and corporate printer and an active participant in the

EDGAR pilot, will provide advice on the design and operation of the receipt

and acceptance subsystem. Bechtel, a long-established engineering and

construction firm and the Commission's paper and microfiche contractor

since 1985, will continue to provide paper and microfiche dissemination of

electronic and paper filings as a subcontractor to BDM.

The Commission will share funding of the EDGAR system costs with BDM.

The Commission will pay for both the receipt and acceptance, and analysis

and review subsystems. The contractor will pay the full cost of the dissemination subsystem in exchange for Commission-regulated sale of electronically

filed data and associated services.

In early May 1989, BDM completed the first draft of the EDGAR Requirements Description Report and the corresponding set of system blueprints.

After Commission staff reviewed these documents, it was agreed that BDM

would accelerate developing all major functions of the receipt and acceptance

subsystem as part of the EDGAR Release 1 software. This approach will

facilitate a smooth transition from the pilot to the operational system since it

enhances filer interface and associated support functions. This software

release is now scheduled for the second quarter of fiscal year 1991.

As a result of these changes, a new EDGAR implementation timetable was

prepared in consultation with BDM. This timetable calls for the conversion of

pilot filers to the operational system in July 1991 but will allow test filings to

be submitted beginning in January 1991. Once the pilot filers enter the

operational system, the pilot system will be terminated. The first group of

non-pilot filers will enter the operational system during November 1991,

January 1992, and April 1992. This group will consist of approximately 2,500

filers. It is anticipated that all remaining filers will enter the operational system

beginning in late 1992. Provided no major system problems are encountered

and the Commission is staffed adequately to phase-in approximately 1,500

33

•
filers per quarter, 15,000 filers should be converted to the operational system

by mid.1994.

Rulemaking

In order to refine requirements and assist in the detailed design of the

operational system, the Commission has formed numerous work groups

consisting of representatives from the contractor, subcontractors. and several

Commission divisions and offices that will be impacted by EDGAR. The

Rulemaking Coordination Work Group has identified issues that require

Commission rulemaking. Issues addressed by this work group include: (1)

phase-in (including voluntary filings); (2) hardship exemptions; (3) filing date

adjustments; (4) receipt and acceptance; (5) data tagging; (6) Williams Act

filings; (7) filer identification and password access;(8) preliminary proxy and

going-private material; (9) redlining; (10) correspondence filed electronically;

(11) exhibit files; (12) modular documents (formerly called reference filings);

(13) testing; (14) user manuals; (15) segmented filings; (16) paper printouts;

(17) amendments; (18) confidential treatment requests; (19) fee verification;

and (20) use of personal identification numbers. These issues will be largely

resolved as the EDGAR Release 1 software is finalized during fiscal year 1990.

The initial rules and phase-in schedule are expected to be released for

comment during the third quarter of fiscal year 1990.

Conclusion

Although the detailed design of the operational EDGAR system has taken

approximately eight months longer than anticipated, the Commission

remains committed to this project and is convinced of the soundness of its

design. Work on the operational system in fiscal year 1990 will include

completion of the system design and construction, rulemaking initiatives, and

initial training of the filer support staff.

34
Regulation of the Securities Markets

Introduction

The Division of Market Regulation, together with regional office examination staff, is charged with the responsibility of overseeing the operations of the

nation's securities markets and market professionals. In fiscal year 1989, over

11,000 broker-dealers, nine active securities exchanges, as well as the

over-the-counter (OTC) markets, and 15 clearing agencies were subject to the

Commission's oversight.

Key 1989 Results

FY'89

$2,040

FY'88

$1,907

FY'86

$1,735

Market Value of Equity and Options Sales on 0.5. Exchanges

(billions)

FY'87

$2,367

FY'85

$1,147

BID Oversight Examinations

FY'85 FY'86 FY'87 FY'88 FY'89

447 481 452 421 328

BID Cause Examinations

FY'85 FY'86 FY'87 FY'88 FY'89

145 69 56 89 148

Surveillance and Regulatory Compliance Inspections of SROs

FY'85 FY'86 FY'87 FY'88 FY'89

21 22 23 21 22

SRO Final Disciplinary Actions

FY'85 FY'86 FY'87 FY'88 FY'89

971 845 991 1,336 1,508

In fiscal year 1989, the Commission continued with market reforms

addressing the concerns resulting from the 1987 market break; adopted rules

and enhanced inspections of broker-dealers to curtail "penny stock" fraud and

other broker-dealer sales practice abuses; furthered the goals of internationalization of the securities markets through clearing linkages as well as easing

the access of foreign broker-dealers to domestic markets; adopted disclosure

rules for new issue municipal securities; approved fundamental reforms

concerning arbitration of disputes between broker-dealers and customers; and

35
proceeded with a phased removal of barriers to the multiple trading of options

on all exchanges with the ultimate aim of establishing appropriate market

linkage facilities. The Commission also furthered the development of both the

national market system and the national systems for transaction clearance

and settlement through various technical advancements which, for example,

will lead to next-day comparison of exchange and OTC trades.

Securities Markets, Facilities and Trading

Market Reform Initiatives

During fiscal year 1989, the nation's securities markets continued to

experience periods of large price and volume volatility. These events demonstrated that the episodes of intense volatility encountered during and shortly

after the October 1987 market break were not isolated occurrences. As a

result, the Commission continued to pursue many of the market reform

initiatives that were first undertaken in 1988 in order to enhance the stability

and integrity of the nation's securities markets.

Studies of the October 1987 market break recommended, among other

things, the adoption of temporary trading halts, commonly known as "circuit

breakers," in order to disseminate information concerning significant price

movements and to provide market participants with time to re-establish an

equilibrium between buying and selling interest. In order to implement these

recommendations, the Commission in 1989 approved rule changes by the

American Stock Exchange (Amex), Chicago Board Options Exchange

(CBOE), Midwest Stock Exchange (MSE), National Association of Securities

Dealers, Inc. (NASD), New York Stock Exchange (NYSE), and Philadelphia

Stock Exchange (Phlx) that provide for temporary trading halts of one and two

hours if the Dow Jones Industrial Average (DJIA) falls more than 250 points

or more than 400 points, respectively, on a single day.107 The Commodity

Futures Trading Commission (CFTC) approved analogous rule changes submitted by futures exchanges with respect to halts in the trading of stock index

futures and options on those futures. In addition, as discussed in greater detail

below, 108 the Commission approved a NYSE proposal to segregate program

trading orders on its automated order execution system into a separate file

during periods of significant market declines and to give priority on the

system to orders of individual investors on days when the DJIA declines more

than 25 points.

After the October 1987 market break, the Report of the Presidential Task

Force on Market Mechanisms 109 advocated the establishment of crossmargining rules to allow market participants with an investment in index

futures to receive credit (for purposes of calculating the necessary margin) for

a stock or options position that is hedged by the futures position, The

Commission implemented this recommendation by approving proposed rule

changes by the Options Clearing Corporation (OCC) that would allow crossmargining with certain futures positions cleared by the Chicago Mercantile

Exchange (CME),IIO

36
The Commission also participated in discussions with the Group of Thirty

both prior and subsequent to the release of its report on global clearance and

settlement systems. III The Group of Thirty is a private sector group of

international businessmen, brokers, and others concerned with the international financial system. Among other things, the Group of Thirty recommended that, by 1992, settlement of equity securities transactions occur on

the third day after the trade date. The Commission supported this recommendation and has worked with the Group of Thirty and the securities industry to

identify the steps that must be taken, such as the further elimination of

physical certificates, to implement this recommendation.

In light of the markets' performance during the extreme volatility and

volume of October 1987, the Commission staff focused attention during fiscal

year 1989 on outlining certain steps it believes the self.regulatory organizations (SROs) should take to ensure that their automated systems have the

capacity to accommodate current and reasonably anticipated future trading

volume levels and to respond to emergency conditions. In November 1989,

the Commission published the Automation ReviewPolicy Statement, which

states that the SROs should, on a voluntary basis, establish comprehensive

planning and assessment programs to determine systems capacity and

vulnerability. Primary objectives of their programs would be to establish

capacity estimates, to conduct stress tests, and to contract with independent

reviewers to assess their automated systems annually. 112

In addition, the Commission proposed amendments to its uniform net

capital rule, Exchange Act Rule 15c3-1. 113Among other things, the proposal

would require specialists, who are now exempt from the net capital rule, to

maintain certain minimum levels of net capital in accordance with the terms

of the rule.

During fiscal year 1989, the Commission approved proposed rule changes

by seven clearing organizations to establish the Securities Clearing Group

(SCG).114SCG is a voluntary organization of clearing agencies designed to

increase coordination and cooperation between clearing agencies in overseeing the financial and operating condition of their participants.

Finally, the Commission continued to pursue the series of legislative

proposals that it first proposed in 1988 to enhance the efficiency and fairness

of the United States capital markets and to help avoid precipitous market

declines. As introduced in the House and the Senate, the proposed legislation

provided for:(1)information reporting by broker-dealer holding companies for

purposes of risk assessment; (2) large trader reporting; (3) clarification of the

Commission's authority to facilitate development of coordinated clearance

and settlement systems; and (4) emergency authority for the Commission. 1IS

In addition, the Commission devoted considerable resources to the preparation of Congressional testimony concerning these and other market reform

initiatives.

The National Market System

In fiscal year 1989, the Commission took action on several national market

system (NMS) plans under Section 11A of the Exchange Act. First, the

37
Commission published for comment a proposed Joint Industry Plan submitted by the NASD, together with the American, Philadelphia, Boston, and

Midwest Stock Exchanges, governing the collection, consolidation and dissemination of quotation and transaction information for NASDAQ/NMS OTC

securities listed on an exchange or traded on an exchange pursuant to a grant

of unlisted trading privileges.116

In addition, the Commission reviewed amendments to the Intermarket

Trading System (ITS) plan. The ITS is a communications system designed to

facilitate national market system trading among competing markets by

providing each market with order routing capabilities based on current

quotation information. The amendments to the plan (1) recognized the use of

the "Regional Computer Interface" by the Boston Stock Exchange; (2) allowed

for the price used in pre-opening procedures to be based on the closing price

on the NYSE or the Amex in certain circumstances; (3) clarified the responsibility of a specialist/market maker who has sent a pre-opening response to

seek an execution report; and (4) clarified the procedures for resolving third

participating market center trade-throuqhs.l!? The amendments were

approved in November 1989.

During fiscal year 1989, the Commission reviewed a number of SRO

proposed rule changes intended to enhance or introduce new automated

systems. For example. the Commission published for comment a proposed

rule change by the NASD to establish a one-year pilot program testing the

OTC Bulletin Board Display Service for securities traded OTC that are not

included in the NASDAQ System or listed on a national securities

exchanqe.U" In addition, the Commission permanently approved a Boston

Stock Exchange (BSE) proposal establishing the Boston Stock Exchange

Automated Communications Order-routing Network (BEACON), an automated order-routing and execution system, and rules governing the

system. 119BEACON routes orders in eligible stocks from member firms to

the BSE and guarantees either an automatic or manual execution, depending

on the classification of the stock, at the BEACON quotation.

On May 12, 1989, the American Stock Exchange submitted a proposed rule

change to implement a pilot program for the use of AUTO-EX (a feature of the

Exchange's PER/AMOS order routing system) for the automatic execution of

trades in 20 of the exchange's most actively traded equities. The Commission

continues to consider this proposal. The Amex also requested that transaction

charges for the selected stocks be waived, whether or not executed through

AUTO-EX. The Commission granted approval of the proposed transaction fee

waiver on October 2, 1989.120

In addition, the Commission published for comment a NASD proposal to

create the Rules of Practice and Procedures for the Automated Confirmation

Transaction Service (ACT).121The ACT Service is intended to facilitate the

comparison and clearing of interdealer OTC equity trades by requiring input

of trade reports within specific time frames, comparing that trade data, and

submitting matched, locked-in trades to clearing. In September 1989, the

Commission granted partial accelerated approval of the ACT rules as they

apply to self-clearing firms only. 122

38
In May 1989, the Commission adopted an amendment to its rule governing

transaction fees to extend indefinitely the exemption on transactions in

OTClNMS securities from the imposition of Section 31 transaction fees.123

National System for Clearance and Settlement

During fiscal year 1989, market events continued to underline the importance of enhancements to all components of the National System for

Clearance and Settlement (National System). The Commission continued to

work with clearing agencies, banks, broker-dealers and other federal regulators to implement changes recommended in various reports on the October

1987 market break.124

During fiscal year 1989, the Commission approved a number of SRO

proposals designed to improve intramarket and intermarket clearance and

settlement. For example, the Commission approved rule changes which, when

fully implemented, willprovide for next.day comparison of exchange and OTC

trades125 and will automate the resolution of uncompared trades. 126 As noted

earlier, the Commission also approved clearing agency proposals creating the

sca, a voluntary association of clearing agencies designed to improve

coordination of clearing agencies' monitoring of common members. 127

Additionally, the Commission approved proposed rule changes by the OCC

that (1) increase initial net capital requirements for clearing members from

$150,000 to $1 million and member maintenance net capital requirements

from $100,000 to $750,000128 [OCe's futures clearing subsidiary, the

Intermarket Clearing Corporation (ICC),made identical changes to its memo

ber net capital requirements]; 129 (2)increase minimum required clearing fund

contributions to OCe's equity and non-equity option clearing funds from

$10,000 and $50,000, respectively, to $75,000; 130 and (3) authorize OCC, in

the event of a market emergency, to defer liquidation of a defaulting clearing

member's positions and to execute hedge transactions to protect against a

decline in value of the open posttlons.P!

As noted above, the Commission during fiscal year 1989 also recommended to Congress legislative proposals which, among other things, would

authorize the Commission and the CFTC to facilitate development of coordinated clearance and settlement systems, and would authorize the Commission to establish uniform pledge and transfer rules if necessary to the safe and

efficient operation of the National System. 132

The Commission staff also consulted extensively with an American Bar

Association (ABA) committee examining possible federal and state legal

impediments to efficient and safe clearance and settlement. The committee

transmitted a letter, dated April 26, 1989, to Chairman Ruder outlining

potential state commercial law problems that the committee will study.

Also during fiscal year 1989, the Commission approved clearing agency

proposals that continued expansion of the services and immobilization goals

of the National System to mutual fund, mortgage-backed, and U.S. government securities. For example, the Commission approved enhancements to

National Securities Clearing Corporation's (NSCC) Automated Customer

Account Transfer Service to permit the automated transfer of book share

39
mutual fund assets in customer accounts that are subject to a customer

transfer request (for mutual funds associated with NSCC fund members and

mutual fund processors).133 The Commission also issued an order registering

Participants Trust Company (PTC) as a clearing agency on a temporary basis

for a period of 12 rnonths.P" PTC provides depository services for mortgagebacked securities. In addition, the Commission approved a system of the

Government Securities Clearing Corporation (GSCC)for netting and settling

compared, next-day, government securities trades submitted for clearance

and settlement by GSCC members. 135

The Commission also issued an order registering Delta Government

Options Corporation (Delta) as a clearing agency on a temporary basis for a

period of 36 months.P" The Seventh Circuit Court of Appeals vacated the

order,137 effective January 18, 1990, and remanded the matter to the

Commission for further consideration of whether Delta has the capacity to

comply with the Exchange Act because the Commission had not determined

whether the OTC options trading system is an exchange that must be

registered as such under the Exchange Act. 138

Internationalization

In recognition of the accelerated pace of internationalization in securities

markets, 139 on July 11, 1989 the Commission adopted Rule 15a-6 under the

Exchange Act to provide conditional exemptions from broker-dealer reqlstration for foreign broker-dealers that engage in certain activities involving

United States investors and securities markets. 140 These activities include (1)

"nondirect contacts" by foreign broker-dealers with U.S. investors and mar.

kets, through execution of unsolicited securities transactions and provision of

research to certain U.S. institutional investors; and (2) "direct contacts,"

involving the execution of certain transactions through a registered broker.

dealer intermediary with or for certain U.S. institutional investors, and

transactions with or for registered broker-dealers, banks acting in a broker or

dealer capacity, certain institutional organizations, foreign persons temporarily present in the U.S., U.S. citizens resident abroad, and foreign branches

and agencies of U.S. persons. By adopting Rule 15a-6, the Commission

sought to facilitate access to foreign markets by U.S. institutional investors

through foreign broker-dealers and the research that they provide, consistent

with maintaining the safeguards afforded by broker-dealer registration, and to

provide clear guidance to foreign broker-dealers seeking to operate in

compliance with U.S. broker-dealer registration requirements.

Concurrent with the adoption of Rule 15a-6, the Commission issued a

release discussing the concept of an exemption from broker-dealer reqlstration based on recognition of foreign requlatlon.l''! Recognizing foreign

regulation as a substitute, in certain circumstances, for U.S. registration would

allow certain foreign broker-dealers to deal with U.S. institutional investors

without incurring the expense of U.S. registration and thereby substantially

increase the access of U.S. investors to the valuable services that foreign

broker-dealers provide relative to foreign markets. In seeking comment on its

concept release, the Commission stressed that any approach to regulation of

40
foreign broker-dealers must not compromise the essential protections for

customers and the market system as a whole provided by the U.S. regulatory

regime.

Also during fiscal year 1989, the Commission took several actions with

respect to the application of Rules 10b-6, 10b-7, 10b-8, and 10b-13 under

the Exchange Act to transactions involving concurrent U.S. and foreign

distributions or tender offers. Rule 10b-6 proscribes certain conduct by

persons participating in a distribution to prevent such persons from artificially

conditioning the market for a security to facilitate the distribution. Rule 1Ob- 7

governs market stabilization activities during offerings. Rule 10b-8 governs

the market activities of participants in a rights offering. Rule 1Ob-13 prohibits

purchases otherwise than pursuant to a tender offer or exchange offer from the

time such offer is publicly announced until the offer expires. The Commission's actions permitted non-U.S. persons to continue certain customary

market activities in foreign jurisdictions during multinational transactions,

subject to certain conditions designed to prevent a manipulative impact on the

U.S. market.

For example, an exemption was granted to permit the U.K. market maker

affiliates of the dealer managers of concurrent U.S. and U.K. tender offers to

continue market making activities during the tender offers.142 In addition,

U.K. market makers 143and Canadian exchange specialists 144affiliated with

distribution participants were permitted to continue their market making

activities during multinational rights offerings involving U.K. and Canadian

issuers, respectively. In connection with offerings in the U.S. by Australian, 145

British,146 Dutch.l"" French, 148Italian, 149and Spanish 150issuers, relief from

the application of Rule 10b-7 permitted the underwriter to initiate a stabilizing bid based on the price of the security on a foreign exchange.

During fiscal year 1989, the Commission continued to promote the development of international linkages between clearing agencies and to foster

foreign participation in the National Clearance and Settlement System. For

example, the Commission registered the International Securities Clearing

Corporation (lSCC) as a clearing agency on a temporary basis for a period of

18 months.P! ISCC was formed to develop linkages with clearing organizations in other countries. The Commission also approved Depository Trust

Company's (DTC) International Institutional Delivery System, which automates the confirmation and affirmation process for institutional trades that

include non-U.S. entities and institutional trades in foreign securities.P''

In fiscal year 1988, the NASD submitted a rule proposal to establish the

PORTAL system, which is a screen. based system designed to facilitate the

placement, distribution, and secondary market trading of securities, including

certain foreign securities, that would be exempt from registration pursuant to

proposed Rule 144A under the Securities Act of 1933. During fiscal year

1989, the Commission published for comment a NASD amendment to the

proposed rule change which was in the nature of a substitute proposal.P''

In addition to these regulatory actions, the staff participated in several

international securities working groups. The Technical Committee of the

International Organization of Securities Commissions (IOSCO) is comprised

41
of representatives of securities regulators of 12 countrles.P" It held its first

meeting in July 1987. At that meeting, six working groups were established

to study various aspects of the international securities markets. One group,

Working Group Number 3, includes representatives from France, Japan, the

United Kingdom, and the United States (represented by Commission staft),

and was established to study the issues related to capital adequacy for

securities firms from a worldwide perspective.

The capital adequacy working group produced a report concluding that: (1)

there is a need for a common worldwide conceptual framework regarding the

capital requirements for non-bank securities firms; (2) requirements should

include risk-based elements covering all the risks to which a firm is exposed;

and (3) minimum capital requirements should be based on type of business

and that firms wishing to enter the securities business should demonstrate an

appropriate level of commitment, but standards should not be so high as to

adversely affect competition. The report was approved by the IOSCO Technical Committee on June 20-21, 1989 and was endorsed by lOSCO at its annual

meeting in Venice, Italy on September 18-21, 1989. At its Venice meeting,

IOSCO asked the working group to continue and expand its efforts.

Options and Other Derivative Products

During fiscal year 1989, the Commission reviewed a large number of rule

changes that were intended to address market volatility concerns that have

arisen in connection with the markets for options and futures instruments.

First, in response to recommendations resulting from the October 1987

market break studies, the Commission and the CFTC approved SRO proposals establishing coordinated circuit breaker procedures to be used in periods

of severe market stress. These procedures are outlined in the subsection above

entitled "Market Reform Initiatives." Second, the Commission approved an

NYSE proposal imposing certain trading restrictions on orders entered into

the NYSE's automated order-routing system, the Designated Order Turnaround (DOT) System, during periods of significant market declines (the

"sidecar" rule).155 The rule applies when the price of the S&P 500 futures

contract traded on the CME falls 12 points below the previous trading day's

closing value (approximately equivalent to a 96.point fall in the DJIA). Once

activated, program trading-related market orders entered into DOT are routed

into a separate file. The purpose of channelling program trades into a separate

file, or "sidecar," during times of market volatility is to isolate one potential

cause of market volatility, program trading, from other market activity. The

"sidecar" rule replaced the 50-point "collar" rule that had prohibited index

arbitrage-related stock transactions through DOT on days when the DJIA had

moved 50 or more points from the previous day's close.

Third, the Commission approved an NYSE proposal that grants individual

investors' market orders of up to 2,099 shares entered into the DOT system

priority in delivery to the specialist's post for execution. 156The feature, known

as the Individual Investor Express Delivery Service (llEDS), is activated when

the DJIA rises or falls 25 points from the previous trading day's close and

42
remains in effect for the remainder of the trading day that it is activated. lIEDS

is designed to facilitate implementation of the "sidecar" rule.

Fourth, the Commission approved identical proposals filed by the Amex,

CBOE, Phlx and Pacific Stock Exchange (PSE) to extend current margin

requirements for equity and stock index optlons.l'" The margin requirement

for broad-based index options is 100 percent of the option premium plus 15

percent of the underlying aggregate index value, less any out-of-the-money

amount, with a minimum of premium plus 10 percent of the underlying

aggregate index value. For equity options, the margin requirement is premium plus 20 percent of the underlying stock value, less any out-ofthe-money amount, with a minimum requirement of premium plus 10 percent

of the underlying stock value.

During fiscal year 1989, the Commission also adopted Rule 19c-5 under

the Exchange Act. 158In adopting Rule 19c-5, the Commission found that the

reasonably anticipated benefits from options multiple trading (i.e., increased

price competition, enhanced market making requirements, and improvements in exchange services) outweighed the possible adverse consequences of

an expansion of multiple trading-namely, market fragmentation, domination by one market, and harm to the financial integrity of particular

exchanges. The rule provides that, as of January 22, 1990, no rule, stated

policy, practice or interpretation of an options exchange shall restrict the

listing of any new stock options class to a single exchange. In addition,

effective January 21, 1991, but not before, Rule 19c-5 amends exchange

rules to prohibit any exchange from limiting by any means its ability to list any

stock options class because that options class is listed on another exchange.

The rule also contains a phased-in implementation schedule. Moreover, in

order to increase the anticipated benefits from options multiple trading, the

Chairman requested that the options exchanges work together to develop a

joint plan for a market linkage facility.159

In conjunction with the adoption of Rule 19c-5, the Commission separately

released for comment a white paper, prepared by the staff of the Commission's

Division of Market Regulation, that discusses the market structure issues

associated with multiple trading of options on exchange-listed stocks and

outlines several possible market structure enhancements. 160In particular, the

white paper describes three possible measures to integrate the options

markets: an intermarket order routing linkage, a mechanism for orderby-order routing to the market with the best price, and a central limit order file.

During fiscal year 1989, the Commission reviewed several new derivative

product proposals. First, the Commission approved proposals submitted by

the Amex, CBOE, and Phlx to list for trading market basket products

designated as index participations (IPS).161An IP is a present interest in the

current value of a portfolio of stocks, is of indefinite duration, and entitles

holders to receive cash payments equivalent to a proportionate share of any

regular cash dividends paid on the component stocks in the underlying stock

portfolio. The United States Court of Appeals for the Seventh Circuit,

responding to a challenge by the CME and the Investment Company Institute,

set aside the Commission's orders. The Court, in Chicago Mercantile

43
Exchange v. SEC, found that the SEC had no jurisdictional basis to approve the

trading of IPs contracts on a national securities exchange. 162

Second, the Commission approved a CBOE proposal to list options on two

interest rate measures: a short-term interest rate measure based on the most

recently auctioned 13-week Treasury bill and a long-term interest rate measure based on the most recently auctioned seven. and ten-year Treasury notes

and 30-year Treasury bonds.163 The options are designed to provide investors

with hedging and risk-shifting vehicles that reflect the overall movement of

short. and long-term interest rates.

Third, CBOE and the Chicago Board of Trade (CBT) entered into a joint

venture (JV) agreement which provided for the concurrent trading on the

CBOE floor of index option and futures contracts.P" Pursuant to the JV

agreement, CBT commenced trading CBOE 250 Stock Index futures contracts in November 1988. To accommodate the trading of the new futures

products on CBOE, the Commission approved rule changes submitted by

CBOE that defined the individuals and organizations that are permitted to

execute transactions in JV contracts, specified certain CBOE rules applicable

to non-CBOE member JV participants, and established trading rules for JV

and .Jv-related products.

Fourth, pursuant to Section 2(aXIXB) of the Commodity Exchange Act, the

Commission sent to the CFTC two comment letters concerning proposed new

stock index futures contracts. The Commission sent a comment letter not

objecting to the CME's proposed futures on the European, Australia, and Far

East Index (EAFE). 165 The EAFE is a capitalization-weighted index designed

to be a barometer of the securities markets of Europe, Australia, and the Far

East. In addition, the Commission sent a comment letter not objecting to

designation of the CME as a contract market to trade options on its Nikkei

futures contract.166 The Nikkei is a price-weighted stock index based on the

prices of 225 stocks traded in the first section of the Tokyo Stock Exchange.

Fifth, the Commission submitted a letter to the CFTC commenting on the

CFTC's proposed rule and statutory interpretation regarding the regulation of

hybrid instruments, such as debt securities with principal or interest payments

pegged to stock market rnovements.J'" The letter suggests that, rather than

adopt the proposed rule and interpretation, the CFTC continue discussions

with representatives of the Commission and other interested regulatory

bodies to address perceived concerns relating to hybrid instruments.

The Commission also approved several other important rule changes

relating to derivative instruments. First, the Commission approved a NYSEI

CME policy and circular prohibiting a member or person associated with a

member or member organization from engaging in frontrunning involving

securities and stock index futures or options on stock index futures.168

Frontrunning generally is defined as trading on the basis of nonpublic market

information regarding imminent, material market transactions.

Second, the Commission approved proposals submitted by Amex, CBOE,

MSE, NYSE, NASD, Phlx, and the PSE requiring members to develop,

implement, and maintain specific written standards for approving customer

accounts seeking to establish uncovered short options positions, and to

44
establish a minimum net equity requirement for approving and maintaining

such customer accounts.Y?

Finally, the Commission approved a CBOE proposal to require each CBOE

market maker clearing firm to file with the CBOE's Department of Financial

Compliance written procedures for assessing and monitoring the risk to the

clearing firm's capital from positions in its own market maker accounts and

from positions of independent market makers for whom it clears trades. 170

These procedures will enable clearing firms, as well as the CBOE, to better

assess and monitor the potential risk of loss from options market maker

accounts over a specified range of possible market movements.

Regulation of Brokers, Dealers, Municipal Securities Dealers, and

Transfer Agents

Penny Stock Task Force

In response to the Commission's growing concerns with the widespread

incidence of broker-dealer fraud and other misconduct in connection with

certain low-priced, or "penny," stocks traded in the OTC market, the Penny

Stock Task Force was created to coordinate the Commission's enforcement,

regulatory, and educational efforts. 171 To this end, in fiscal year 1989,

rulemaking and inspection programs focused on specific aspects of these

concerns.

On August 22, 1989, the Commission adopted Rule 15c2-6 under the

Exchange Act, which imposes sales practice requirements on broker-dealers

who recommend purchases of these securities to persons who are not

established custorners.V'' As a means reasonably designed to prevent fraud,

the rule makes it unlawful for a broker-dealer to sell to, or to effect the

purchase by, any person of a security subject to the rule (in general, a

non-NASDAQ, OTC equity security of an issuer with lessthan $2 million in net

tangible assets) unless (a) the transaction is exempt under the rule or (b) prior

to the transaction, the broker-dealer has (1) approved the purchaser's account

for transactions in those securities and (2) received written agreement to the

transaction from the purchaser. Exemptions are provided for (a) transactions

in which the price of the security is five dollars or more; (b) transactions in

which the purchaser is, as defined in the rule, an accredited investor or an

established customer of the broker-dealer; (c) transactions that are not

recommended by the broker-dealer; and (d) transactions by a broker-dealer

who is not a market maker in the particular security and whose sales-related

revenue from transactions in securities subject to the rule does not exceed five

percent of its total sales-related revenue from transactions in securities.

Also, as part of its effort to curb penny stock market abuses, the Commission published for comment amendments to Rule 15c2-11 under the

Exchange Act.173 Rule 15c2-11 governs the submission and publication of

quotations by brokers or dealers for certain non-NASDAQ, OTC securities.

Among other things, the proposals would revise that rule by specifically

requiring a broker-dealer to review the information the rule requires the firm

45
to have before initiating or resuming a quotation in a quotation medium, and

to have a reasonable basis to believe that the information is true and accurate

and obtained from reliable sources. The proposed amendments also would

require a broker-dealer initiating or resuming quotations for a security to have

in its records a copy of any trading suspension order, or Exchange Act release

announcing a trading suspension, issued by the Commission with respect to

any of the issuer's securities during the preceding year, and to review the other

required information in its records in light of the information contained in that

order or release. The Commission also solicited comment on whether to

modify or eliminate the rule's "piggyback" provisions that allow brokerdealers to enter quotations without having the information specified by the

rule where there has been a specified amount of recent market activity in the

security.

Furthermore, the Commission's regional offices completed 165 examinations of penny stock broker-dealers. A large number of these examinations

uncovered evidence of serious violations involving excessive retail markups,

market manipulation, high-pressure "boiler-room" sales practices, and misrepresentations to investors concerning the business activity and financial

condition of corporate issuers. Enforcement referrals have been made in 82

(50 percent) of the completed examinations, and an additional 14 examinations (9 percent) have been referred to the NASD for its enforcement

consideration. The penny stock program will continue in fiscal year 1990, with

particular focus on compliance by firms with new Rule 15c2-6, which became

effective on January I, 1990.

Broker-Dealer Examination Program

The broker-dealer examination program seeks to evaluate the examination

programs of the SROs through the conduct of oversight examinations of SRO

members. In addition, the Commission conducts cause examinations when it

is aware of circumstances that may warrant direct Commission rather than

SRO action. In fiscal year 1989, the regional offices completed 328 oversight

examinations and 148 cause examinations. These completed examinations

resulted in a record high number of matters referred for Commission enforcement consideration (106, or 22.3 percent) and of referrals to SROs (46, or 10

percent).

As discussed above, during fiscal year 1989, the examination program

placed heavy emphasis on examining firms engaged in a penny stock

business. In addition, the examination staff continued to review for brokerdealer compliance with the currency transaction reporting obligations of the

Bank Secrecy Act. As a result, the Commission referred a number of matters

to the Department of the Treasury. The Commission also provided "talking

points" for the U.S. delegation to the International Financial Transactions Task

Force, which is addressing money laundering problems. Further, Commission

staff developed examination procedures to review firm compliance with

the Insider Trading and Securities Fraud Enforcement Act of 1988.174

Finally, procedures were developed to monitor and assessrisks taken by firms

46
that concentrate a substantial amount of their capital in complex trading

strategies.

Municipal Securities Disclosure

On June 28, 1989, the Commission adopted Rule 15c2-12 under the

Exchange Act, which requires underwriters participating in primary offerings

of municipal securities of $1 million or more to obtain, review, and distribute

to investors copies of the issuer's disclosure documents. 175 The rule grew out

of the Commission's previous issuance of a release soliciting public comment

on several initiatives designed to improve the quality, timing, and dissemination of disclosure in the municipal securities markets.

The release addressed the concerns identified by the Commission in its

investigation of the Washington Public Power Supply System default by

detailing the disclosure and due diligence obligations of municipal securities

underwriters.Vf Rule 15c2-12, which became effective on January 1, 1990,

establishes standards for the procurement and dissemination by underwriters

of disclosure documents as a means of enhancing the accuracy and timeliness

of disclosure to investors in municipal securities. The Commission also issued

an interpretation concerning the responsibilities of underwriters of municipal

securities under the general antifraud provisions of the federal securities laws.

The interpretation stated, among other things, that, at a minimum, the

Commission expects that in all offerings of municipal securities underwriters

will review the issuer's disclosure documents in a professional manner for

possible inaccuracies and omissions.

Commission Dollar Practices

A variety of issues regularly arise in connection with the use by money

managers of commission dollars of their advised accounts to obtain investment research and brokerage services. Section 28(e) of the Exchange Act

provides a safe harbor for these so-called "soft dollar" arranqernents.l " In

connection with an ongoing staff review of these arrangements and their

market implications, the Commission sponsored a roundtable on commission

dollar practices in July 1989.178 Some of the issues addressed at this

conference included the relationship between soft dollar arrangements and

market liquidity, the use of these payments in the context of directed

brokerage accounts, the definition of the term "research" as used in Section

28(e), and disclosure issues implicated by soft dollar payments. The roundtable also focused on issues surrounding broker-dealer payment for order flow

in exchange and OTC transactions. Participants in the roundtable included

representatives from the NYSE, NASD, the United States Department of

Labor, the United Kingdom Securities and Investments Board, and the

broker-dealer, investment advisory, and banking communities.

Exemption of Certain Securities Issued by the Resolution Funding

Corporation

The Financial Institutions Reform, Recovery and Enforcement Act of
1989179 authorized the newly-created Resolution Funding Corporation (RFC)

to provide financing for the resolution of matters relating to insolvent savings

and loan associations in part from the public offering of debt securities to be

issued by RFC. Unless otherwise exempted, these securities would be subject

to a variety of regulatory restrictions imposed by the Exchange Act. In order

to avoid delays in these financings or increases in the interest costs of the debt

securities issued by RFC resulting from the application of the statutory

restrictions, which was not deemed necessary for the protection of investors,

the Commission adopted on an emergency basis Rule 3a12-10 under the

Exchange Act.180 The rule, which was adopted pursuant to Section

3(aX12XAXv) of the Exchange Act,181 defines the debt securities issued by

RFC as "exempted securities" for purposes of those provisions of the Act that

by their terms do not apply to such securities. Concurrent with the adoption

of Rule 3a 12-1 0, the Commission issued an order exempting these securities

from the registration requirements of the Securities Act of 1933.182

Financial Responsibility Rules

The Commission published for comment a proposal to amend Rule 15c3-1

under the Exchange Act by raising the minimum net capital required of

certain registered broker-dealers. 183Broker-dealers that hold customer funds

or securities would be required to maintain at least $250,000 in net capital.

Those firms that clear customer transactions but do not hold customer funds

or securities would need to maintain at least $100,000. Broker-dealers that

introduce customer accounts would be required to maintain $50,000 or

$100,000, depending on whether they occasionally or routinely receive

customer funds and securities.

The Commission also issued a release proposing to amend the net capital

rule to make the rule applicable to certain exchange specialists that are now

exempt from the rule. 184As proposed, the amendments would allow those

specialists a grace period during which they could either bring in additional

capital or reduce the size of their positions in specialty securities in order to

satisfy the value reductions ("haircuts") on those positions called for by the

rule. Under the proposal, options market makers would continue to be exempt

under specified conditions.

The Commission issued a release proposing to amend its customer

protection rule, Exchange Act Rule 15c3_3.185 The amendment would

expand the categories of instruments that broker-dealers may deliver as

collateral to customers from whom they borrow fully paid or excess margin

government securities. In addition to the instruments currently permitted

under the rule, the amendment would allow broker-dealers to deliver as

collateral "government securities" as defined by Sections 3(aX42XA) and

3(aX42XB) of the Exchange Act, and securities issued or guaranteed by the

Federal Home Loan Mortgage Corporation, the Federal National Mortgage

Association, the Student Loan Marketing Association, or the Financing

Corporation. The proposed amendment excludes zero coupon bonds and

"stripped" securities not issued by the Department of the Treasury. Pending

final action on the proposed amendment, the Commission authorized issu48
ance of a no-action letter allowing broker-dealers to expand, in accordance

with the proposed amendment, the categories of instruments they may deliver

as collateral to customers in government securities borrowinqs.l'"

Lost and Stolen Securities

Rule 17f-1 sets forth participation, reporting, and inquiry requirements for

the Lost and Stolen Securities Program (Program). As of December 31, 1989,

21,858 institutions were registered in the Program. Statistics for the calendar

year 1988 (the most recent year available) reflect the Program's continuing

effectiveness. During the year, registered institutions reported as lost, stolen,

missing or counterfeit 626,829 certificates valued at $2,877,883,729. Those

institutions also reported the recovery of 122,627 certificates valued at

$636,405,051. At the end of 1988, the aggregate value of securities contained

in the Program's database was $15,079,115,776. Registered institutions made

inquiry concerning 2,577,303 certificates. Inquiries concerning 2,178 certificates valued at $10,679,142 matched reports of lost, stolen or missing

securities on file in the database.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30, 1989, nine active exchanges were registered with the

Commission as national securities exchanges. During the fiscal year, the

Commission granted exchange applications to delist 84 debt and equity

issues and nine options issues and granted applications by issuers requesting

withdrawal from listing and registration for 26 issues. In addition, during the

fiscal year, the Commission granted 339 applications by exchanges for

unlisted trading privileges.

During fiscal year 1989, the Commission received 194 proposed rule

changes from the stock exchanges. The Commission approved several

significant rule filings, including an NYSE proposal consisting of two policy

agreements in regard to intermarket trading restrictions between the NYSE

and the CME and between the NYSE and the New York Futures Exchange

(NYFE). While not affecting legitimate trading activities, the joint policy

prohibits a member or person associated with a member or member organization from engaging in intermarket frontrunning lnvolvlnq securities and

stock index futures or options on stock index futures. 187

A NYSE proposal to prohibit the use of portable telephones on the floor of

the exchange was approved by the Commission during fiscal year 1988.188

During fiscal year 1989, the United States Court of Appeals for the Second

Circuit, responding to a challenge by a NYSEmember, upheld the Commission's decision to approve the rule, The Court, in Higgins v. SEC, found that the

SEC decision was supported by substantial evidence because it evaluated

"several harmful consequences" that it could foresee from the use of portable

telephones on the f100r.18g The Court found these consequences to be

"sufficiently substantial" to sustain the SEC action. The Court concluded that

49
the Commission decision was not arbitrary, capncious, or an abuse of

discretion because the Commission adequately considered and responded to

comments received on the proposal and adequately weighed the competing

interests.

During fiscal year 1989, the Commission approved NYSE proposals that

revised certain requirements for specialists. The Commission approved a

proposal to revise, restate, and consolidate the Exchange's Specialist Job

Description and Code of Acceptable Business Practlces.P" The revisions

replace the former specialist job description with one that provides more

specificity regarding the performance expected of specialists.

A NYSE proposal to establish certain minimum issuer and member

contact requirements for specialists was also approved by the Cornrnisslon.l'"

Under the rule, specialist units are required to make quarterly contacts, at

least one of which is an in-person meeting, with a senior official at each of the

specialist unit's listed companies. The specialist units are also required to

establish semi-annual contacts, off the Exchange floor, with the 15 largest

NYSE member organizations, other member organizations that are significant customers of the specialist unit, and any other member organizations

that request such contact.

NYSE and Fhlx proposals to impose allocation restrictions on a specialist

unit that loses its registration in a specialty security were also approved by the

Commission.192 The rules prohibit a specialist unit from applying for new

listings for a six-month period immediately following the reallocation of any

of the unit's specialty stocks as a result of informal corrective action or a

disciplinary proceeding.

In addition, the Commission approved modifications to the NYSE shareholder approval policy for listed domestic companies, as set forth in the NYSE

Listed Company ManuaI.193 The modified policy continues to require shareholder approval as a prerequisite to listing securities issued in certain

significant corporate transactions. However, the circumstances triggering a

shareholder vote were revised to clarify and make more realistic the

exchange's standards and to simplify its administration of the policy. For

example, the threshold amount for requiring shareholder approval for issuances of stock in connection with acquisitions was increased from 18.112

percent to 20 percent, and the policy was amended to take into account total

voting power in addition to the shares outstanding at the time of the issuance

to determine when the threshold would be exceeded.

National Association of Securities Dealers, Inc.

The NASD, the only national securities association registered with the

Commission, is the largest self-regulatory organization in the securities

industry in terms of membership, with over 6,300 member firms. It is the

operator of NASDAQ, the second largest stock market system in the United

States, and the third largest in the world (after the Tokyo Stock Exchange and

the NYSE). In fiscal year 1989, the NASD reported a total of 869 final

disciplinary actions.

Additionally, the Commission received 54 filings of proposed rule changes

50
from the NASD and approved 64 proposed rules changes in fiscal year 1989.

Among the significant rule changes approved by the Commission 194 were

those involving the registration of associated persons of member firms. Rule

changes were approved to specifically prohibit member firms from maintain.

ing inactive registrations 195 and to require member firms to provide associ.

ated persons who resign or are dismissed a copy of the form U-5 (the Uniform

Termination Form filed with the NASD) and to obtain, before hiring, past U-5

forms relating to each new associated person.196 Also, Schedule C of the

NASD By.Laws was amended to establish a new category of registration for

persons who function as securities order takers (Assistant Representative.

Order Processing). 197

The Commission also approved an extension through December 1, 1990 of

the quotation linkage between the NASD and the International Stock

Exchange of the United Kingdom and the Republic of Ireland, Ltd.198 The

Commission published for comment NASD proposals that would prevent a

firm that has been removed as a market maker on NASDAQ from making a

market in that security outside that system during the prohibited period.199

Clearing Agencies

During fiscal year 1989, the Commission received 114 proposed rule

changes from registered clearing agencies and approved 100 rule changes.

For example, the Commission approved a DTC filing concerning the Automated Tender Offer Program (ATOP), which allows DTC participants to

transmit electronically to DTC instructions regarding securities on deposit at

DTC that are subject to a tender or exchange offer.2OO The Commission also

approved a DTC filing concerning a system permitting DTC participants with

a short position at DTC to request DTC to use its Participant Terminal System

to invite tenders, from participants who are long in the particular security, to

eliminate the short positions.2°1 In addition, the Commission approved an

OCC proposal to clear and settle a new CBOE market basket product through

physical delivery of shares at each clearing member's designated clearing

corporation.2°2 Other clearing agency oversight activities of the Commission

during the fiscal year are discussed above in the section entitled "Securities

Markets, Facilities and Trading."

Municipal Securities Rulemaking Board

In fiscal year 1989, the Commission received eight proposed rule changes

from the Municipal Securities Rulemaking Board (MSRB), and approved five

MSRB rule filings. Of particular note was the partial Commission approval of

amendments to the MSRB's Arbitration Code concerning the fairness and

efficiency of the MSRB's arbitration process, and the use of predispute

arbitration clauses in customer agreements. The amendments bring the code

in line with the procedures of the exchanges and the NASD as recommended

by the Securities Industry Conference on Arbitration, as discussed in the

following subsection. The remaining issue to be resolved relates to the

MSRB's proposed definition of "public arbitrator" and whether persons with

strong industry ties should be eliminated from the arbitrator pool.

51
SRO Sponsored Arbitration

During the fiscal year, the Commission and staff placed special emphasis on

oversight of the securities arbitration programs of the SROs. Those oversight

efforts culminated in the Commission's approval on May 10, 1989 of major

reforms to the arbitration rules of most of the SROs that administer arbitration

programs, including all of the forums with significant caseloads. The NASD,

NYSE, Amex,203 CBOE,204 and MSE 205 have adopted the new rules. As

discussed above, the MSRB has adopted the new rules with one exception

concerning the classification of arbitrators.206

The new arbitration rules improve virtually all significant aspects of the

arbitration process. Key issues such as who may serve as arbitrators, public

availability of the results of arbitrators, prehearing discovery of information,

and other issues important to investor confidence in arbitration as a means for

resolving disputes with the brokerage community have been addressed in the

new rules. In addition, the new rules prescribe specific disclosure requirements for customer account agreements that include predispute arbitration

clauses and prohibit the use of such clauses to curtail substantive rights that

would otherwise be available in a judicial forum.

Inspections of SRO Surveillance and Regulatory Compliance

During fiscal year 1989, the staff conducted an inspection of the Amex

options, equity and financial surveillance programs, and of its investigatory

and disciplinary programs. While the inspections staff found that, overall, the

Amex programs functioned adequately, the division recommended improvements in a number of specific areas, including the use of summary fines for

its members with data submission deficiencies and a review of present staffing

levels in its Compliance Department. Further, the staff recommended that

Amex strive to generate its daily specialist capital report either prior to the

start of trading or as shortly thereafter as feasible (enhanced by electronic

submission of input for the report), develop formal procedures to monitor

specialist capital on an intra-day basis following instances of extreme intra-day

price volatility (augmented by changes to its "early warning" signals), and

require reports on financial arrangements available to specialists on a

quarterly rather than annual basis.

In a special purpose inspection, the staff reviewed the programs at the NYSE

and Amex for monitoring affiliations between large, diversified broker-dealers

and specialist operations pursuant to NYSE Rule 98 and Amex Rule 193,

respectively. The inspection staff found that both exchange programs

appeared to be operating effectively. However, the staff made a number of

recommendations for improvements in each exchange's procedures. The staff

also recommended that the NYSE and Amex improve the coordination of

their very similar programs, consider the feasibility of joint examinations for

dual-member firms, and meet regularly to compare findings about dualmember firms and to discuss means of further enhancing the exchanges'

monitoring programs.

In fiscal year 1989, the inspections staff conducted a comprehensive

52
inspection of the NYSE surveillance, investigatory, and disciplinary programs

for "upstairs" member firms' trading violations. The inspections staff found

that while the surveillance and investigatory programs were functioning

adequately, timeliness of investigation completion needed improvement.

Accordingly, the staff recommended that the exchange focus on having all

member firms prepared to transmit requested trade data electronically,

commit to greater use of its disciplinary authority to encourage prompt

transmissions, develop an automated case tracking system, and continue to

improve the efficiency of its automated surveillance systems. As to the

exchange's disciplinary program, the inspection revealedcontinuing deficiencies concerning timeliness and case management and documentation. As a

result, the staff recommended that the exchange implement procedures to

achieve case resolution within 12 months from the time of referral from its

surveillance division, and implement a case tracking system and the use of

internal control procedures, such as the maintenance of docket sheets.

In fiscal year 1989, the staff conducted an inspection of the Phlx regulatory

programs relating to options and equities trading violations. The purpose of

the inspection wasto ascertain the status of the exchange's implementation of

the staffs recommendations made following a comprehensive 1987 inspection. The 1989 inspection found that the Phlx had responded satisfactorily to

the staffs prior findings and recommendations. The staff did recommend,

however, that the exchange devote additional resources to identifying those

surveillance procedures that could be performed more efficiently with additional automation. In addition, the inspection revealed deficiencies in the

timeliness of the exchange's disciplinary process. Accordingly, the staff

recommended that the exchange improve file documentation, establish a

60-day time limit between the authorization of formal charges and the

subsequent issuance of charges to its members, and consider increasing the

staff of its enforcement division.

In April 1989, the staff began a special purpose inspection of broker-dealer

policies and procedures designed to prevent, pursuant to the Insider Trading

and Securities Fraud Enforcement Act of 1988, the misuse of material

nonpublic information. In this regard, the inspections staff reviewed the

surveillance and documentation procedures and interviewed key compliance,

legal, and investment banking personnel at 23 firms nationwide.

The staff conducted an inspection of the NASD's programs for review of

members' communications with the public. Specifically, the inspection

focused on the pre-use review and spot-checks of advertising and sales

literature conducted by the Advertising Department and the on-site review of

such material conducted during routine broker-dealer examinations.

Although a few technical deficiencies were noted, the inspection disclosed

that, overall, the NASD was conducting an effective review of members'

communications with the public.

As a result of findings from a series of inspections of SRO reviews of

members' communications with the public, including the NASD inspection,

the staff sent a letter to the Options Self-Regulatory Council, which is

composed of representatives of those SROs that engage in options trading,

53
recommending improved guidelines and better coordination among SROs in

the review of options advertising, educational material, and sales literature.

The Council, through its Advertising Subcommittee, has proposed a number

of initiatives to respond to the concerns expressed in the staffs letter.

In a related action, the staff conducted a survey of the Amex, CBOE, NASD,

and NYSE to determine whether those SROs, in their reviews of members'

communications with the public, found any communications that they

believed were in violation of any "good taste" standard adopted by the SROs.

Overall, the SROs reported finding few violations, with one SRO, the NASD,

having no specific requirement of that kind in its rule. Although the

Commission had, in the past, approved amendments to SRO advertising rules

that established "good taste" requirements, the SROs were advised that these

requirements are now disfavored by the Commission and that the staff would

consider future amendments by SROs to remove them.

The staff conducted an inspection of the NYSE's programs for monitoring

transfers of customer accounts between member firms, together with a

separate inquiry into specific prolonged failures to transfer customer accounts

by and between certain NYSE members. The inspections disclosed significant

deficiencies in the NYSE's ability to effectively monitor transfers, as well as a

failure to impose meaningful sanctions against members unable to consistently complete transfers within time periods prescribed by NYSE rules.

The staff conducted an inspection of the NASD's broker-dealer examination

program focusing specifically on the NASD's effectiveness in computing retail

markups on equity securities traded in OTC markets. The inspection disclosed systemic weaknesses in the NASD's ability to compute markups in a

manner consistent with NASD guidelines and Commission decisions. Since

the inspection, the NASD has implemented a number of initiatives designed

to ensure proper markup computations, including improved examiner training and supervision.

The staff conducted an inspection of the NYSE Division of Enforcement,

focusing on the NYSE's recommendations to close a number of outstanding

enforcement cases as part of an initiative aimed at effectively managing the

growing caseload within the NYSE's enforcement program. Although the staff

did not object to the NYSE's disposition of any of the cases reviewed, the

inspection raised concerns with some of the rationales used by the NYSE to

support its decisions to close specific cases. The staff recommended that, in

future cases, the NYSE should consistently consider and resolve all attendant

issues (such as the adequacy of the firm's supervision of respondents) and

should take additional steps to ensure that enforcement casesare begun in the

most timely manner possible.

The Commission's nine regional offices conducted routine oversight inspections of regulatory programs administered by ten of the NASD's 14 district

offices. These inspections included evaluations of the districts' broker-dealer

examinations and their financial surveillance and formal disciplinary programs, as well as investigations of customer complaints, terminations of

registered representatives for cause, and members' notices of disciplinary

action. Although these inspections disclosed several deficiencies involving a

54
variety of issues, most were characterized as less serious in degree and

magnitude. Overall, these inspections revealed that the NASD was effectively

meeting its regulatory responsibilities.

On occasion, the inspections staffs oversight of SRO programs indicates a

need for formal remedial action with respect to an SRO's performance. During

the past fiscal year, and for the third time in the past ten years, the Commission

instituted an administrative proceeding against an exchange based on circumstances revealed in the course of the staffs oversight. On May 11, 1989,

the Commission issued an order censuring the CBOE for failing to enforce

compliance with its trading rules?07 Simultaneously with the institution of

these proceedings, the Commission accepted CBOE's offer of settlement.

CBOE, without admitting or denying any of the matters set forth in the

Commission's order, consented to the issuance of the order, the findings

contained therein, and the sanction imposed by the Commission. The

Commission also directed CBOE to comply with undertakings designed to

improve its disciplinary procedures and to strengthen its market surveillance

program.

In the order, the Commission concluded that CBOE failed to enforce

compliance with certain of its rules when CBOE's Business Conduct Committee (BeC) determined not to initiate charges against 12 market makers

(including a former vice chairman of the CBOE) and seven affiliated firms.

The Commission found that, in 1986, the CBOE staff presented compelling

circumstantial evidence to the BCC that certain trades, entered into during the

introduction of new multiply-traded options, were effected primarily for the

purpose of creating an artificial appearance of activity, a practice known as

"chumming," Nevertheless, the BCC determined that no probable cause

existed for finding violations and did not cause a formal disciplinary hearing

to be held. Under these circumstances, the Commission found that the CBOE

violated Section 19(9X1) of the Exchange Act by failing, without reasonable

justification or excuse, to enforce its own rules. Subsequent inspections of the

CBOE surveillance, investigatory and disciplinary programs for trading violations, including one conducted in 1989, found that the CBOE programs

functioned effectively. In the 1989 inspection, however, the staff recommended that the CBOE complete its automated Market Surveillance System,

improve its audit trail accuracy rates, and enhance its file documentation. The

staff also recommended the development of guidelines for the timely and

thorough resolution of all investigations.

During the fiscal year, the inspections staff also conducted a review of

program trading strategies utilized in early 1989 and submitted a report,

dated June 30, 1989, to Congressional oversight committees on these

strategies and their effects on market volatility.

Routine oversight inspections of the BSE and the Spokane Stock Exchange,

and special purpose inspections of the audit trail procedures at the NYSE,

Amex, and the NASD, also were commenced in fiscal year 1989.

Applications for Re-entry

During fiscal year 1989, the Commission received 75 SRO applications to

55
permit persons subject to statutory disqualification, as defined in Section

3(aX39) of the Exchange Act, to become or remain associated with brokerdealers. The distribution of filings among SROs was the following: NASD (50);

NYSE (24); and MSE (1). Of the total filings processed in 1989, including those

received but not completed in 1988, six were subsequently withdrawn, 76 were

completed and four were pending at year-end. One re-entry application was

denied.208

SRO Final Disciplinary Actions

Section 19(dXl) of the Exchange Act and Rule 19d-l thereunder require

self-regulatory organizations to file reports with the Commission of all final

disciplinary actions.

A Rule 19d-l filing reports the facts about a completed action that may

have been initiated at any time during the current or previous years. The

duration of an SRO disciplinary action frequently reflects the severity of the

violations charged, the number of respondents involved, and the complexity

of the underlying 'facts. SROs generally conclude cases involving minor or

technical violations and a single respondent in less than a year. Cases

involving serious trading violations (e.g., price manipulation, insider trading,

frontrunning, etc.) often require more time to complete because of the

necessity for demonstrating specific intent to the disciplinary panel that acts

as trier of fact. Consequently, the absolute volume of Rule 19d-l notices

submitted by an SRO in a given year is not a precise measure of its proficiency

in market surveillance and compliance. Nevertheless, the number of actions

reported can be useful in assessing the regulatory effectiveness of different

SROs over similar time periods, and this information has proved useful in

focusing inspections of SRO regulatory programs.

In fiscal year 1989, the Amex filed 49 Rule 19d-l reports; the CBOE filed

188; the NYSE filed 127; the Phlx filed 166; the PSE filed 107; the MSE filed

two; the registered clearing agencies, the Cincinnati Stock Exchange and the

BSE filed none; and the NASD filed 869.209

SRO Final Disciplinary Actions

1985 1986 1987 1988 1989

Exchanges 530 419 382 624 639

NASD:

District Committees 348 252 415 542 794

NASDAQ and Market

Surveillance Committees 93 174 194 170 75

TOTALS 971 845 991 1336 1508

Securities Investor Protection Corporation (SIPC)

The SIPC Fund amounted to $450.3 million on September 30, 1989, an

increase of $59.8 million from September 30, 1988. Further financial support

56
for the SIPC program is available through a $500 million confirmed line of

credit established by SIPC with a consortium of banks. In addition, SIPC may

borrow up to $1 billion from the United States Treasury Department, through

the Commission.

On January 1, 1989, following Commission approval.f"? SIPC reimposed

revenue-based assessments on member broker-dealers at the rate of 3/16 of

one percent of each member's annual gross revenues from the securities

business, with minimum assessments of $150 per year for each member.

57
Investment Companies and Advisers

Introduction

The Division of Investment Management oversees the regulation of investment companies and investment advisers under two companion statutes, the

Investment Company Act of 1940 (Investment Company Act) and the Investment Advisers Act of 1940 (Investment Advisers Act), and administers the

Public Utility Holding Company Act of 1935 (Holding Company Act). The

tables below show the number and size in terms of assets of registered

investment companies and investment advisers and the number of examinations of those registrants performed over the last five years.

Number of Active Registered Investment Companies

and Investment Advisers

Investment Companies

Investment Advisers

FY'85

2,458

10,908

FY'86

2,912

11,707

FY'87

3,305

12,690

FY'88

3,490

14,120

FY'89

3,544

16,239

85-89

%

Increase

44.18

48.87

132.38

276.06

85-89

%

FY'89 Increase

$1,200

$4,400

FY'88

$1,125

$3,400

FY'87

$1,205

$2,500

FY'85 FY'86

$525 $742

$1,170 $1,400

Investment Company and Adviser Assets Onder Management

(in billions)

Investment Companies

Investment Advisers

38.62

10.68

20.55

FY'89

786

1,150

1,936

FY'88

799

1,374

2,173

FY'87

739

1,294

2,033

FY'86

643

1,337

1,980

FY'85

567

1,039

1,606

Inspections/Examinations of Investment Companies and Advisers

85-89

%

Increase

Investment Companies

Investment Advisers

Total Examinations

The number of registered investment companies increased by only 1.5

percent during fiscal year 1989. An important factor in the recent slowing of

growth in the number of registered investment companies is the number of

investment companies that now combine several separate portfolios or

investment series in one investment company registration. The Division of

Investment Management estimates that counting the separate portfolios or

series of these companies would equate to a registrant population of 16,000

investment companies at the end of fiscal year 1989. Registered investment

companies added 590 new portfolios or series during fiscal year 1989. The

58
number of registered investment advisers grew by 10 percent and the assets

they manage increased by 19.5 percent.

Investment company and investment adviser examinations completed

decreased by 11 percent during the fiscal year. This decrease was due to a

decision to devote greater staff resources to the examination of high risk

investment companies and advisers.

Key 1989 Results

Significant Legislative Developments

In June 1989, the Commission proposed legislation to amend the Investment Advisers Act to authorize the creation of one or more self-regulatory

organizations (SROs) for investment advisers. The SROs would generally be

patterned after SROs for broker-dealers created under the Securities

Exchange Act, providing for Commission oversight of the activities of any

investment adviser SRo. All registered investment advisers would be required

to join an adviser SRO, which would regulate all advisory activities except

those involving investment companies registered under the Investment Company Act. The Commission would retain oversight responsibilities for investment companies.

Disclosure Requirements

The Commission revised registration Forms N-3 and N-4 used by insurance companies that issue variable annuity contracts under the Investment

Company Act and the Securities Act?ll The revisions consolidate expenserelated data in a table near the front of the prospectus in order to improve the

quality of expense disclosure in variable annuity prospectuses.

Rule 30b 1-3 under the Investment Company Act was adopted by the

Commission in March 1989. The rule requires companies changing their fiscal

year to file a report on Form N-SAR within 60 days after the close of the

transition period or the date of the determination to change the fiscal year,

whichever is later; the transition period can be no longer than six months.212

Amendments to the registration form for closed-end investment companies

(Form N-2) were proposed that would extend the two-part disclosure format

to closed-end funds, update current disclosure requirements, and shorten and

simplify the per share table. The Commission also proposed an amendment

to Rule 8b-16 under the Investment Company Act to exempt closed-end funds

from the requirement that their Investment Company Act registration statements be updated annually, provided certain disclosures are made to fund

shereholders.P:'

The Commission adopted three new forms (N-17f-l, N-17f-2, and

ADV-E) to be filed by accountants with their certificates for examinations in

those cases in which investment companies (or members of a national

securities exchange) or investment advisers have custody of securities. The

forms are to be filed in accordance with Rules 17f-l and 17f-2 under the

Investment Company Act and Rule 206(4)-2 under the Investment Advisers

59
Act. The new forms are intended to facilitate proper filing of examination

certiflcates.F'"

The Commission published for comment a release proposing revisions to

Form N-1A, the registration statement used by open-end investment companies. The Commission proposed two alternative amendments designed to

provide investors with new, easily understood information about mutual fund

performance. The first alternative would require management to discuss and

analyze the mutual fund's performance during its previous fiscal year and the

techniques used to achieve that performance in light of the fund's objective.

The second alternative would require a comparison of fund performance over

certain time periods to the performance of an appropriate securities index

over the same periods. In addition, the Commission proposed amendments

that would (1) revise the per share table contained in the prospectus to shorten

and simplify it, while providing investors with the fund's total return and (2)

require disclosure about persons who significantly contribute to the investment advice relied on by funds. The revised disclosure requirements are

intended to provide investors with more information about the performance of

the fund and the individuals who may be primarily responsible for that

perforrnance.v'"

EDGAR Filings

In July 1985, the Office of Public Utility Regulation began accepting

electronic filings from registered public utility holding company systems and

their member companies. An EDGAR Pilot Branch was formed in October

1985, which began processing electronic filings for a volunteer group of

investment company registrants. The volunteers include a representative

group of 214 management investment companies and 78 unit investment

trusts with over 3,659 separate series. Electronic filings of semi-annual reports

on Form N-SAR have also been made by 999 registered management

investment companies that are not full-scale participants in the EDGAR Pilot.

As of September 30, 1989, the Commission had received 42,980 investment

company filings through the EDGAR pilot system.

Over one-third of all active registered management investment companies

are now making electronic filings on Form N-SAR. The Division of Investment Management is working with the Commission's Office of Information

Systems Management to develop an efficient means to transfer the information contained in these filings to a N-SAR database and to permit the

automated manipulation of that information. The number of investment

companies filing N-SARs electronically has reached a point where a N-SAR

database, using data extracted from reports filed through EDGAR, could be a

useful resource in the investment company inspection program and other

Commission activities.

Regulatory Policy

Significant Investment Company Act Developments. During fiscal year 1989,

the Commission proposed 216 and adopted 217 Rule 32a-3 under the Invest60
ment Company Act to provide an exemption, under certain conditions, from

the requirement that an independent public accountant be selected at a board

of directors meeting held within 30 days before or after the beginning of the

company's fiscal year or before the annual meeting of stockholders. Companies eligible to rely on the rule are given an expanded time period during

which to select an accountant.

Rule 12dl-l under the Investment Company Actwas proposed during fiscal

year 1989 to ease restrictions on registered investment companies' acquisitions of the securities of foreign banks and foreign insurance companies.218

Rule 12d-l is intended to provide registered investment companies a broader

range of investment policies and more flexibility in acquiring the securities of

foreign banks and foreign insurance companies. The rule has now been

adoptedr"?

Rule lla-3 under the Investment Company Act was adopted to permit a

registered open-end investment company (other than a registered separate

account) or its principal underwriter (collectively, the offering company) to

make certain exchange offers to the company's shareholders or to shareholders of another open-end investment company in the same group of investment

cornpanles.F" Since exchange offers permit shareholders to move easily from

one fund to another, such offers are popular with investors. Absent the rule,

such exchange offers would be prohibited without prior Commission approval.

The Commission proposed amendments to Rule 12d3-1 under the Investment Company Act which would allow registered investment companies to

acquire the equity securities of foreign securities firms, provided such

securities conform to certain criteria.221

Significant Public Utility Holding Company Developments. There were 13

registered public utility holding company systems with aggregate assets of

$92.2 billion as of June 30, 1989, an increase of $2.9 billion or 3.2 percent

over June 30, 1988. Total operating revenues for the 12 months ended June

30, 1989 were $34.2 billion, a $1.5 billion increase from the 12 months ended

June 30, 1988. There are 69 electric or gas utility subsidiaries, 76 nonutility

subsidiaries, and 29 inactive companies in the 13 registered systems, a total

of 187 companies operating in 24 states (excluding seven power supply

subsidiary companies).

During fiscal year 1989, the Commission authorized the issuance of nearly

$4.9 billion of senior securities and common stock financing for the 13

registered systems: $4.0 billion in long-term debt financing and $871 million

in common and preferred stock. Long-term debt financing decreased by 13.0

percent from fiscal year 1988 primarily due to the volume of refinancing

undertaken in prior years. In addition, $169 million in pollution control

financing and $7.8 billion in short-term debt financing were approved.

Pollution control financing decreased 72.9 percent from amounts authorized

in fiscal year 1988. Short-term debt increased 59.2 percent from the previous

fiscal year. The Commission authorized $2.6 billion of financing for the sale

and leaseback of nuclear and coal-fired generating plants owned by the

registered holding company systems and $340 million of investments in

qualified cogeneration and small power production facilities and energy

61
management and audit systems. Total financing authorizations increased

34.8 percent over 1988, from $11.5 billion to $15.5 billion. Finally, the

Commission authorized $584 million for nuclear fuel and $80 million for oil

and gas development and exploration.

The Commission reviews holding company fuel procurement activities,

accounting policies, audits of service companies, as well as annual reports of

holding company subsidiary service companies and fuel procurement subsidiaries and quarterly reports by holding company nonutility subsidiaries.

Electric utility subsidiaries of registered public utility holding companies were

required to reduce the cost of fuel billed to customers by the amount of

revenues gained from (1) the sale of excess oil and gas to nonassociated

companies and (2) subleasing and transloading of coal and oil barges.

Approximately $16.7 million in savings to consumers was realized as a result

of this requirement.

The Commission proposed two rules during fiscal year 1989. Rule 17

specifies circumstances in which nonutility diversification by an intrastate

public utility holding company would not be deemed detrimental to the public

interest or the interest of investors or consumers.222 Rule 52 would allow

routine issuance and sale of securities by public utility subsidiary companies

of registered holding companies to proceed without filing an application,

provided certain conditions are met.223 The Commission adopted Rule 52

essentially as proposed so as to permit the immediate realization of the rule's

benefits.224 However, the Commission is seeking comment on the need to

revise Rule 52 to eliminate or modify certain of the conditions that are now

part of the rule.225

Significant Institutional Disclosure Program Developments. Securities

Exchange Act Section 13(f)(1)and Rule 13f-1 require specified "institutional

investment managers" to file quarterly reports on Form l3F. Under Rule

13f-2(D, these managers may file the report on Form 13F-E through

magnetic tape by using the Commission's pilot electronic disclosure system,

EDGAR. Managers filing these reports disclose specified equity holdings of

the accounts over which they exercise investment discretion. for the year

ended September 30, 1989, Form 13f reports had been filed by 940

managers for total holdings of $1.5 trillion. Sixty managers electronically filed

form 13F-E reports for the quarter ended September 30, 1989 and reported

nearly 11,000 securities holdings totaling over $83 billion.

Form 13F reports are available to the public at the Commission's Public

Reference Room promptly after filing. Two tabulations of the information

contained in these reports are available for inspection: (a) an alphabetical list

of the individual securities showing the number of shares held by the

managers reporting the holding and (b) a list with the total number of shares

of a security reported by all reporting managers. Both tabulations normally

are available two weeks after the date on which the reports must be filed.

Significant Applications and Interpretations

Investment Company Matters. A Canadian closed-end fund holding com.

62
pany was exempted from Section 12(dX1XA)of the Investment Company Act

and permitted to invest more than ten percent of its assets in the securities of

United States closed-end investment companies.226 The Canadian fund must

still comply with all provisions of Section 12(dX1XF)except registering under

the Investment Company Act, and the fund may not offer, sell, or permit the

transfer of its securities in the United States or to its citizens.

An administrative hearing involving the application of The College Retirement Equities Fund (CREF), a non-profit corporation providing retirement

benefits to employees of colleges and universities, was concluded in August

1989. Exemptive relief had been requested under the Investment Company

Act to restrict redemptions and limit the voting rights of its participants. The

Commission approved the terms of the settlement under which CREF agreed

to permit transfers and lump sum distributions if an employer consents. The

settlement also provides for the election of CREF's Board of Trustees by fund

partlclpants.F"

The Commission exempted the open-end management investment companies for which Fidelity Management and Research Company or an affiliate

acts as investment adviser from Sections 12(dX1), 17(aX1), 17(aX3), 17(d),

18(f), and 21(b) of the Investment Company Act and Rule 17d-1 thereunder,

and approved certain joint transactions under Rule 17d-l. 228 The relief

permits the funds to borrow from and lend to each other through a proposed

credit facility at interest rates that, because of the elimination of intermediaries, would be both higher for the lender and lower for the borrower than

would otherwise be available. The relief is subject to several conditions.

The Commission allowed the T. Rowe Price Spectrum Fund, a "fund of

funds," to invest 100 percent of its assets in Price funds so long as no more

than 15 percent of its assets are invested in anyone underlying Price fund.229

The Spectrum Fund is designed to offer small and retirement-oriented

investors the benefits of a diversified portfolio of mutual fund investments at

less cost than separately purchasing shares of each underlying fund.

The staff declined to grant no-action relief to an entity that wanted to

distribute non-English language sales materials and advertisements within

the United States to persons who use English as a second language because

only an English language prospectus was available for the funds.23o The staff

stated that if the entity distributed sales literature or advertisements in a

language other than English, a prospectus in the same language should be

readily available.

The staff stated that it would not recommend enforcement action to the

Commission for a fund that did not include performance results achieved prior

to the date that a new investment adviser managed the fund.231 However. as

a condition to this no-action position, the fund must clearly state in any

advertisement or sales literature that it previously operated under different

management, and no person affiliated with the new adviser had any affiliation

with the previous adviser; per share income and capital changes for the last ten

fiscal years must be disclosed in the fund's prospectus.

In June 1989, the staff stated that ifthe information required to be disclosed

in the fee table of a fund's prospectus does not, because of unique circum63
stances, reflect anticipated future expenses, a fund may describe the nature of

those circumstances in the narrative following the table or elsewhere in the

prospectus.232 Because funds have the ability to explain fully any unique

circumstances and because the staff would have difficulty making the kind of

factual determinations necessary to grant a no-action request, the staff stated

that, as a matter of policy, it would not grant no-action relief in this area.

On October 20, 1989, the staff concluded that Resolution Funding Corporation (Refcorp) is wholly owned, directly or indirectly, by the United States or

an agency or instrumentality of the United States for purposes of the

Investment Company Act; therefore, that Act does not apply to Refcorp.233In

reaching its conclusion, the staff noted that Refcorp is authorized to issue only

one class of equity securities (non-voting capital stock) to be held by Federal

Home Loan Banks. The Directorate, its governing body, will be comprised of

the director of the Office of Finance, Federal Home Loan Banks, and two

members selected by the Oversight Board from among the presidents of the

Federal Home Loan Banks. Members of the Oversight Board, having general

oversight over Refcorp, will consist of officials of the United States government

and two persons appointed by the President, with the advice and consent of

the Senate.

Insurance Products Matters. The staff issued a letter stating that Rule 6e-3(T)

under the Investment Company Act applies only to contracts for which there

is a reasonable expectation that unscheduled payments will be made by

contract holders.234 No-action relief was denied because the contracts under

consideration would not have allowed a purchaser to increase the death

benefit beyond its initial level and the initial premium was already the

maximum permitted by the Internal Revenue Code.

Investment Advisers Act Matters. The Commission issued an order that

exempted Smith Breeden Associates, Inc. from Section 205(aX1) of the

Investment Advisers Act. Smith Breeden Associates was permitted to receive

an incentive fee for the disposition of assets of a failed thrift which were held

in the securities portfolio of a federally-insured thrift institution.235

HoLding Company Act Matters. The Commission authorized a plan submitted by Northeast Utilities, a registered holding company, under Section 11(e)

of the Holding Company Act to organize a new gas holding company system,

Yankee Energy System Inc. Northeast Utilities proposed to transfer and sell its

gas utility business to Yankee Energy and to divest its gas utility business by

means of a pro rata distribution of Yankee Energy common stock to its

common shareholders.P''

The Commission released jurisdiction over the issuances, sales, and acquisitions of certain securities after May 14, 1989, which was reserved in the

Commission's Memorandum Opinion and Order dated May 12, 1988 (HCAR

No. 24641), and authorized a proposal by EUA Power Corporation (EUA

Power), an electric public utility subsidiary company of Eastern Utilities

Associates (EUA), a registered holding company. By this action, the Commission authorized EUA Power to issue 17-112 percent Series C Secured Notes

(Series C Notes) on May 15, 1989 in the amount of $26,107,102 and on

November 15, 1989 in the amount of $29,145,316. These two issues were in

64
lieu of the semi-annual cash interest payments due on those dates on EUA

Power's outstanding 17-112 percent Series B Secured Notes and Series C

Notes.237 EUA Power was further authorized to issue and sell, and EUA was

authorized to acquire, through May 14, 1990, up to an additional $15.6

million of Class A 25 percent Cumulative Convertible Preferred Stock

(Preferred Stock). This issue will fund EUA Power's share of costs associated

with its joint ownership interest in the Seabrook Nuclear Power Project and to

maintain EUA Power's debt/equity ratio. In connection therewith, EUA was

authorized to finance its acquisition of EUA Power's Preferred Stock through

the issuance, through December 31, 1989, of up to an additional $15.6

million of short-term notes to banks under its existing lines of credit.

The Commission authorized Indiana and Michigan Power Company and

AEP Generating Company, subsidiaries of American Electric Power Company,

a registered holding company, to sell and leaseback their respective 50

percent ownership interests in the Rockport 2 coal-fired generating station for

an amount not to exceed $1.7 billion.238 The Commission authorized Louisiana Power and Light Company, a subsidiary of Energy Corporation (formerly,

Middle South Utilities), a registered holding company, to sell and leaseback a

9.3 percent undivided interest in the Waterford 3 nuclear plant for approximately $354 million.239

After an administrative hearing, an administrative law judge rendered an

Initial Decision on February 23, 1989 approving an application by CSW Credit,

Inc., a captive finance subsidiary company of Central and South West

Corporation.P'? The application sought the removal of a limitation the

Commission had previously imposed, by order, on the ability of CSW to factor

receivables of nonassociated utility companies. The division sought review of

the Initial Decision by the Commission. The petition for review was granted on

March 15, 1989. Oral argument will be scheduled.

A notice of the filing of two applications by Noverco of Montreal, Canada

was issued.241 No requests for a hearing were filed, but written comments were

received. The Commission, on December 1, 1988, issued a notice of and order

for hearing on Noverco's two applications.242 The parties waived an evidentiary hearing and an initial decision by the administrative law judge. Briefs

have been filed. The two applications request (a) approval under Sections

9(aX2) and 10 of the Act to acquire all of the common stock of Northern New

England Gas Corporation, a Vermont corporation and an exempt holding

company which owns all of the common stock of Vermont Gas System, Inc.,

a Vermont corporation that provides retail gas service in Vermont, and (b) an

exemption under Section 3(aX5) of the Act. There are two issues presented,

namely, whether the proposed acquisition by a foreign public utility holding

company of the common stock of a United States public utility company

should be authorized and, if so, whether the foreign holding company should

thereupon be exempted from the Act given the size of the United States public

utility company.

On November 28, 1988, ALLTELand CP National Corporation (CPN)jointly

filed an application under Section 3(aX3) of the Holding Company Act

requesting an exemption for ALLTEL from all of the provisions of the Act

65
except Section 9(aX2) thereof. The application for exemption was filed in

anticipation of ALLTEL.:sacquisition of all of the common stock of CPN, which

is, among other things, a gas utility company. The acquisition of CPN was

effected on December 30, 1988, and ALLTEL thereupon became a public

utility holding company. The application was amended on February 6, 1989

to reflect the completed acquisition and to remove CPN as a co-applicant.

Under Section 3(c) of the Act, ALLTEL is exempt "until the Commission has

acted upon such application." On October 5, 1989 the Commission issued a

Notice of and Order for Hearing to determine whether ALLTEL, which is

engaged primarily in the telecommunications business, may be deemed to be

"only incidentally a holding company" under Section 3(aX3) of the Act and to

determine whether an exemption is appropriate given the size and location of

its gas utility operations.243

66
Other Litigation and Legal Activities

Introduction

The General Counsel represents the Commission in all litigation in the United

States Supreme Court and the courts of appeals. This litigation includes appeals

of district court decisions in Commission injunctive actions and petitions for

review of Commission orders. The General Counsel defends the Commission and its employees when sued, prosecutes administrative disciplinary

proceedings against securities professionals, and appears amicus curiae on

behalf of the Commission in significant private litigation involving the

federal securities laws. In addition, under the supervision and direction of

the General Counsel, the regional offices represent the Commission in

corporate reorganization cases under the Bankruptcy Code that have a

substantial public investor interest. The General Counsel also analyzes

legislation that would amend the federal securities laws or otherwise affect

the Commission's work and prepares legislative comments and conqressional testimony. The General Counsel's Office reviews proposed Cornmission action to ensure that enforcement and regulatory programs are

consistent with the Commission's statutory authority. In addition, the

General Counsel assists the Commission in the preparation of its decisions

in administrative proceedings under various statutes.

Key 1989 Results

The General Counsel represented the Commission in 350 litigation matters

in fiscal year 1989, compared to 314 such matters in fiscal year 1988. During

the year, 43 court of appeals and Supreme Court cases were concluded, all but

eight favorably to the Commission. There were 27 appeals in Commission

injunctive actions, four of which were concluded, with no outcomes unfavorable to the Commission.

In fiscal year 1989, there were 27 appellate and district court actions seeking

to overturn Commission orders in administrative proceedings or affirming

self.regulatory organization (SRO) disciplinary proceedings against securities

professionals. Of these appeals, 13 were concluded, with only two adverse results.

In fiscal year 1988, six such actions were concluded, with one adverse result.

FY'85 FY'86 FY'87 FY'88 FY'89

Win Loss Other' Win Loss Other' Win Loss Other' Win Loss Other' Win Loss Other'

Supreme Court and

Appellate Courts 36 4 5 32 3 2 31 3 2 24 3 0 30 8 5

District Court 23 3 2 21 0 1 14 3 0 16 2 5 16 2 2

Bankruptcy Court 20 5 0 13 3 1 4 7 1 8 3 1 4 0 2

Other" 7 0 0 4 1 0 3 0 0 2 1 1 5 0 3

, Issue not reached. split decision. etc.

State Courts and Admlnistranve Tribunals.

67

"
The federal securities laws provide for private remedies as well as government enforcement actions. Because decisions in private cases may have

precedential effect on SEC regulatory activities and private remedies provide

added deterrence to violations, the Commission's participation in such cases

is an important supplement to its enforcement program. The Commission

participated as amicus curiae (friend of the court) in 45 cases during the year,

compared to 50 cases in fiscal year 1988. It participated in 13 private cases

that were decided, only three of which resulted in decisions adverse to the

Commission.

The General Counsel also handled more than 251 other proceedings before

the Commission or in the federal district courts. These included 58 suits

brought against the Commission or its staff and 102 suits seeking access to

Commission documents-including actions under various public information

statutes. Of the latter, 96 suits involved discovery subpoenas in private actions

where the Commission is not a party. In fiscal year 1988, there were 61 suits

brought against the Commission or its staff and 95 suits (including 89

third-party subpoenas) under the various public information statutes.

In addition to litigation, the General Counsel is involved in significant

legislative, regulatory, and adjudicative work. For example, the office assisted

the Chairman and the Commissioners in preparing testimony on issues such

as the globalization of the securities markets, the impact of leveraged

buyouts, and the need for additional enforcement remedies. The office also

assisted the Commission in preparing legislative proposals concerning,

among other things, the sanctions and remedies available to the Commission,

market reform, and statutory changes to improve the Commission's ability to

enforce the securities laws in increasingly global markets. In addition, the

office assisted the Commission in preparing its decisions in administrative

proceedings on appeals from adjudicative actions taken by self-regulatory

organizations and administrative lawjudges and on motions presented to it in

connection with such matters.

During fiscal year 1989, 125 debtors with publicly-held securities registered

under the Securities Exchange Act of 1934 (Exchange Act) commenced

Chapter 11 reorganizations. The Commission appeared in 53 of these cases,

which, together with one non-registered company, involved assets of about

$8.7 billion and about 200,000 public investors. A list of pending Chapter 11

cases in which the Commission has filed a notice of appearance is set forth in

Table 23 of the Appendix to this report.

Litigation

Illegal Trading and Disgorgement. In SEC v. First City Financial COrp.,244 the

Commission successfully urged the United States Court of Appeals for the

District of Columbia Circuit to affirm a district court order enjoining the

defendants from violating the disclosure provisions of Exchange Act Section

13(d) and requiring them to disgorge approximately $2.7 million of illegal

trading profits. The district court found that the defendants had entered into

an informal understanding with a broker that enabled them to conceal the fact

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that they had purchased stock in excess of the Section 13(d) five percent

reporting threshold. The District of Columbia Circuit agreed with the Commission that injunctive relief was proper because of the seriousness of the

reporting violation, which had the effect of depriving the market of valuable

information and allowing the defendants to buy stock at bargain prices. The

Court also agreed with the Commission that disgorgement was an appropriate

remedy for such reporting violations because buying stock while failing to

make the disclosures required by statute is, in effect, trading by an insider who

fails to disclose material information that he is under a duty to disclose.

The Commission assisted the United States Attorney for the Southern

District of New York in United States v. Chestman,245 an appeal of insider

trading convictions. Chestman argued that there was insufficient evidence to

support his convictions. The government contended that Chestman violated

Exchange Act Section 1O(b) and Rule 10b-5 when he traded on material

nonpublic information about an upcoming tender offer that had been tipped

to him by the husband of a member of the family that owned a majority of the

target company's stock. In addition, Chestman challenged the validity of

Exchange Act Rule 14e-3, which prohibits trading while in possession of

material nonpublic information about a tender offer. The government argued

that promulgation of the rule, which furthers the goal of encouraging full

disclosure in connection with tender offers, was well within the Commission's

rulemaking authority.

In the insider trading cases of SEC v. Levine and SEC v. Wilkis,246 the

Commission urged the United States Court of Appeals for the Second Circuit

to affirm a district court order awarding the defendants' illegal insider trading

profits to the victims of their fraud, as beneficiaries of a constructive trust,

rather than to satisfy the claims of the Internal Revenue Service (IRS)and other

tax authorities. The Court of Appeals, however, reversed this portion of the

district court's decision, holding that a requisite element of a constructive

trust-a wrongful act-had been neither proven nor conceded. In addition, the

Court held that, even if wrongdoing had been established, the district court

erred in concluding that the defendants did not have property rights in the

illegal profits to which an IRS lien could attach. The Court reasoned that

transactions that violate the federal securities laws are merely voidable, not

void, and that under applicable New York law, voidable title is sufficient to

enable a wrongdoer to pass good title. As a result of the Second Circuit's

decision, a substantial portion of the illegal trading profits disgorged from

defendant Levine will be paid to the IRS to satisfy a tax lien. Litigation

continues with respect to the remainder of the disgorgement fund.

Self.Regulatory Organizations. During fiscal year 1989, the Commission

responded to several important petitions for review of Commission actions

involving SROs. In The Business Roundtable v. SEC,247 the petitioners

challenged the Commission's authority to promulgate Rule 19c-4, which

requires SROs to adopt rules denying listing (or requiring delisting) of the

equity securities of any company that nullifies, restricts, or reduces the per

share voting rights of any outstanding class of common stock. The rule was

adopted in response to a New York Stock Exchange proposal to change its

69
listing requirements to permit disproportionate voting rights. In its brief to the

United States Court of Appeals for the District of Columbia Circuit, the

Commission disputed the contention that it lacks the authority to amend SRO

listing standards that relate to internal corporate governance. Such authority,

the Commission argued, exists under the 1975 Amendments to the Exchange

Act, which expanded the Commission's authority to include all SRO rules,

regardless of the subject matter. The Commission also urged that Rule 19c-4

furthers the purposes of a number of Exchange Act sections, in particular

Section 14's proxy provisions, by promoting fair corporate suffrage. Finally,

the Commission argued that Rule 19c-4 is not an impermissible infringement

upon the states' traditional authority to charter and regulate corporations.

In Chicago Mercantile Exchange v. SEC,248 the United States Court of

Appeals for the Seventh Circuit set aside Commission orders that allowed

three securities exchanges and the Options Clearing Corporation to issue,

trade, and clear index participations (IPs). The Commission had determined

that IPs fall within the Exchange Act's definition of security and are not futures

contracts. The Court did not disagree with the Commission's determination

that IPs are securities. The Court, however, deferred to the view of the

Commodity Futures Trading Commission (CFTC), expressed in an amicus

curiae brief, that IPs also are futures contracts, and thus held that IPs are

subject to regulation only by the CFTC under the Commodity Exchange Act.

Definition of a Security. The Supreme Court, as urged by the Commission,

granted certiorari in Arthur Young & Co. v. Reves 249 to address the question

whether certain interest-bearing promissory notes that were widely offered

and sold to the public by an Arkansas farmers' cooperative are securities. The

United States Court of Appeals for the Eighth Circuit held that the notes were

not securities because they were payable on demand and because the interest

paid on the notes did not constitute "profit" under the test established by the

Supreme Court in SEC v. \.v.J. Howey Co,250 for an "investment contract."

The Commission argued in an amicus curiae brief to the Supreme Court that

the instruments are "notes" within the statutory definition of "security" in

both the Securities Act of 1933 (Securities Act) and the Exchange Act. The

Commission argued that the Eighth Circuit failed to take into account the

substance of the transactions-that the notes were sold to the public in small

denominations as part of a broad offering and were marketed as investments.

In addition, the Commission's brief discussed the three tests used by the

courts of appeals to determine when an instrument is a "note" within the

definition of "security" and urged the Supreme Court to adopt the Second

Circuit's "family resemblance" test. The Commission further argued that the

fact that the notes were payable on demand does not disqualify them from

being securities, since it is a note's character, not its maturity date, that

determines whether the note is covered by the federal securities laws. Finally,

the brief took the position that an investor's expectation of receiving interest

on a debt instrument qualifies as "profit" under Howey.

In Holloway v. Peat, Marwick, Mitchell & CO./51 the United States Court of

Appeals for the Tenth Circuit, agreeing with the position urged by the

Commission as amicus curiae, held that certificates issued by two Oklahoma

70
financial institutions were securities. The certificates at issue generally had

maturity dates of six months or less and some were payable on demand.

Applying the Tenth Circuit's "cornrnercial/Investrnent' test for determining

when an instrument is a "note" within the definition of "security," the Court

held that the certificates were covered by the securities laws because they had

been offered to the general public, purchased by more than 10,000 investors,

and advertised to the public as investments. The Court rejected the argument

that, under the Supreme Court's decision in Marine Bank v. Weaver,252 the

federal securities laws should not apply, since the financial institutions

involved were subsidiaries of a bank holding company that had been subject

to regulation under the federal Bank Holding Company Act at the time the

certificates were issued. The Court held that the Marine Bank exclusion was not

applicable in this case because the protections of the two statutes were not

comparable-the Bank Holding Company Act's purpose is to protect depositors in banks owned by holding companies, not investors in the nonbank

subsidiaries of holding companies. The Court also held that state regulation

of financial institutions is not sufficient to invoke the Marine Bank exclusion.

Finally, in Foremost Guaranty Corp. v. Meritor Seoinqs Bank,253 the Com.

mission filed an amicus curiae brief that addressed the question of whether

certain mortgage backed pass-through certificates are securities. The Commission urged the United States Court of Appeals for the Fourth Circuit to

overturn a district court decision holding that the certificates are not securities. The Commission took the position that the certificates satlsfy the

investment contract test set forth in SEC v. WJ. Howey Co. The Commission

also took the position that the certificates fall within the category "certificate

of interest . . . in any profit-sharing agreement" included in the definition

of a security in both the Securities Act and the Exchange Act. In addition, the

Commission pointed out that such mortgage backed certificates have been

universally viewed as securities by Congress, by the Commission, by com.

mentators, and by the legal and financial communities. Thus, the Commission

argued that the certificates fall within the category "instrument commonly

known as a 'security'" included in the Securities Act and Exchange Act

definitions of security.

Btoker-Deelers and Market Professionals. The Commission filed an amicus

curiae brief at the request of the United States Court of Appeals for the Ninth

Circuit in Hollinger v. Titan Capital COrp.,254 expressing the Commission's

views on important issues concerning the liability of brokerage firms and

urging the Court to hear the case en banco First, the Commission urged the

Court of Appeals to overrule its earlier decisions holding that respondeat

superior (the doctrine that a principal is responsible, under certain circumstances, for the conduct of the principal's agent) is unavailable in actions under

Section 10(b). The Commission took the position that respondeat superior is

applicable to the federal securities laws just as it is in actions for common law

fraud. In addition, the Commission urged the Ninth Circuit to hold that

recklessness as defined at common law-a conscious indifference to the truth,

falsity, or misleading nature of a representation-satisfies the scienter requirement of Section 10(b) and Rule lOb-5.

71
Liability in Private Actions. In Wilson v. Ruffa & Hanover, p.c.,255 the United

States Court of Appeals for the Second Circuit held that a law firm that

participates in a securities offering can only be found liable under Securities

Act Section 12(2) if its participation was "the legal equivalent of solicitation of

a sale." The Second Circuit's decision reflected the position of the Commission, which had filed an amicus curiae brief at the Court's invitation. The Court

of Appeals, applying the principles governing liability articulated by the

Supreme Court in Pinter v. Dahl256 for actions under Securities Act Section

12(1) to actions under Section 12(2), held that a law firm could not be found

liable when its participation in an offering consisted only of preparing offering

materials and sending them to investors at the issuer's request. In addition, the

Court of Appeals agreed with the Commission that aiding and abetting

liability is inappropriate under Section 12(2).

The Commission participated in two recent cases raising the issue of the

appropriate statute of limitations for private actions under Exchange Act

Section 1O(b)in the absence of an express statutory limitations period for such

actions. In response to the Supreme Court's request for the government's

views, the Solicitor General filed an amicus curiae brief, in accord with the

Commission's position, in Lebman v. Aktiebolaget Electrolux.257 The United

States Court of Appeals for the Fifth Circuit had affirmed the district court's

dismissal of the petitioners' action under Exchange Act Section 10(b) as

time-barred, finding that the applicable statute of limitations was the two-year

limitations period governing actions under the Texas general fraud statute.

The government's brief in the Supreme Court expressed the view that

applying state law has yielded inconsistent results and recommended that this

approach should be abandoned in favor of a uniform limitations period drawn

from federal law.The brief urged that the Court adopt the five-year limitations

period of Exchange Act Section 20A, which establishes an express private

cause of action against persons who trade while in possession of material

inside information. Congress, in adopting Section 20A as part of the Insider

Trading and Securities Fraud Enforcement Act of 1988, for the first time

provided a statutory federal limitations period applicable to certain private

actions brought under Section 1O(b)(I. e., actions for insider trading). The brief

noted that, in selecting the five-year period, Congress established a limitations

period attuned to what it perceived to be the appropriate balance between

affording a remedy for investors injured by fraud and providing repose for

potential defendants in private antifraud actions. Despite advancing a view

contrary to the Fifth Circuit's decision, the brief recommended that the

Supreme Court deny review because the Fifth Circuit's decision predated the

adoption of Section 20A and since other courts had not had the opportunity

to consider whether Section 20A provides a suitable analogy to other actions

under Section 10(b) and Rule lOb-5. The Supreme Court denied review.

In Ceres Partners v. GEL Associates,258 the Commission asserted the same

position as to the applicability of the five-year limitations period in an amicus

curiae brief filed in the United States Court of Appeals for the Second Circuit.

Finally, in Deutschman v. Beneficial COrp.,259another case involving private

rights of action under Section 1O(b),the Supreme Court declined to review a

72
decision by the United States Court of Appeals for the Third Circuit, holding

that purchasers of call options have standing to assert a cause of action for

affirmative misrepresentations against the non-trading issuer of the underlying securities. In response to the Supreme Court's request for the government's views, the Solicitor General filed an amicus curiae brief, in accord with

the Commission's position, urging that the Court deny review. The government's brief took the position that it is appropriate that options traders have

standing in the circumstances presented. The brief observed that options

traders are purchasers and sellers of securities, and that the complaint in this

case alleged a fraud "in connection with" purchases and sales. The brief also

argued that, in a case alleging affirmative misrepresentations, no fiduciary

relationship need exist between the options traders and the corporation

making the misstatement. Finally, the brief argued that there are no policy

reasons that would support denying standing to options traders. In particular,

the brief noted that not allowing options traders to sue would leave unrernedied economic harm flowing from fraud, and that assertions that allowing

options traders to sue would impose enormous potential liability on issuers

are unsubstantiated.

Intemational Application of the Securities Laws. In Consolidated Gold Fields,

PLC v. Minorco, S.A.,260 the United States Court of Appeals for the Second

Circuit held that a tender offer involving two foreign corporations had a

"substantial effect" within the United States. Thus, even though most of the

shareholders resided outside of the United States and the tender offeror

sought to exclude United States shareholders from the offer, the presence of

"substantial effect" was sufficient to allow subject matter jurisdiction under

the antifraud provisions of the federal securities laws. The district court had

dismissed securities fraud claims brought against the acquiring company on

the ground of "insignificant" United States effects. The Second Circuit,

agreeing with the position urged by the Commission in an amicus curiae brief,

held that the district court should have asserted jurisdiction, since the

acquiring company had sent the tender offer documents to British nominees

of the target company's American shareholders and those nominees were

required by law to forward the offering materials to the American shareholders. Nevertheless, the Appellate Court, consistent with the position urged by

the Commission, remanded the proceeding to the district court to determine

whether the extraterritorial effect of the particular remedy sought (an injunction against the tender offer worldwide) was disproportionate to the harm in

the United States for which redress was sought.

Actions Under the Public Utility Holding Company Act of J 935 (Holding

Company Act}. In Wisconsins Environmental Decade v. SEC,261 the petitioners

challenged a Commission order approving a corporate restructuring that

separated the utility and nonutility business of an existing intrastate public

utility holding company under a new holding company in order to facilitate

diversification into nonutility businesses. The United States Court of Appeals

for the District of Columbia Circuit rejected the petitioners' argument that the

proposed diversification was detrimental to the public interest and that the

Commission was precluded from granting the new company an intrastate

73
exemption from the Holding Company Act. The Court of Appeals determined

that the Commission, in granting the exemption, had properly relied on state

limitations imposed on the holding company's diversification activities, as

well as the Commission's continuing jurisdiction to monitor such activities

and, if necessary,to revoke the exemption. In addition, the Court found that

the Commission properly concluded that the transaction would not "unduly or

unnecessarily complicate the structure" of the holding company system, as

required by Holding Company Act Section 10(cX1).The Court of Appeals,

however, agreed with the petitioners that the Commission had failed to

demonstrate, as required by Holding Company Act Section 1O(cX2),how the

restructuring would "tend toward the economical and efficient development of

an integrated public-utility system." The Court therefore vacated the order

approving the restructuring and remanded the case to the Commission for

further proceedings.

Motions to Vacate Injunctions. During fiscal year 1989, the Commission

opposed several motions to vacate injunctions entered in Commission

enforcement actions. In SEC v. ZaLe,262the United States Court of Appeals for

the Fifth Circuit affirmed a district court's denial of a motion to vacate a

consent injunction obtained in a Commission enforcement action. The Court

agreed with the Commission that the defendants' contention that they were

"stigmatized" because of the injunction did not constitute grievous wronq

resulting from unforeseen circumstances that would justify vacation of the

injunction under United States v. SWift & CO.263

The United States Court of Appeals for the Eleventh Circuit refused to

overturn a district court order freezing a company's assets,pending disgorgernent, in SEC v. GoLdcor, Inc.264 The Commission had filed an enforcement

action against Goldcor and its affiliates, alleging that they were engaging in

antifraud violations by selling stock in a sham gold mining operation in Costa

Rica. In its brief to the Court of Appeals, the Commission argued that the

district court had not abused its discretion in denying Goldcor's request to

have the freeze order dissolved because without such an order there was a

serious risk that Goldcor's managers would conceal or dissipate the company's assets.

Actions InvoLVing Other Agencies. The Comrnlsslon filed an amicus curiae

brief in FederaLDeposit Insurance Corporation v. Jenkins.265 In this case, the

United States Court of Appeals for the Eleventh Circuit, consistent with the

Commission's brief, reversed a district court decision enjoining shareholders

from litigating their Section 10(b)and Rule lOb-5 claims against officers and

directors of a failed bank and its holding company until the claims of the

Federal Deposit Insurance Corporation (FDIC) against the officers and directors were satisfied. In its brief the Commission argued that the FDIC

improperly invoked the absolute priority rule, which provides that, in certain

contexts in bankruptcy and receivership proceedings, creditors' claims against

a corporation receive priority over the claims of shareholders. The Commission pointed out that neither the rule, by its terms, nor its rationale applies

when claims are asserted against parties other than the bankrupt or insolvent

corporation. In addition, the Commission's brief noted that Bankruptcy Code

74
Section 510(b), which expressly subordinates certain shareholder security

fraud claims against an issuer in a bankruptcy proceeding, suggests that the

FDIC's position on priority with respect to claims against third parties is

unwarranted. The Commission argued that neither the legislative history nor

the case lawand legal commentary leading to the enactment of Section 51O(b)

contemplates the application of a similar priority rule to shareholder fraud

claims against third parties.

Discovery Actions in Commission Enforcement Actions. In SEC v. CarL N.

Karcher, et ai.,266 the Commission defeated an attempt to depose two

Commissioners in connection with a pending injunctive action.267 The

Commission argued that depositions of such high ranking government

officials are permissible only on a preliminary showing of extraordinary

circumstances, and that the defendants should not be allowed to depose

Commissioners about the Commission's deliberations. After briefing, the

Court issued a protective order prohibiting the depositions.

Litigation lnuotoiru; Requests for Access to Commission Records. Although

the Commission received more than 5,143 Freedom of Information Act(FOIA)

and confidential treatment requests in fiscal year 1989, only one of these

resulted in the filing of court action against the Commission. The court action

was dismissed by stipulation. The Commission received 2,147 requests under

the FOIA for access to Commission records and 2,974 requests for confidential treatment from persons who submitted information. In fiscal year 1989,

there were 73 appeals of denials of FOIA requests to the Commission's

General Counsel and 22 appeals of denials of confidential treatment requests.

In Occidental Petroleum Corp. v. SEC,268the Court of Appeals forthe District

of Columbia Circuit affirmed the district court's decision to remand a

reverse-FOIA case to the Commission for further proceedings to develop a

more complete administrative record.269 The Court of Appeals held that the

record and the Commission's decision were insufficient to permit effective

judicial review, and that the procedural requirements that the district court

imposed on the Commission were within the district court's authority and

were necessary to produce a reviewable record. For example, the district court

remand order required a document-by-document explanation of the Commission's denial of confidential treatment and concluded that, where a denial of

confidential treatment was based on public availability of information, the

agency record was not reviewable unless it included the public sources on

which the Commission relied. The Court of Appeals also held that the

imposition of such requirements in the remand order did not exceed the

district court's authority because itstopped short of requiring the Commission

to adopt specific procedures, where other procedures might achieve the

standard of reviewability mandated by the Administrative Procedure Act. The

Court indicated that any procedure producing a record capable of judicial

review must be accepted by the Court after remand.

In Sa[ecard v. SEC,270 plaintiff sought review of the Commission's decision

to withhold certain documents under FOIA Exemption 7(A) in response to

Safecard's FOIA request for access to 32 Commission investigative files. The

Commission successfully protected the interests of witnesses who provided

75
information during these investigations and prevented the disclosure of the

majority of Commission internal memoranda and handwritten staff notes.

After review of the parties' cross-motions for summary judgment, the district

court granted, with limited exceptions, the Commission's motion for partial

summary judgment. The plaintiffs appeal to the District of Columbia Circuit

is pending.

Actions Against the Commission. In Suter v. Ruder,271 the United States

District Court for the Northern District of Illinois granted the Commission's

motion to dismiss in a case alleging that present and former Commissioners

and staff participated in a conspiracy to violate the First Amendment rights of

an investment newsletter publisher. The Court also imposed monetary sanctions against the plaintiff pursuant to Rule 11 of the Federal Rules of Civil

Procedure and enjoined him from filing any civil action without first obtaining

leave of the court in which he seeks to file his action. The Commission's

motion to dismiss Suter's appeal from this order is pending before the Seventh

Circuit.272

In Lin v. SEC,273 the United States District Court for the Northern District of

California dismissed a complaint against the Commission, a former Chairman

of the Commission, and present and former attorneys in its Division of

Enforcement, alleging misconduct in connection with a Commission law

enforcement investigation. In the first decision of its kind, the Court recognized that Commission enforcement attorneys were absolutely immune from

suit as long as they were exercising a discretionary prosecutorial function

within the limits of their authority. The suit also sought damages against the

Commission arising out of a temporary cancellation of the plaintiffs registration as an investment adviser. The Court ruled that the doctrine of

sovereign immunity barred damage claims against the Commission arising

out of cancellation of a registration as an investment adviser; the exclusive

remedy was appellate review under the provisions of the Investment Advisers

Act of 1940 (Investment Advisers Act).

Actions Against Professionals Under Commission Rule 2(e). The staff is

litigating against a number of professionals under Commission Rule 2(e).

During fiscal year 1989, a number of such actions were concluded. In In re

Checkosky andAldrich,274 Administrative LawJudge Brenda P. Murray found,

followinq a five-week hearing, that two audit partners of the firm of Coopers

& Lybrand had engaged in improper professional conduct by violating

generally accepted auditing standards during five consecutive audits of Savin

Corporation. Judge Murray found that Checkosky and Aldrich had failed to

exercise due care and obtain sufficient evidence to support their positions.

Instead, according to the Court's findings, they had given paramount consideration to pleasing the client, while showing little concern for the truthfulness

of the client's financial statements. Judge Murray found that because of the

respondents' misconduct, the public had received five sets of financial

statements that were materially incorrect and that overstated the company's

financial position. Based on her findings, Judge Murray suspended Checkosky and Aldrich from appearing and practicing before the Commission for five

years.275

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In In re Clark,276 after two weeks of trial, a partner in the national accounting

firm of Peat, Marwick, Mitchell & Co. consented to a Commission order that

censured him and ordered him not to practice before the Commission for nine

months. The staff had alleged that the partner engaged in improper professional conduct by signing an "unqualified" audit report when he had information indicating that the bulk of the revenues of the company were

improperly recorded and should not have been recognized.

Actions Under the Right to Financial Privacy Act. District courts dismissed

four actions filed pursuant to the Right to Financial Privacy Act seeking to

quash Commission subpoenas for customer financial information from financial institutions.277 In each of these cases, the courts held that the Commission was seeking the bank records for a legitimate law enforcement purpose,

and that the records sought were relevant to the investigation. The courts

therefore ordered compliance with the Commission's subpoena.278

Significant Administrative Decisions

Broker-Dealers and Market Professionals. In Hamilton Bohner, lnc., John R.

McKowen and John E. Sherman,279 the Commission affirmed the disciplinary

action taken by the NASD against the NASD member firm of Hamilton

Bohner, Mr. McKowen, its former president, and Mr. Sherman, its former vice

president. The Commission found, as had the NASD, that respondents

charged excessivecompensation for selling securities for a customer, and that

the firm and McKowen sent the customer confirmations that misrepresented

the capacity in which the firm was acting and did not disclose the actual

compensation it was charging. In ten transactions, Hamilton Bohner, which

was not a market maker, purchased shares sold by its customer and simultaneously resold the shares to market makers. Based on the prices Hamilton

Bohner received from those market makers, the prices paid the customer for

its securities represented markdowns of 5.3 percent to 10.2 percent below the

prevailing market price. Pointing to the "well established industry practice

pursuant to which markdowns by broker-dealers on purchases from customers are substantially lower than markups on sales to customers," the Commission found the markdowns of 5.3 percent to 10.2 percent charged by

respondents to be "far in excess of permissible levels."

In Robert J. Check,28o the Commission sanctioned Mr. Check, who was

manager of a brokerage firm's mutual funds department, for failing to exercise

reasonable supervision over the firm's salesmen with a view to preventing their

failure to apprise mutual fund customers of the salescommission discounts to

which the customers were entitled. The Commission was not persuaded by Mr.

Check's arguments that he did not have supervisory responsibility over the

salesmen, that branch managers were responsible for ensuring their sales.

men's compliance with applicable requirements, and that neither salesmen

nor branch managers reported directly to him. The Commission found that

Mr. Check "failed to carry out his responsibilities and to exercise his authority

to take effective action," and that he was not relieved of his supervisory

obligations because other officials of the firm shared responsibility for

77
supervising its salesmen. The Commission pointed out that Mr. Check was

"uniquely positioned to exercise effective supervisory control in the specialized area of mutual fund sales."

Significant Legislative Developments

Enforcement Remedies. In January 1989, the Commission submitted to

Congress the proposed Securities Law Enforcement Remedies Act of 1989.

The proposal, which was similar to a proposal made by the Commission the

previous year, was introduced in the Senate as S. 647 and in the House of

Representatives as H.R. 975.

The proposal would amend the securities lawsto authorize the Commission

to impose civil money penalties in administrative proceedings and would

expand the power of the courts to impose such penalties in civil actions

brought by the Commission. The Act also would enable the Commission to

bar or suspend persons from service as officers and directors of companies

that are required by the Exchange Act to file periodic reports with the

Commission. The authority of the courts to impose such sanctions would be

clarified. In addition, the scope of Section 15(cX4)of the Exchange Act would

be broadened to permit the Commission to bring administrative proceedings

against persons for violating the securities ownership reporting provisions of

Section 16(a) of that Act.

Former Chairman Ruder testified in support of the proposals before the

Securities Subcommittee of the Senate Committee on Banking, Housing, and

Urban Affairs on April 18, 1989 and before the Telecommunications and

Finance Subcommittee of the House Energy and Commerce Committee on

July 19. No further action was taken by the lOlst Congress during its first

session.281

InternationaL Enforcement. The accelerating internationalization of the

world's securities markets has made it necessary for the Commission to

develop additional means of conducting investigations and bringing enforcement actions with respect to violative conduct that occurs in part or entirely

outside the territorial borders of the United States. In particular, the Commission has sought to negotiate bilateral assistance agreements with foreign

governments, known as Memoranda of Understanding. These agreements

enable the Commission to obtain evidence located abroad through the

cooperation of foreign officials. In order to enhance its ability to enter into

such cooperative arrangements, the Commission asked Congress for the

authority to conduct investigations requested by foreign authorities even

when there is no indication that a violation of the United States securities laws

has occurred. The Insider Trading and Securities Fraud Enforcement Act,

which was passed by Congress and enacted into law on November 19, 1988,

amended the Exchange Act to permit the Commission to conduct such

investigations.

In January 1989, the Commission submitted legislation to Congress that

would further strengthen its international enforcement capabilities. The

International Securities Enforcement Cooperation Act of 1989, introduced in

78
the Senate as S. 646 and in the House of Representatives as H.R. 1396, would

authorize the Commission to accept reimbursement for expenses incurred in

providing assistance to a foreign securities authority. It also would permit the

Commission and the SROs to impose sanctions on a securities professional

who is found by a foreign court or securities authority to have engaged in

improper or illegal conduct. SROs would also be given the authority, subject

to Commission oversight, to prohibit any person who has been convicted of a

felony from becoming a member of that organization, or associated with a

member, or to place conditions on such membership or association.

The Act also would amend the Exchange Act to enable the Commission to

preserve the confidentiality of certain evidence obtained from foreign authorities that otherwise might have to be disclosed pursuant to the FOIA. The

disclosure provisions of that Act would not be applicable to such evidence if

the foreign authority represented in good faith that disclosure would violate

the laws of that country. By carving out a narrow exception to the FOIA, the

proposed legislation would facilitate the sharing of information relevant to

Commission investigations. In addition, the bill would clarify the Commission's rulemaking authority to provide domestic and foreign enforcement

officials with certain nonpublic information.

Hearings were held in both Houses of Congress. H.R. 1396 was passed by the

House on September 25, 1989. In the Senate, the Commission's proposal

became part of a comprehensive bill entitled the Securities Acts Amendments

of 1989, passed by the Senate at the close of the first session as H.R. 1396. The

House did not act on the comprehensive proposal before the end of the

session.

Internationalization. On June 15, 1989, former Chairman Ruder testified

before the Securities Subcommittee of the Senate Committee on Banking,

Housing, and Urban Affairs concerning the globalization of the securities

markets. Former Chairman Ruder described for Congress the degree of

internationalization that has taken place in recent years and outlined the

numerous initiatives undertaken by the Commission to deal with this phenomenon. Among the measures discussed was the Commission's Policy

Statement on the Regulation of the International Securities Markets, which

was issued in November 1988. That statement urges cooperation among the

world's securities regulators while recognizing the need to take account of

cultural differences and national sovereignty concerns. The Commission's

statement suggests that an effective regulatory structure for an international

securities market system would include efficient mechanisms for quotation,

price and volume information cissemlnation, order routing, order execution,

clearance, settlement and payment, and strong capital adequacy standards;

sound disclosure systems that protect investors while balancing costs and

benefits for market participants; and fair and honest markets achieved

through regulation of abusive sales practices, prohibitions on fraud, and high

levels of enforcement cooperation.

Market Reform Legislation. The Commission's legislative package to address

certain issues raised by the October 1987 market break was re-introduced in

the 101st Congress as S. 648 and H.R. 1609, the Stock Market Reform Act of

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1989. As amended by the House Telecommunications and Finance Subcommittee and by the Senate Committee on Banking, Housing, and Urban Affairs,

the bill would permit the Commission to close the markets in the event of an

emergency so long as the President does not object, require that information

concerning the identity and transactions of large securities traders be made

available to the Commission, enable the Commission to gain access to

information concerning the financial and operational condition of entities

associated with broker-dealers, and facilitate improved clearance and settlement. The House Finance Subcommittee also added a provision dealing with

program trading.

Although the Commission's original proposal would have given the agency

unilateral authority to impose a halt in securities trading on an exchange or

otherwise for up to 24 hours (and for additional periods with the approval of

the President), Chairman Breeden explained in testimony before the House

Telecommunications and Finance Subcommittee on October 25, 1989 that

nondiscretionary circuit breakers implemented since the market break have

lessened the need for such authority. The subcommittee voted on November

14, 1989 to report a version of the bill, which was subsequently introduced as

H.R. 3657, that provides that a Commission decision to close the markets will

not take effect unless the Commission notifies the President and the President

does not object. The Senate Committee on Banking, HOUSing,and Urban

Affairs voted to report substantially similar language.

With respect to a proposal to require reports to the Commission by any

person effecting large securities transactions for that person's own account,

concerns were raised by the SROs and members of the securities industry that

the original bill, which required that such information be provided to the

Commission on an ongoing basis, would be expensive and cumbersome. The

revised bill would require large traders to provide information to the Commission concerning their identity and the accounts through which they trade

and would require broker-dealers to retain records relating to large securities

transactions by large traders.

Similarly, changes were made to the proposals relating to holding company

risk assessment to reflect discussions among Commission staff, members of

the securities industry, and the Department of the Treasury. Rather than

requiring such companies to report risk assessments to the Commission on an

ongoing and comprehensive basis, the revised proposal would require recordkeeping and quarterly reports to the Commission. In this instance, the

Commission would have the ability to obtain an immediate and detailed risk

assessment when conditions warranted. In addition, certain status exemptions

for regulated entities (e.g., banks and insurance companies) would be replaced

with augmented exemptive authority for the Commission.

The revised proposal also directs the Commission to establish an advisory

committee, under the Federal Advisory Committee Act, to assess the current

adequacy of state commercial laws with respect to the clearance and settlement of securities. The proposal also would require the Commission to

consult with the Federal Reserve Board and the Department of the Treasury in

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connection with rulemaking concerning the transfer and pledge of

securities.282

Although the Commission's original proposal did not deal with program

trading, the House subcommittee reported language that would authorize the

Commission to adopt rules prohibiting certain manipulative or abusive

practices that contribute to market volatility and to enforce these rules

through ceaseand desist authority and civil fines. The Senate committee did

not agree to the proposal but did approve a provision directing the Commission to conduct a study of program trading.

Leveraged Buyouts (LBOs). During fiscal year 1989, the Commission

submitted extensive testimony to a number of Senate and HouseCommittees

on issues concerning leveraged buyouts. Although LBOs take many forms, all

involve using the assetsof a company as collateral for a loan that is obtained

to pay for all or part of the purchase or restructuring of the company. The

Commission's testimony focused on the disclosure obligations and antifraud

concerns surrounding such transactions. In particular, the Commission discussed the problems inherent in management-led buyouts and the workings

of Rule 13e-3, which generally applies to going-private transactions. In

promulgating that rule, the Commission determined that substantive fairness

requirements should be left to state law. Rule 13e-3 seeks to provide

shareholders with the information they need to assess the fairness of a

"going-private" transaction and to pursue the remedies provided under state

law. Former Chairman Ruder's testimony on behalf of the Commission was

given to the Senate Committee on Finance on January 25, 1989 and to the

House Waysand Means Committee on January 31, 1989. He had previously

given similar testimony-in a private capacity-to the House Subcommittee

on Telecommunications and Finance.

Investment Adviser Sed-Requleiion, The Commission submitted proposed

legislation to amend the Investment Advisers Act of 1940 to permit the

registration of one or more national investment adviser organizations as

self-regulatory organizations subject to Commission oversight. These SROs

would establish qualification and business practice standards, perform inspections, and enforce compliance with the securities laws.Membership would be

mandatory for all investment advisers required to register with the Commission except those whose only clients are registered investment companies.

The Commission's proposal was introduced in the SenateasS. 1410 and in the

House as H.R. 3054.

Shareholder Communications. A Commission proposal to extend the benefits of its shareholder communication rules to mutual fund and other

investment company shareholders was introduced in the Senate asS. 649 and

the House as H.R. 2780 during the first session of the 101st Congress. The

shareholder communication rules generally require entities that hold securities in nominee name to deliver proxy materials and annual reports to

beneficial owners and to supply issuers with information concerning beneficial owners. The proposal also would require that the information statements

provided by registrants in the event of a shareholder vote-for which the

registrant does not solicit proxies-must be transmitted to beneficial owners.

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Mutual funds and other investment companies would be required to provide

information statements when a shareholder vote is held but proxies are not

solicited. This proposal was passed by the Senate at the end of the firstsession

as part of the Securities Acts Amendments of 1989, H.R. 1396. That Act was

not passed before the end of the session.

Debt Financing. Hearings were held on the Commission's comprehensive

proposal to modernize the Trust Indenture Act of 1939 (Trust Indenture Act)

before both the Senate and House oversight subcommittees. The proposal is

designed to accommodate the legal requirements relating to modern financing and institutional trust practices without undermining the protection of

investors in debt securities provided by the Act. Among the changes proposed

are provisions to incorporate certain sections of the Act into trust indentures

qualified under the Act by operation of law. The Commission's exemptive

power would be broadened and certain technical conflicts of interest for

indenture trustees would not affect a trustee's eligibility to serve prior to

default. To promote the internationalization of public securities markets, the

Act would be amended to allow foreign trustees under specified circumstances. The Senate bill was incorporated into the comprehensive Securities

Acts Amendments of 1989, which was not enacted during the first session.

RICO Reform. The Commission supported certain portions of H.R.1046, the

Racketeer Influenced Corrupt Organizations (RICO)ReformAct of 1989, which

was designed to limit the use of the civil liability provisions of RICOin cases

involving the securities laws.283 In testimony before the Subcommittee on

Crime of the House Judiciary Committee, General Counsel Daniel L. Goelzer

stated that, while the Commission has long supported both judicial and

legislative steps to ensure that persons injured by violations of the securities

laws have meaningful relief, the Commission also is concerned that securities

law claims can, in many cases, be converted into civil RICOcases. Successful

plaintiffs in such cases are entitled to treble damages, despite the recovery

limitation of actual damages under the securities laws. Moreover, plaintiffs

may be able to use RICOto bypass the carefully crafted liability provisions of

the securities laws, thus placing increased and unwarranted financial burdens

on defendants, including members of the securities industry. Accordingly, the

Commission supported those provisions of the Act designed to eliminate the

overlap between private remedies under RICO and those under the federal

securities laws.

Corporate Reorganizations

The Commission acts in a statutory advisor's role in reorganization cases

under Chapter 11 of the Bankruptcy Code to see that the interests of public

investors are adequately protected. In these cases, a debtor generally is

allowed to continue business operations under court protection while it

negotiates a plan to rehabilitate the business and to pay the company's debts.

Reorganization plans often provide for the issuance of new securities to

creditors and shareholders in exchange for part or all of their claims or

interests in the debtor, under an exemption in the Bankruptcy Code from

registration under the Securities Act.

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In fiscal year 1989, the Commission authorized a review of its Section

1109(a) general statutory advisory role in Chapter 11 cases and of the

adequacy of public investor protections under Chapter 11 of the Bankruptcy

Code. The goal of this review is to provide an informed basis upon which to

determine whether that role should be modified and whether legislation is

needed. In connection with the review, the Commission issued a release 284

inviting comments from the bench, bar, and others and will hold a roundtable

where participants can discuss their comments. The project also includes the

assessment of active participation by the Commission staff in six reorganizetion cases that have been paired with six other cases in which the Commission

is not actively participating. In addition, the Commission's Office of Economic

Analysis is studying the impact of Commission participation in Chapter 11

cases between 1979 and 1989 and other investor protections under Chapter

11.

In its capacity as a special advisor, the Commission may raise or present its

views on any issue in a Chapter 11 case. Although the Commission may not

initiate an appeal, it frequently participates in appeals taken by others. While

Chapter 11 relief is available to businesses of all sizes, the Commission

generally limits its participation to cases involving debtors that have publicly

traded securities registered under the Exchange Act. In fiscal year 1989, the

Commission participated in Chapter 11 cases on a variety of issues.

Committees. Official committees are empowered to negotiate with a debtor

in possession on the administration of a case and to participate in all aspects

of the case, including formulation of a reorganization plan. With court

approval, an official committee is permitted to employ, as a cost of adrnlnistration, one or more attorneys, accountants, or other professionals to assist

the committee in performing its duties. In addition to a committee represent.

ing creditors holding unsecured claims, the code allows the court or a United

States Trustee to appoint additional committees for stockholders and others

where necessary to assure adequate representation of their interests. During

fiscal year 1989, the Commission moved or supported motions for the

appointment of committees to represent investors in two Chapter 11 cases.285

In In n? Continental Information Systems Corp., et aL.,286the Commission

supported the motion by certain individual shareholders to appoint an official

committee to represent the interests of Continental's shareholders. The

creditors' committee, the United States Trustee, and a secured creditor

opposed the motion, arguing that the debtor was hopelessly insolvent. The

Commission argued that the record provided no evidence of "hopeless

insolvency" but rather tended to show that the debtor was in fact solvent.

Further, the Commission argued that it was premature, at this early stage in

the case, to address the issue of insolvency.

The bankruptcy court agreed with the Commission's position that "hopeless

insolvency" could not be demonstrated. The court directed the United States

Trustee to appoint expeditiously an equity security holders' committee.

Estate Administration. The Commission acts to protect the interests of public

investors in reorganization cases by participating on selected issues involving

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administration of the debtor's estate that have a significant impact upon the

rights of public investors.

In In re Angicor Ltd. ,287the Commission filed a brief addressing the scope

of the bankruptcy court's authority to supplant state lawcorporate governance

with respect to altering the composition of the debtor's board of directors. In

this case, a group of investors filed a motion, without notice to shareholders,

requesting that the bankruptcy court remove the debtor's board of directors

and appoint a board of directors favorable to the rnovants' interests. The

movants argued that the debtor's management had been ineffective in

proceeding toward a plan of reorganization and that a bankruptcy court has

equitable powers to alter shareholder corporate governance rights in bankruptcy. The Commission argued, consistent with the position urged by the

Commission and adopted by the Second Circuit in In re Johns-ManviLLe

Corp.,288 that shareholders of debtor corporations do not ordinarily lose their

corporate governance rights under state law.The Commission pointed out that

the Bankruptcy Code provides specific alternative means for remedying any

problems with current management, including the appointment of a trustee.

Prior to a hearing on the motion, a settlement was reached whereby the

members-of the existing board of directors agreed to appoint additional

directors to the board, designated by the movants, in accordance with the

debtor's bylaws and to notify shareholders of the appointment of the new

directors.

In In re Sahlen & Associates, Inc.,289 the Commission, relying on In re

Baldwin-United, 43 B.R. 443 (S.D. Ohio 1984), filed a brief urging that

indemnification of the legal defense costs may be authorized as an administrative expense of the estate under Section 503(bXlXA)of the Code ifthe court

finds that the continued service of the officers and directors is beneficial to the

estate and that the benefits to be derived from their continued service justify

the amount advanced for legal fees. In this case, because no adequate showing

was made, the Commission urged on appeal that the matter should be

remanded to the bankruptcy court for further proceedings. The appeal is

pending.

During fiscal year 1989, the Commission reiterated in several cases its

position (54th Annual Report at 96 and 53rd Annual Report at 73) that class

claims are permissible in bankruptcy. The Commission believes that, under

principles of statutory construction, the well-recognized right to file class

claims outside of bankruptcy is equally available in bankruptcy cases.

The Commission won a major victory in In re The Charter CO.,290when the

Eleventh Circuit ruled that class proofs of claim are permissible in bankruptcy

and that a class representative's request for application of class action

procedures is timely when made within a reasonable time after the debtor's

objection to the class proof of claim. The Eleventh Circuit thus joins the

Seventh Circuit, which had agreed with the Commission's argument in In re

American Reserve291 in permitting class claims. The only other circuit to

consider the issue, the Tenth Circuit, held, in a case of uncertain precedential

value,292 that class claims are not allowable in bankruptcy.

The Commission has participated in several other cases urging the permis84
sibility of class claims. In In re LTV Corp.,293 the district court, relying on the

American Reserve and The Charter Co. decisions, concluded that permitting

class proofs of claim is consistent with the broad goals of the Bankruptcy

Code. The court reversed the bankruptcy judge, rejecting the rationale of a

much-cited 1985 decision to the contrary in In re Johns.Manville.294 The

district court decision is currently on appeal in the Second Circuit. Appeals

are also pending before the district courts in In re Texas International Co.295

(class claim allowed) and In re Allegheny International, Inc. et al.296(class claim

denied).

In In re Kaiser Steel Resourees,297 a case of major significance to the

brokerage industry, a Commission appeal to the district court addressed the

question of whether brokerage firms and other entities may be liable for

payments made to customers in connection with a leveraged buyout under

state fraudulent conveyance law through use of the Bankruptcy Code avoidance powers. Using a discount brokerage firm defendant as a test case, the

bankruptcy court found, among other things, that the brokerage firm acted as

an agent for undisclosed or partially disclosed principals (i.e., its customers)

in the transaction because the defendant effected the Kaiser stock transfers in

"nominee name" for the customers. Under this finding, the brokerage firm

could be liable to Kaiser for the LBO payments as an "initial transferee" under

Section 550(aX1) of the Bankruptcy Code.

The Commission argued on appeal that the bankruptcy court's decision was

contrary to settled case law holding that financial intermediaries such as

brokerage firms that function as mere conduits in a transaction should not be

subject to liability as "initial transferees" under the Bankruptcy Code.

Moreover, the Commission contended that by imposing potential liability on

securities brokers for transactions executed in "nominee" or "street" name,

the bankruptcy court's decision could adversely affect the depository bookentry system-a critical element of the national clearance and settlement

system mandated by Congress in Section 17A of the Exchange Act. The

district court agreed with the Commission's position and reversedthe decision

of the bankruptcy court.298

Disclosure Statements/Plans of Reorganization. A disclosure statement is a

combination proxy and offering statement used in soliciting acceptances of a

plan of reorganization. Such plans often provide for the exchange of new

securities for claims and interests of creditors and shareholders of the debtor.

The Bankruptcy Code provides that adequate disclosure is to be made without

regard to whether or not the information provided would otherwise comply

with the disclosure requirements of the federal securities laws. However, in

recognition of the Commission's special expertise on disclosure questions,

the Bankruptcy Code recognizes the Commission's right to be heard, distinct

from its special advisory role, on the adequacy of disclosure. For this reason,

the Bankruptcy Rules require service on the Commission of all disclosure

statements.

During fiscal year 1989, the Commission received approximately 6,000

disclosure statements filed in Chapter 11 cases involving both privately-held

and publicly-held corporations. The staff limits its review to those disclosure

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statements filed in cases involving a publicly-held company or a company

likely to be publicly traded as a consequence of the reorganization. During

fiscal year 1989, the staff reviewed 179 disclosure statements.

In its review of disclosure statements, the staff seeks to determine whether

the issuance of securities under a plan is consistent with the exemption from

registration in the Bankruptcy Code and otherwise in compliance with the

federal securities laws.The Commission also reviewsstatements to determine

whether there is adequate disclosure concerning the proposed plan. Generally,

the Commission seeks to resolve questions concerning bankruptcy disclosure

through staff comments to the plan proponent. If questions cannot be

resolved through this process, the Commission may object to the disclosure

statement in the bankruptcy court.

During fiscal year 1989, the Commission commented on disclosure statements in 95 cases, the vast majority of which were adopted by debtors. The

Commission was compelled to object to disclosure statements in one case. In

In re Texas International CO.,299 the Commission filed an objection to the

proposed plan, arguing, as it has on several other occaslons.P?" that the

provisions of the plan that purported to discharge and release non-debtor

liability should be stricken or revised because such provisions are beyond the

confines of the Bankruptcy Code discharge of liability. The plan was subsequently withdrawn by the debtor and an alternative plan, which did not include

a provision releasing or discharging non-debtor liability, was filed.

Compliance with the Registration Requirements of the Securities Act. Section

1145 of the Bankruptcy Code contains a limited exemption from registration

under the Securities Act for the distribution of securities by a debtor, or an

affiliate or successor to the debtor, pursuant to a plan of reorganization and in

exchange for claims against or securities of the debtor or such affiliate. The

issuance of securities pursuant to a plan is deemed to be a "public offering,"

which means that there is no restriction on resale of such securities unless the

seller is an "underwriter" as specifically defined in Section 1145(b). During

fiscal year 1989, the staff had no occasion to file formal objections to a

reorganization plan on the basis of violations of Section 1145 of the

Bankruptcy Code.

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Economic Research and Analysis

Introduction

The Office of Economic Analysis provides technical support and analysis

designed to aid in the evaluation of the economic aspectsof the Commission's

regulatory program and the impact of that program on the rapidly changing

global capital market. The economics staff provides the Commission with

research and advice on rule proposals, policy initiatives, and the capital

markets. The staff assists the Commission in making decisions affecting the

fairness, efficiency, and structure of our nation's securities industry. In

addition, the program monitors developments in capital markets around the

world and major program initiatives impacting the United States financial

services industry, markets, and investors.

Key 1989 Results

Application of new technology within the securities industry, increased

complexity of new financial products, and development of new trading

strategies have resulted in a more dynamic domestic securities market

environment. The United States securities industry has been a leader in

financial innovation for many years. The securities markets continue to

benefit from a regulatory structure that fosters both competition and the

protection of investors and, thereby, promotes both public confidence and

operational efficiency in the markets. The need to keep abreast of economic,

regulatory, and institutional changes in foreign securities markets that could

have an effect on the operation and competitiveness of the United States

securities markets will become increasingly important in the 1990s.

Internationalization presents challenges to both the United States and

foreign regulators. The world's securities markets havealready become highly

interdependent. Further growth and inteqratlon of international securities

markets is anticipated in the years ahead, presenting numerous regulatory

and economic issues. This integration and growth of global markets will

require the development of a global regulatory perspective that preservesthe

efficiencies associated with international capital mobility, while maintaining

the integrity and fairness of the United States market. The challenge in the

1990s will be to assure that this balance is achieved in the evolving global

capital market. An efficient global market facilitates the free flow of capital

across national borders, encourages competition in financial services, and

provides for a regulatory framework that builds investor confidence. The

economics staff expects to develop capital market b.ieflnq reports and policy

papers that will assessthe economic, institutional, and regulatory developments impacting the competitiveness of the domestic securities market and

the Commission's regulatory program.

During fiscal year 1989, the economics staff reviewed rule proposals

encompassing the full range of the Commission's regulatory program. The

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staff provided advice, technical assistance, and empirical analyses of issues of

concern to the Commission and its operating divisions. Monitoring programs

were developed and maintained to study the impact of major rules, new

trading facilities, and market developments. Key accomplishments of the

economics program include:

periodic reports on the outlook for domestic and international

financial markets;

a follow-up study to the staff report to Congress on the

internationalization of the securities markets;

an analysis of the liquidity provided by exchange specialists and the

depletion of their buying power during the 1987 market break;

a report on the financial condition and performance of exchange

specialists during 1975-1987 as background for Commission

consideration of a proposal to bring all exchange specialists under the

net capital rule;

forecasts of the effects on broker-dealers of a proposal to raise the

minimum net capital requirements of firms that deal directly with the

investing public;

a study of the connection between index options and the volatility of

stocks in the S&P 500 index;

an analysis of trading volume during the twentieth century on the New

York Stock Exchange on an hourly and daily basis;

an analysis of the aftermarket price performance of initial public

offerings of closed-end funds;

an assessment of the impact of Rule 12b-1 fees on mutual fund

expenses and growth in net asset value and total assets;

a study of the relationship between the quality of a firm's acquisitions

and the likelihood that the acquiring firm will itself become a future

takeover target; and

a study of the relationship between pension fund terminations and

corporate takeovers.

In addition to preparing economic studies, the staff provided technical

advice and assistance to the Commission's operating divisions on a wide

variety of issues. In the accounting area, for example, the staff helped

determine the fair value of non-traded warrants, evaluated mergers where

assets were pooled, and assisted in the development of appropriate accounting principles for reporting earnings per share in unbundled stock units. The

staff also assisted in the establishment of rules for publishing "yield" in unit

investment trusts and provided input on proposed proxy disclosure requirements for closed-end funds. Technical support was provided to the Commission's enforcement program in such areas as penny stocks and the suitability

of trading strategies recommended to customers of broker-dealers. The staff

provided economic assistance to the Division of Investment Management in

developing disclosure guidelines for quoted rates of return in unit investment

trusts and to the Division of Market Regulation in the areas of broker-dealer

capital adequacy and specialists activities.

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Management and Program Support

Introduction

The goals of program direction are to formulate and communicate policy

and to manage agency resources, enabling the Commission to fulfill its

statutory responsibilities. These goals are accomplished through policy

management and administrative support. Policy management encompasses

policy formulation, information dissemination, and management of the

agency's resources. Administrative support entails services such as account.

ing, data processing, staffing, and space management to support the Commission's objectives.

Key 1989 Results

Policy Management

A major component of program direction is management, coordination,

and support of Commission regulatory policies. In carrying out its regulatory

mission, the Commission has actively sought to consider the diverse viewpoints of investors, the securities industry in general, and other interested

parties. During fiscal year 1989, the Commission considered a wide range of

issues, including penny stock fraud; a wide variety of enforcement actions,

including those involving insider trading by Wall Street professionals; and

market reform, financial services reform, and other legislation affecting the

Commission. The Commission became a leading participant in the global.

ization of securities markets, analyzing such issuesas international clearance,

settlement, and payment mechanisms; international enforcement of securities laws; the exchange of information with foreign regulators; and access to

foreign markets. The Commission was also an active participant in the

International Organization of Securities Commissions (IOSCO) and hosted

numerous visits by foreign officials to the Commission's headquarters in

Washington, D.C.

The Commission held 78 meetings in fiscal year 1989, during which it

considered 419 matters including rule proposals, enforcement actions, and

other matters that significantly affect the stability of the markets and the

nation's economy. Significant rules proposed or adopted by the Commission

included:

proposal of Rule 144A to establish a non-exclusive safe harbor from

registration requirements for resales of restricted securities under the

Securities Act of 1933 to a specified class of institutional investors;

proposal of Regulation S to clarify the extraterritorial application of

the registration requirements of the Securities Act of 1933;

amendments to Form S-8 to reduce burdens in registering securities

issued pursuant to employee benefit plans;

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revisions of Regulations 130 and 13G to permit filing of Schedules

130 and 13G based upon the purpose of the share acquisitions;

amendments to Schedules 130, 13E-3, 14B, and 140-1 to require

disclosure concerning significant equity participants in control

transactions; and

proposed rules to allow acquisition of foreign broker-dealer equity

securities by investment companies, to permit investment companies

to acquire securities of foreign banks and insurance companies, and to

allow investment companies to organize as limited partnerships.

The Commission's management staff maintained a comprehensive program of financial oversight of the agency's resources, initiated special

projects, justified the agency budget request to the Office of Management and

Budget (OMB) and Congress, and completed the agency's budget authorization request for fiscal years 1990 to 1992. In January 1989, the staffs

Self-Funding Study was submitted to the Securities Subcommittee of the

Senate Committee on Banking, Housing and Urban Affairs. The study

described the personnel and funding difficulties facing the SEC and presented

alternative solutions. Other major projects conducted during fiscal year 1989

included modifications to the Commission's Public Reference Room rules,

initiation of automation projects aimed at developing both a local area

network (LAN) and a wide area network (WAN), and installation of a pilot

automation system in the Boston Regional Office. In addition, the Commission's management staff has begun coordination of the agency's internal

control and audit follow-up responsibilities pursuant to the Inspector General

Act Amendments of 1988. '

Consumer Affairs and Information Services

The Office of Consumer Affairs and Information Services supports the

Commission's efforts to prevent fraud in the nation's financial markets. The

office researches and responds to investor complaints and inquiries, collects

and analyzes complaint information and trends to help target regulatory and

enforcement activities, and prepares educational materials to assist investors

in protecting their interests. In addition to its complaint processing and

tracking role, the office serves as the agency's receipt and processing point for

requests for information under various statutes such as the Freedom of

Information Act (FOIA) and the Privacy Act.

During fiscal year 1989, the Commission's consumer affairs staff responded

to a total of 44,987 complaints and inquiries from investors. Of this total,

29,368 were complaints and 15,619 were inquiries. Of the complaints, over

17,100 (59 percent of all complaints) were directed at broker-dealers. Complaints against penny stock broker-dealers numbered 3,776-representing

approximately 22 percent of all broker-dealer complaints in fiscal year 1989.

In other complaint areas, issuers of securities accounted for 17 percent of total

complaints, while the remainder of complaints were divided among mutual

funds, transfer agents, banks, and investment advisers.

The complaints and inquiries received during fiscal year 1989 were marked

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by their increased complexity. Thus, the time necessary to process and

research them has increased. To meet the demands of the large influx of

complex complaints and inquiries, the office initiated a rnulti-year project to

redesign the Commission's computerized complaint tracking system. The new

system will permit thorough analysis of complaint information and trends and

increase the timeliness of Commission responses to investors and other

members of the public. The new system is targeted for implementation during

the second quarter of fiscal year 1991.

The office also supported special Commission initiatives in a number of

ways. In addition to designating "penny stock fraud" as the focus of its

National Consumer's Week observance in fiscal year 1989, Consumer Affairs

staff supported the activities of the Commission's Penny Stock Task Force.

Specifically, support in the form of supplemental tracking and retrieval of

complaints against individual penny stock brokers was provided. The office

also participated in the compilation and distribution of several penny stock

educational brochures.

The Office of Consumer Affairs and Information Services also responds to

a variety of information requests. During fiscal year 1989, the office processed

1,989 FOIA requests, 52 Privacy Act requests, 97 Government in the Sunshine

Act requests, 23 government referrals, and 3,127 requests for confidential

treatment. In addition, the staff coordinated 1,199 requests for Commission

records from members of Congress.

Public Reference

The Commission maintains public reference rooms in the Washington,

D.C., New York, and Chicago offices. As part of a reorganization during fiscal

year 1989, the headquarters' Public Reference Room implemented procedures

designed to expedite the identification, location, and retrieval of documents

and microfiche for public users. Throughout the year, the staff answered

questions and completed requests for documents from over 69,000 visitors to

the headquarters' Public Reference Room. Over the same period, approximately 309,000 paper documents and 371,000 microfiche were added to the

existing library of publicly available information. In addition, the staff processed over 500 formal requests for certifications of Commission filings,

49,700 requests for microfiche records, 13,000 requests for paper filings, and

over 90,000 telephone inquiries regarding filings.

Equal Employment Opportunity

During fiscal year 1989, an independent study of the Commission's Equal

Employment Opportunity (EEO) program was conducted. The study provided

a series of recommendations designed to improve the effectiveness and

administration of EEO operations, as well as to improve employee awareness

of the EEO Office and its programs. By the close of fiscal year 1989, the

Commission had implemented approximately one-third of the study's recommendations. The recommendations acted upon included:

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improving and expanding the EEO counseling and Federal Women's

Programs (FWP);

providing additional Office of Personnel Management (OPM) training

for EEO counselors and FWP personnel;

recruiting more attorneys and accountants as EEO counselors;

revising the agency's affirmative employment plan;

using new forms to streamline the EEO process;

developing EEO reference books for use by collateral duty personnel;

acquiring EEO investigators through the General Services

Administration's (GSA) blanket contract with a national professional

investigative firm;

revising the agency's EEO fact sheet by highlighting EEO procedures

and policies; and

publishing an EEO bulletin as a vehicle to communicate information

about EEO matters to all employees.

The Commission actively recruited and employed minority groups and

women during fiscal year 1989. At the close of the year, women accounted for

almost one-half of the total SEC workforce. Blacks made up 28 percent of the

workforce. Hispanics accounted for approximately three percent of all SEC

employees. Asian Americans made up 2.36 percent of the agency's employees and American Indians/Alaskan natives made up 1.0 percent of the

Commission's workforce.

Public Affairs

The Office of Public Affairs communicates information on Commission

activities to those interested in or affected by Commission actions, including

the press, the general public, regulated entities, and employees of the

Commission. Special projects, such as support for activities related to penny

stock fraud and efforts regarding the internationalization of securities markets, were undertaken by the office in support of the Commission's mission.

In addition to special projects, workload increased substantially in the office's

ongoing activities as well in fiscal year 1989. These increases will continue in

future fiscal years.

The Office of Public Affairs' primary function is the collection and dissemination of information to the public, Commission staff, and the regulated

population. The SEC News Digest-a daily publication that provides information on rule changes, enforcement actions against individuals or corporate

entities, acquisition reports, releases, decisions on requests for exemptions,

upcoming Commission meetings, and other events of interest-was prepared

by office staff in fiscal year 1989. The SEC News Digest is available in the

Commission's Public Reference Room. Information on Commission activity is

also disseminated through notices of administrative actions, litigation

releases, and other materials.

Another important function is the coordination of the Commission's

interaction with the press. Press releases issued prior to Commission meetings

and press briefings conducted after these meetings provide insight into

proposed and adopted changes in policies and regulations and can have a

92

•

•

•

•

•

•

•

•

•
significant impact on financial markets. Public Affairs staff also issues press

releases on upcoming events, Commission programs, and special projects. In

all, 102 news releases were issued during fiscal year 1989. Many Commission

actions are of nationwide and, increasingly, international interest. When

appropriate, these actions are drawn to the attention of regional, national, and

international press. Special projects such as studies and reports on emerging

issues in the financial markets are also publicized.

In addition to the above functions, the office responded to approximately

82,000 requests for specific information on the Commission or its activities.

Staff is also responsible for coordinating the visits of national and foreign

officials to the Commission. In total, programs for 355 foreign visitors were

coordinated in fiscal year 1989.

Administrative Support

In addition to policy management, program direction encompasses administrative support. The administrative support function provides Commission

programs with the necessary financial, facilities, data processing, and personnel support necessary to carry out their missions. Under the direction of the

Office of the Executive Director, these support services are provided by the

Commission's Offices of the Comptroller, Administrative Services, Information Systems Management, and Personnel.

Financial Management

During fiscal year 1989, the Commission completed its first year of

operation on its new accounting system, the Federal Financial System (FFS).

Under FFS, time, error correction, and processing delays are avoided through

the electronic input of voucher and payment data into the accounting

system-a significant improvement over the old system. A further benefit of

FFS is the ready availability of management data, which allows for tighter

control over the agency's accounting system. FFS data input, limited to

selected organizations within the Commission's headquarters in fiscal year

1989, will be implemented in the remaining headquarters organizations and

the regional offices over the next two years.

Throughout fiscal year 1989, the Commission continued to improve its fee

collection processes. During the year, the Commission adopted a proposal to

accept credit card charges for the payment of filing fees in 1991. In addition,

the Commission has begun design of a newautomated fee tracking, reporting,

and accounts receivable system. Once operational, this new system will

generate daily deposit tickets, electronically record and match filings and fees

within "corporate accounts," maintain accounts receivable records, produce

required billing notices, and perform periodic reconciliations.

Facilities Management

Fiscal year 1989 continued to present numerous space and logistical

challenges for the Office of Administrative Services. Office space was acquired

for the forced relocation of the NewYorkand Philadelphia Regional Offices. In

93
addition, the office acquired needed space for the Commission's Washington,

D.C. headquarters.

During 1989, Delegated Lease Management Authority (DLMA) was

obtained from GSA for application at the Commission's offices in Philadelphia

and New York. As a result, the Commission's DLMA program now applies to

six field offices, in addition to the headquarters office.

In support of the Commission's efforts to automate its information systems,

the Office of Administrative Services obtained a Delegated Procurement

Authority (DPA)from GSA. This authority allowed the Commission to install

horizontal cabling in preparation for the implementation of a local area

network in the headquarters building.

The Office of Administrative Services exercised increased responsibility in

contracting activities in fiscal year 1989. The office awarded contracts in

excess of $18 million during the year-an increase of approximately $5

million over fiscal year 1988. A significant portion of this increase in contract

award value is attributable to the extensive procurement of ADP equipment in

fiscal year 1989.

Information Systems Management

During fiscal year 1989, the Office of Information Systems Management

(ISM) continued its efforts to modernize the Commission's computer systems

and to support the Commission's mission through advanced automation.

These efforts included:

development of an electronic "blue sheet" tracking system-a

PC-based document tracking system for major enforcement cases;

design of a pilot Central Registrations Depository (CRD) system in

cooperation with the National Association of Securities Dealers that

will allow for the automated receipt, processing, and assimilation of

broker-dealer filings; and

technical support for the development of the Commission's Electronic

Data Gathering, Analysis, and Retrieval (EDGAR) system.

Beyond program-related support, ISM continued to assist in the improvement of Commission administrative and management systems in fiscal year

1989. In response to Public Law 100-235, an ADP security plan was

developed that outlined sensitive computer applications and the means

necessary to protect them. Also, in order to assist the agency in complying

with OMB Circular A-127, ISMworked with the Offices of the Comptroller and

Administrative Services in the effective implementation of the Federal Financial System. Finally, efforts were undertaken throughout fiscal year 1989 to

develop local and wide area network capabilities within the agency.

Personnel Management

During fiscal year 1989, the Office of Personnel (OPM) revised regulations

on training, performance appraisals, and employee grievances in accordance

with government-wide changes. In addition, the office implemented a leave

transfer program to benefit employees affected by medical emergencies.

94

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In response to continued Commission emphasis on information systems

automation, approximately 800 employees were trained on computer systems

and applications. In addition to computer training, the office provided

requested training to 700 staff members in order to improve their on-the-job

performance.

Recognizing that a significant portion of the Commission's staff will be

eligible to retire in the next few years, retirement counseling was provided to

approximately five percent of the agency's staff in fiscal year 1989. As a

supplement to counseling, the office developed and issued an individual

retirement benefits brochure to each permanent Commission employee.

While staff retention and turnover improved in fiscal year 1989, the

Commission continued to face severe challenges in recruiting and retaining

qualified staff. Continued emphasis was placed on the recruitment of professionals, such as attorneys, accountants, and securities compliance examiners.

Through attendance at numerous aPM job fairs, fiscal year 1989 proved to be

the Commission's most successful year for recruiting computer specialists and

secretaries. In addition, labor market conditions and special pay rates allowed

the Commission to exceed its expected level of securities compliance examiner recruitment in New York and Los Angeles.

The Commission completed its first self-evaluation as required under

Section 504 of the Rehabilitation Act of 1973 during fiscal year 1989. The Act

requires each agency to make its programs and activities accessible to

handicapped persons. Upon conclusion of the review, the Commission was

praised by the Department of Justice for its implementation of this statute.

During fiscal year 1989, the Commission administered a balanced personnel management program through appropriate recognition of employee

performance. In fiscal year 1989. the SEC awarded more than $900,000 in

incentive and performance awards.

Commission Operations

In fiscal year 1989, for the seventh consecutive year, the SEC collected

revenue for the U.S. Treasury in excess of its appropriation. The SEC collected

fee revenue of $214 million compared to a congressional appropriation of

$143 million-a net gain to the U.S. Treasury of $71 million. Fee revenue is

collected from four basic sources: registrations under the Securities Act of

1933 (comprising 51 percent of total fiscal year 1989 fee revenue); transactions on securities exchanges (27 percent); tender offer and merger filings (19

percent); and miscellaneous filings (3 percent).

95
Commissioners and Principal Staff

Officers

Joseph A. Grundfest * * * Edward H. Fleischman

Mary L. Schapiro * * * *

Executive Assistant to the Chairman: Linda D. Fienberg

Principal Staff Officers As of September 30, 1989

George G. Kundahl, Executive Director

Kenneth A. Fogash, Deputy Executive Director

Linda C. Quinn, Director, Division of Corporation Finance

Elisse B. Walter, Deputy Director

Mary E. T. Beach, Associate Director

Ernestine M. R. Zipoy, Associate Director

Robert Bayless, Associate Director

Mauri L. Osheroff, Associate Director

William E. Morley, Associate Director

VACANT, Director, Division of Enforcement ** * * * John H. Sture, Associate Director

William R. McLucas, Associate Director

Joseph I. Goldstein, Associate Director

Michael D. Mann, Associate Director

Thomas A. Ferrigno, Chief Counsel

Richard C. Breeden was sworn in as Chairman

1989 for the term expiring June 5, 1993.

Commissioners As of September 30, 1989

David S. Ruder, Chairman *

Charles C. Cox * *

on October 11,

Term Expires

1991

1993

(renominated)

1990

1992

1994

"David S. Ruder resigned from the Commission on September 30, 1989.

Philip R. Lochner, Jr. was sworn in on March 12, 1990 for the term expiring

June 5, 1991.

"Charles C. Cox resigned from the Commission on September 30, 1989.

** Joseph A. Grundfest resigned from the Commission on January 18, 1990 .

•• •• Mary L. Schapiro was nominated on December 22, 1988 in a recess

appointment. She was renominated on November 8, 1989 and confirmed by the

Senate on November 18, 1989.

* •••• William R. McLucas was appointed Director of the Division of

Enforcement on December 26, 1989.

96

•

•
Thomas C. Newkirk, Chief Litigation Counsel

Richard G. Ketchum, Director, Division of Market Regulation

Mark D. Fitterman, Associate Director

Brandon C. Becker, Associate Director

Larry E. Bergmann, Associate Director

Kathryn B. McGrath, Director, Division of Investment Management

Marianne K. Smythe, Associate Director

Gene A. Gohlke, Associate Director

Mary S. Podesta, Associate Director

William C. Weeden, Assistant Director, Office of Public Utility Regulation

Daniel L. Goelzer, General Counsel

Paul Gonson,Solicftor

Jacob H. Stillman, Associate General Counsel

Benjamin Greenspoon, Associate General Counsel

Phillip D. Parker, Associate General Counsel

William S. Stern, Associate General Counsel

Edmund Coulson, Chief Accountant

Glen L. Davison, Deputy Chief Accountant

Kenneth Lehn, Chief Economist, Office of Economic Analysis

Jeffry L. Davis, Deputy Chief Economist

Terry M. Chuppe, Associate Chief Economist

David H. Malmquist, Associate Chief Economist

Jonathan G. Katz, Secretary

Mary M. McCue, Director, Office of Public Affairs

John D. Heine, Deputy Director

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Henry I. Hoffman, Assistant Comptroller

Richard J. Kanyan, Director, Office of Administrative Services

David L. Coman, Deputy Director

VACANT, Director, Office of Personnel

William E. Ford, II, Assistant Director

Wilson Butler, Director, Office of Applications and Reports Services

Bonnie Westbrook, Director, Office of Consumer Affairs and Information

Services

Gregory Jones, Sr., Director, Office of Information Systems Management

VACANT, Deputy Director

Nina G. Gross, Director of Legislative Affairs * * * * * * James A. Clarkson, III, Director of Regional Office Operations

VACANT, Manager, Equal Employment Opportunity

John O. Penhollow, Director, Office of EDGAR Management

** * * **Nina G. Gross resigned from the Commission on March 30, 1990. R.

Mitchell Delk was appointed Director of Legislative Affairs on April 3, 1990.

97
Biographies of Commissioners

Richard C. Breeden

Richard C. Breeden was nominated to be a Member of the Securities and

Exchange Commission by President George Bush on September 7, 1989.

Following his confirmation by the United States Senate, Mr. Breeden was

named Chairman of the Commission by President Bush. Mr. Breeden was

sworn in as the 24th Chairman of the Commission on October 11, 1989. As

Chairman, Mr. Breeden is responsible for leading the Commission in the

development of policy, and for overall direction of the Commission. Mr.

Breeden also represents the Commission to the Congress, the Administration,

the financial community, and the public at large.

Mr. Breeden also currently serves as Chairman of the Executive Committee

of the International Organization of Securities Commissions ("IOSCO"). In

this capacity, Mr. Breeden works with the leadership of securities regulatory

agencies worldwide in developing stronger international cooperation to

achieve a more stable global market.

Prior to assuming the chairmanship, Mr.Breeden served in the White House

as Assistant to the President for Issues Analysis. In this capacity, Mr. Breeden

was responsible for In-depth analyses of major issues and policy problems.

Among these was the President's critical plan to restructure the savings and

loan industry. As one of the major architects of the plan, Mr. Breeden helped

to shepherd this through Congress to final passage.

From 1982-1985, Mr. Breeden served as Deputy Counsel to then-Vice

President Bush. In this position he worked on regulatory problems in a variety

of areas. In addition, he served as Staff Director of the President's Task Group

on Regulation of Financial Services, a cabinet level group established to

recommend improvements in federal financial regulatory programs. BLueprint

for Reform, the Task Group's final report authored by Mr. Breeden, was issued

in November 1984. From 1981-1982, Mr. Breeden served as Executive

Assistant to the Undersecretary of Labor.

Mr. Breeden is a lawyer by training. From 1985-1989, he was a partner of

one of the nation's leading law firms. His legal practice included financial

transactions and regulatory matters of all types. Prior to his original government service, Mr. Breeden practiced law in New York City from 1976-1981,

where he handled major domestic and international business transactions.

This followed completion of an appointment to teach constitutional law and

federal jurisdiction at the University of Miami School of Law.

Educated at Stanford University (B.A. with honors in international relations,

1972) and Harvard Law School (1975), Mr. Breeden is the author of law review

articles as well as analytical articles for legal and financial publications.

Representing the United States, he has lectured in New Zealand, Indonesia,

Hong Kong, and Japan. He has also served as a delegate to international

98
conferences on financial institutions and regulation, as well as on committees 

for local and national Bar Associations relating to financial services. 

David S. Ruder 

David Sturtevant Ruder was sworn in as the 23rd Chairman of the Securities 

and Exchange Commission on August 7, 1987, by Associate Justice Antonin 

Scalia of the Supreme Court of the United States, and resigned from the 

Commission on September 30, 1989. 

During his tenure, former Chairman Ruder appointed a special Commission 

task force to deal with the increasingly prevalent problem of fraud and 

manipulation in the penny stock market. 

The October 1987 market break focused increased attention on the role of 

the Commission in addressing securities market problems. Former Chairman 

Ruder took an active role concerning market problems through congressional 

testimony, Commission legislative proposals, oversight of the Commission's 

Division of Market Regulation, discussions with self-regulatory organizations 

and industry leaders, and participation in the President's Working Group on 

Financial Markets. 

In addition to market matters, Mr. Ruder addressed continuation gf the 

congressional policy of balance in the tender offer area; leg~slation to define 

insider trading; emerging issues in internationalization of the securities 

markets; increased disclosure in the municipal securities markets; and reform 

of the financial services industry. He presided over Commission decisions on 

improving the arbitration process for investors, adopting advertising rules for 

mutual funds, and amending proxy and shareholder communications rules, 

among other matters. 

Before his nomination to the Commission, former Chairman Ruder was a 

member of the faculty of Northwestern University School of Law from 1961 to 

1987, where he taught corporate and securities law. He was a visiting professor 

at the University of Pennsylvania Law School in 1971 and a faculty member at 

the Salzburg Seminar in American Studies in 1976. As Dean of Northwestern's Law School from 1977 to 1985, he conducted an extensive faculty 

recruitment program; actively participated in the successful completion of a 

$25 million law school campaign and in the construction of the School's 

Arthur Rubloff Building; and helped to persuade the American Bar Associa. 

tion to move its headquarters to the Rubloff Building. 

Before coming to the Commission, Mr. Ruder authored many articles on 

corporate and securities law matters, was a speaker and participant in 

continuing legal education programs of numerous organizations, and was 

active in bar association activities in the corporate and securities law field. 

While at Northwestern, he played a primary role in the organization and 

ongoing activities of the school's Corporate Counsel Institute, the Ray Garrett, 

Jr. Corporate and Securities Law Institute, and the Corporate Counsel Center, 

which sponsors legal research and provides continuing professional education 

programs for corporate lawyers. 

A native of Wausau. Wisconsin, former Chairman Ruder received a bache- 
lor's degree, cum laude, in 1951 from Williams College, where he was a

member of Phi Beta Kappa and Gargoyle, the senior honorary society. He was

editor-in-chief of the Williams Record, the college newspaper.

He received his law degree with honors in 1957 from the University of

Wisconsin, where he was a member of the Order of the Coif and the recipient

of the Salmon W.Dalberg Prize as the outstanding graduating student. He was

editor-in-chief of the Wisconsin Law Review.Mr. Ruder served in the U.S. Army

from 1951 to 1954, attaining the rank of First Lieutenant.

From 1957 to 1961, he was an associate with the Milwaukee law firm of

Quarles & Brady. While teaching at Northwestern, he was also of counsel to

the Chicago law firm of Schiff, Hardin & Waite from 1971 to 1976.

Charles C. Cox

Charles C. Cox was sworn in as the 62nd Member of the Securities and

Exchange Commission on December 2, 1983 and resigned from the Commission on September 30, 1989 to join Lexecon Inc. in Chicago, Illinois.

Mr. Cox joined the Commission on September 1, 1982 as Chief Economist.

He organized the Office of the Chief Economist to analyze the economic

effects of proposed rules and legislation, evaluate established Commission

policy, and study various capital market topics.

Prior to joining the Commission, Mr. Cox was a professor of management at

Texas A&M University from 1980 to 1982, and a professor of economics at

Ohio State University from 1972 to 1980. He served as a National Fellow of the

Hoover Institution at Stanford University from 1977 to 1978. During his

academic career, Mr. Cox focused his research on the economics of public

regulation of economic activity. He has published various articles on this topic

in scholarly journals. Mr. Cox is a member of the American Economic

Association and the Mont Pelerin Society.

Mr. Cox was born in Missoula, Montana on May 8, 1945. He received his

undergraduate education at the University of Washington where he was

elected to Phi Beta Kappa in 1966 and earned a B.A. degree, magna cum

Laude, with distinction in economics in 1967. He received A.M. and Ph.D.

degrees in economics from the University of Chicago in 1970 and 1975,

respectively.

Joseph A. Grundfest

Joseph A. Grundfest was sworn in as the 65th Member of the Securities and

Exchange Commission on October 28, 1985. He resigned from the Commission on January 18, 1990 to join the faculty of Stanford Law School.

Mr. Grundfest came to the Commission from the Council of Economic

Advisers in the Executive Office of the President, where he was counsel and

senior economist for legal and regulatory matters. Mr. Grundfest is both an

attorney and economist. He has practiced law with Wilmer, Cutler & Pickering

and has served as an economist with The Rand Corporation, and the

Brookings Institution.

Mr. Grundfest is author or co-author of numerous research reports and

100
publications. His works deal with a range of topics, including contests for

corporate control, insider trading, international securities regulation, regula.

tion of markets subject to kickback schemes, the economics and regulation

of broadcasting, and the role of citizen participation in administrative pro.

ceedings. During his academic career, Mr. Grundfest served as a Brookings

Institution Fellow, a Stanford University Fellow, and a California State Fellow

for the Study of Law and Economics.

Mr. Grundfest was born in New York City on September 8, 1951. He received

his undergraduate education at Yale University where he earned a B.A. degree

in economics in 1973. During an undergraduate year abroad, Mr. Grundfest

completed the M.Sc. Program in Mathematical Economics and Econometrics

at the London School of Economics. Between 1974 and 1978, he earned his

J.D. degree from Stanford University and completed all requirements, other

than the dissertation, for a doctorate in economics.

Edward H. Fleischman !t'

.;::}ward H. Fleischman was sworn in as the 66th Member of the Securities

".-n.: Exchange Commission on January 6, 1986, His term expires in June <

li!~;~J2.

I ';~'He formerly practiced law with Beekman & Bogue (a predecessor of the

?'resent Gaston & Snow firm), where he specialized in securities and corporate

lev and related areas.

During his career, Mr. Fleischman has been elected a member of the

Arrrerlcan Law Institute, the American College of Investment Counsel and the

f.\merican Society of Corporate Secretaries, and has served as an Adjunct

Professor of Lawteaching securities regulation at the New York University Law

School. He has been a lecturer at seminars dealing with securities law and

practice. He was co-author of a series of articles relating to Commission Rule

144.

Mr. Fleischman was born in Cambridge, Massachusetts on June 25, 1932.

He received his undergraduate education at Harvard College, served in the

U.S. Army from 1952 to 1955, and obtained his LL.B. degree from Columbia

Law School in 1959.

Mr. Fleischman was admitted to the New York Bar in 1959 and to the bar of

the U.S. Supreme Court in 1980. He serves on the American Bar Association

Section of Business Law's Committee on Counsel Responsibility and chairs

the Committee on Developments in Business Financing. He co-drafted that

Committee's 1979 paper on resale of institutional privately-placed debt and

chaired its Subcommittees on Simplified Indenture and on Annual Review of

Developments. He also serves on the Committee on Federal Regulation of

Securities, for which he chaired Subcommittees on Rule 144 and on Broker.

Dealer Matters and co-drafted the Committee's 1973 letter on utilization and

dissemination of "inside" information. In addition, he serves on the Committee on Futures Regulation and the Committee on Developments in Investment

Services, and has been active in the Section on Administrative Law.

Mr. Fleischman is also a member of Committee E-Banking Law and of

101

~
Committee Q-Issues and Trading in Securities of the International Bar

Association Section on Business Law. In the International Law Association

(American Branch), he has been appointed to membership on the Committee

on International Regulation of Securities.

Mary L. Schapiro

Mary L. Schapiro was sworn in as the 67th Member of the Securities and

Exchange Commission on December 5, 1988. She was nominated to the

Commission by President Reagan on December 22, 1988 in a recess appointment. Ms. Schapiro was renominated to the Commission by President Bush

on November 8,1989 and confirmed by the Senate on November 18,1989.

Her term expires on June 5, 1994.

Ms. Schapiro came to the Commission from the Futures Industry Association (FIA), where she was General Counsel and Senior Vice President. While

at the FIA, her work included regulatory, tax and international issues,

including extensive liaison with foreign governmental officials.

Prior to her service at the FIA, Ms. Schapiro spent four years at the

Commodity Futures Trading Commission. There, she served as Counsel and

Executive Assistant to the Chairman of the Commodity Futures Trading

Commission and was Trial Attorney in the Manipulation and Trade Practice

Investigations Unit of the Division of Enforcement. In the former position, Ms.

Schapiro advised on all regulatory and adjudicatory matters pending before

the Commission and on legislation. She also represented the Chairman with

federal and state officials, Congress, and the futures industry, in addition to

other duties.

A 1977 honors graduate of Franklin and Marshall College in Lancaster,

Pennsylvania, Ms. Schapiro earned a Juris Doctor degree (with honors) from

The National Law Center of George Washington University in 1980. While in

law school, Ms. Schapiro completed internships in the Farm Credit Administration and in the Executive Office of the President. She is a member of the

District of Columbia Bar, the American Bar Association, and the Association

of the Bar of the City of New York. From 1986 to 1988, she served on the

Executive Council of the Committee on Futures Regulation of the American

Bar Association.

Philip R. Lochner, Jr.

Philip R. Lochner, Jr. was sworn in as the 68th Member of the Securities and

Exchange Commission on March 12, 1990 by the Honorable Stanley Sporkin,

Judge of the United States District Court for the District of Columbia. Mr.

Lochner was nominated to the Commission by President Bush in January

1990 for a term expiring in 1991.

Before being nominated to the Commission, Mr. Lochner was General

Counsel, Secretary, and Vice President for Time Warner Inc. He became

General Counsel and Secretary in September 1988. He was elected a Vice

President of Time Warner Inc. in October 1986, and also assumed responsibility for Corporate Human Resources that year. From 1984 to 1986, he served

102
as Senior Vice President and General Counsel for the Time Warner Inc. Video

Group. Prior to that, he was Corporate Associate General Counsel for Time

Warner Inc. for four years, having joined the company in 1978 as Associate

General Counsel.

Before joining Time Warner Inc., Mr. Lochner was with the law firm of

Cravath, Swaine & Moore. He joined the law firm in 1973 after serving, from

1971 to 1973, as an Associate Dean and Assistant Professor of Law at State

University of New York in Amherst, New York.

Mr. Lochner earned a Ph.D. in political science from Stanford University in

1971. He also studied at the University of London from 1967 to 1968 as a

Fulbright Fellow. Mr. Lochner earned a LL.B. degree from Yale University in

1967, where he was on the Board of Editors of the Yale LawJournal, and was

a member of the Order of the Coif. He earned a B.A. from Yale University in

1964 and was elected to Phi Beta Kappa.

His professional activities include the New York State Bar Association,

where he served as Chairman of the Corporate Counsel Section, and has also

served as a member of the Committee on Corporation Law for the Banking,

Corporation and Business Law Section of that Association. Mr. Lochner is a

Fellow of the American Bar Foundation and he served as a lecturer on

securities law matters for the Practising Law Institute. He is a member of the

American, New York State, and City of New York Bar Associations.

Mr. Lochner was born in New Rochelle, New York on March 3, 1943. He and

his wife, Sally, have two children.

103
REGION 1

REGION 2

REGION 3

REGION 4

104

Regional and Branch Offices and

J\dnninistrators

Lawrence lason

NEW YORK REGIONAL OFFICE

75 Park Place, 14th Floor

New York, NY 10007

212/264-1636

Region: New York and New Jersey

Douglas Scarff

BOSTON REGIONAL OFFICE

John W. McCormack Post Office

and Courthouse Building, Suite 700

Boston, MA 02109

617/223-9900

Region: Maine, New Hampshire, Vermont, Massachusetts,

Rhode Island, and Connecticut

Richard P. Wessel

ATLANTA REGIONAL OFFICE

1375 Peachtree Street, NE, Suite 788

Atlanta, GA 30367

404/347-4768

Region: Tennessee, Virgin Islands, Puerto Rico, North Carolina,

South Carolina, Georgia, Alabama, Mississippi, Florida,

and Louisiana east of the Atchafalaya River

Charles C. Harper

MIAMI BRANCH OFFICE

Dupont Plaza Center

300 Biscayne Boulevard Way, Suite 500

Miami, FL 33131

305/536-5765

William D. Goldsberry

CHICAGO REGIONAL OFFICE

Everett McKinley Dirksen Building

219 South Dearborn Street, Room 1204

Chicago, IL 60604

312/353-7390

Region: Michigan, Ohio, Kentucky, Wisconsin, Indiana, Iowa,

Illinois, Minnesota, and Missouri
REGION 5

REGION 6

REGION 7

T. Christopher Browne

FORT WORTH REGIONAL OFFICE

411 West Seventh Street, 8th Floor

Fort Worth, TX 76102

817/334-3821

Region: Oklahoma, Arkansas, Texas, Louisiana west of the

Atchafalaya River, and Kansas

Joseph C. Matta

HOUSTON BRANCH OFFICE

7500 San Felipe Street, Suite 550

Houston, TX 77063

713/266-3671

Robert H. Davenport

DENVER REGIONAL OFFICE

410 17th Street, Suite 700

Denver, CO 80202

303/844-2071

Region: North Dakota, South Dakota, Wyoming, Nebraska,

Colorado, New Mexico, and Utah

Donald M. Hoerl

SALT LAKE BRANCH OFFICE

U.S. Post Office and Courthouse

350 South Main Street, Room 505

Salt Lake City, UT 84101

8011524-5796

James L. Sanders

LOS ANGELES REGIONAL OFFICE

5757 Wilshire Boulevard, Suite 500 East

Los Angeles, CA 90036-3648

213/965-3998

Region: Nevada, Arizona, California, Hawaii, and Guam

Cer Gladwyn Goins

SAN FRANCISCO BRANCH OFFICE

901 Market Street, Suite 470

San Francisco, CA 94103

415n44-3140

105
REGION 8

REGION 9

106

Jack H. Bookey

SEAlTLE REGIONAL OFFICE

3040 Jackson Federal Building

915 Second Avenue

Seattle, WA 98174

206/442-7990

Region: Montana, Idaho, Washington, Oregon, and Alaska

James C. Kennedy

PHILADELPHIA REGIONAL OFFICE

The Curtis Center, Suite 1005 E.

601 Walnut Street

Philadelphia, PA 19106-3322

215/597-3100

Region: Pennsylvania, Delaware, Maryland, Virginia,

West Virginia, and District of Columbia
Footnotes

1In the Matter of The Stusrt-Jemes Co., lnc., et ai., Securities Exchange Act

Release No. 26700 (April 5, 1989), 43 SEC Docket 966.

2SEC v. Amold Kimmes, et ai., Litigation Release No. 12210 (August 10,

1989), 44 SEC Docket 507.

3SEC u Arthur Tuchinsky, et el., Litigation Release No. 12155 (July II, 1989),

43 SEC Docket 2573.

4SEC v. Brownstone Smith Securities Corp., et ei., Litigation Release No. 12126

(June 12, 1989),43 SEC Docket 2072.

5 In the Matter of Broumstone-Smitii Securities Corp., et al., Securities Exchange

Act Release No. 26936 (June 15, 1989),43 SEC Docket 1993.

6SEC v. Habersheir Securities, Inc., Litigation Release No. 11999 (February 16,

1989), 42 SEC Docket 1652.

7SEC u Glenn Golenberg, et ai., Litigation Release No. 12074 (May I, 1989),

43 SEC Docket 1379.

8In the Matter of Glenn Golenberg, Securities Exchange Act Release No. 26795

(May 8, 1989),43 SEC Docket 1409.

9SEC u William S. Banowsky, Litigation Release No. 12033 (March 14, 1989),

43 SEC Docket 742.

lOSEC v. David Hellberg, et el., Litigation Release No. 12113 (May 31, 1989),

43 SEC Docket 1865.

11SEC v. Kerry A. Hurton, et al., Litigation Release No. 12097 (May 16, 1989),

43 SEC Docket 1695.

12SEC v. Seymour G. Ruderman, Litigation Release No. 12109 (May 25, 1989),

43 SEC Docket 1784.

13SEC v. Shayne A. Walters, Litigation Release No. 12219 (August 17, 1989),

44 SEC Docket 588.

14SEC u William J. Dillon, et al., Litigation Release No. 12157 (July II, 1989),

43 SEC Docket 2575.

15SEC v. Stephen Sui-Kusn Wang Jr. and Fred C. Lee a/k/a Chuan Hong Lee,

Litigation Release No. 12191 (August 2, 1989),44 SEC Docket 389.

16SEC u John Naylor Clark, J1J, Litigation Release No. 12056 (April 5, 1989),

43 SEC Docket 1003.

17SEC v. Eddie Antar, et el., Accounting and Auditing Enforcement Release

No. 247 (September 6, 1989), 44 SEC Docket 998.

18SEC v. Donald D. Sheelen, et el., Accounting and Auditing Enforcement

Release No. 215 (February 8, 1989), 42 SEC Docket 1562.

19In the Matter of Matrix Science Corp., et al., Accounting and Auditing

Enforcement Release No. 207 (November I, 1988), 42 SEC Docket 190.

20SEC v. Ronald A. Hammond, et el., Accounting and Auditing Enforcement

Release No. 208 (November I, 1988), 42 SEC Docket 275.

21SEC u Frederick S. Plotkin, et al., Litigation Release No. 11895 (October 17,

1988), 42 SEC Docket 82.

22SEC v. Information Solutions Inc., et al., Litigation Release No. 12119 (June

6, 1989), 43 SEC Docket 1928.

107
23SEC v. David N. Henenie, et el., Accounting and Auditing Enforcement

Release No. 223 (April 17, 1989) 43 SEC Docket 1236.

24SEC v. Wilderness Electronics, lnc., et el., Litigation Release No. 12018

(March 2, 1989),42 SEC Docket 1899.

25SEC v. Rocky Mount Undergarment Co., lnc., et el., Accounting and Auditing

Enforcement Release No. 212 (January 9, 1989),42 SEC Docket 1206.

26SEC v. Timothy L. Sesek, et el., Accounting and Auditing Enforcement

Release No. 214 (December 28, 1988),42 SEC Docket 1203.

27In the Matter of Richard P. Franke, CPA, et el., Accounting and Auditing

Enforcement Release No. 220 (March 24, 1989), 43 SEC Docket 856.

281n the Matter of Lynne K. Mercer, CPA, Accounting and Auditing

Enforcement Release No. 222 (April 13, 1989), 43 SEC Docket 1095.

29/n the Matter of Jack M. Portney, CPA, Accounting and Auditing

Enforcement Release No. 242 (August 21, 1989),44 SEC Docket 638.

30In the Matter of Edmon A. Morrison, /II, Accounting and Auditing

Enforcement Release No. 216 (February 23, 1989), 42 SEC Docket 1681.

31/n the Matter of John L. Van Horn, Accounting and Auditing Enforcement

Release No. 209 (November 1, 1988), 42 SEC Docket 210.

321n the Matter of Larry A. Dixon, Accounting and Auditing Enforcement

Release No. 219 (March 15, 1989),43 SEC Docket 670.

331n the Matter of Noemi L. Rodriguez Santos, Accounting and Auditing

Enforcement Release No. 246 (September I, 1989), 44 SEC Docket 935.

341n the Matter of Merom D. Haney, CPA, Accounting and Auditing

Enforcement Release No. 237 (July 17, 1989), 44 SEC Docket 2.

351n the Matter of Sheldon M. Blazer, Accounting and Auditing Enforcement

Release No. 226 (May 22, 1989), 43 SEC Docket 1736.

36SEC v. Paul A. Bilzerien, et el., Litigation Release No. 12144 (May 31, 1989)

43 SEC Docket 2315.

37SEC v. Amster & Co., Litigation Release No. 11928 (December 5, 1988), 42

SEC Docket 670.

381n the Matter of William R. Grant, Securities Exchange Act Release No.

26339 (December 5, 1988), 42 SEC Docket 618.

39/n the Matter of Merry Land & Investment Co., lnc., Securities Exchange Act

Release No. 26410 (December 30, 1988), 42 SEC Docket 998.

40SEC v. Rene Research, lnc., et el., Litigation Release No. 12049 (March 30,

1989), 43 SEC Docket 925.

41SEC v. Frederick J. Ball, Jr., Litigation Release No. 12242 (September 7,

1989), 44 SEC Docket 1001.

42SEC v. Louisiana Real Estate Equity Ltd., et el., Litigation Release No. 12005

(February 21, 1989), 42 SEC Docket 1757.

43SEC v. Arthur P. Miller, Litigation Release No. 11976 (January 25, 1989), 42

SEC Docket 1649.

44SEC v. William A. Bartlett, et el., Litigation Release No. 12021 (March 6,

1989), 43 SEC Docket 103.

45SEC v. Frank R. Breitweiser, Litigation Release No. 12043 (March 27, 1989),

43 SEC Docket 920.

46SEC v. Drexel Burnham Lambert Incorporated, et el., Litigation Release No.

12061 (April 13, 1989),43 SEC Docket 1147.

47In the Matter of Drexel Burnham Lambert Incorporated, Securities Exchange

Act Release No. 27236 (September 11, 1989), 44 SEC Docket 1059.

108
48SEC v. Waddell Jenmar Securities lnc., et al., Litigation Release No. 12234

(August 29, 1989), 44 SEC Docket 905.

491nthe Matter of Waddell Jenmar Securities Inc., et el., Securities Exchange

Act Release No. 27188 (August 25, 1989),44 SEC Docket 859.

50In the Matter of Gary M. Wozniak, Securities Exchange Act Release No.

26459 (January 13, 1989),42 SEC Docket 1212.

51In the Matter of William S. Hoglund, Securities Exchange Act Release No.

27317 (September 29, 1989), 44 SEC Docket 1469.

52/n the Matter of William E. Parodi, Sr., et el., Securities Exchange Act Release

No. 27299 (September 27, 1989),44 SEC Docket 1337.

53In the Matter of American Investors of Pittsburgh, et ai., Securities Exchange

Act Release No. 26393 (December 27, 1988), 42 SEC Docket 897.

54SEC v. Matthews & Wright Group Inc., et al., Accounting and Auditing

Enforcement Release No. 224 (April 27, 1989), 43 SEC Docket 1724.

55In the Matter of Matthews & Wright Inc., Securities Exchange Act Release No.

26841 (May 19, 1989), 43 SEC Docket 1724.

56In the Matter of Salomon Brothers, Inc., Securities Exchange Act Release No.

26838 (May 19,1989),43 SEC Docket 1712.

57In the Matter of Prudentiel-Becne Securities, lnc., Securities Exchange Act

Release No. 27313 (September 28, 1989),44 SEC Docket 1362.

58SEC v. Thomas E. Bernnoft, et sl., Litigation Release No. 12241 (September

6, 1989), 44 SEC Docket 1000.

591n the Matter of Forbes Portfolio Management, et el., Investment Advisers Act

Release No. 1197 (September 11, 1989), 44 SEC Docket 1145.

60In the Matter of Roberto C. Polo, Investment Advisers Act Release No. 1201

(September 18, 1989),44 SEC Docket 1272.

61/n the Matter of Managed AdVisory Services, lnc., et el., Investment Advisers

Act Release No. 1148 (December 27, 1988), 42 SEC Docket 975.

62/n the Matter of Harvest Financial Group, Inc., et el., Investment Advisers Act

Release No. 1155 (February 21, 1989), 42 SEC Docket 1744.

63SEC v. Dave Mason, et el., Accounting and Auditing Enforcement Release

No. 243 (August 21, 1989), 44 SEC Docket 841.

641n the Matter of Dave Mason, R.I.A., lnc., et el., Investment Advisers Act

Release No. 1200 (September 18,1989),44 SEC Docket 1269.

651n the Matter of Frederick D. Woodside, CPA, Accounting and Auditmq

Enforcement Release No. 244 (August 21, 1989),44 SEC Docket 827.

661n the Matter of Heine Securities Corp., Investment Advisers Act Release No.

1150 (December 28, 1988),42 SEC Docket 979.

671n the Matter of United Services Advisors, et al., Investment Advisers Act

Release No. 1196 (September 8, 1989), 44 SEC Docket 1139.

681n the Matter of Sea Investment Management, lnc., et el., Investment

Company Act Release No. 16952 (May 11, 1989),43 SEC Docket 1457.

69SEC v. John Peter Galanis, et el., Litigation Release No. 12154 (July 10,

1989),43 SEC Docket 2571.

70In the Matter of Chicago Board Options Exchange, Securities Exchange Act

Release No. 26809 (May 11, 1989),43 SEC Docket 1432.

71Release No. 33-6838 (July 11, 1989), 43 SEC Docket 2421.

72Release No. 33-6841 (July 24, 1989),44 SEC Docket 71.

73Release No. 33-6806 (October 25, 1988),42 SEC Docket 91.

74Release No. 33-6839 (July 11, 1989),43 SEC Docket 2434.

109
75Release Nos. 33-6806 (October 25, 1988),42 SEC Docket 91, and 33-6839

(July II, 1989), 43 SEC Docket 2434.

76Release No. 34-26333 (December 2, 1988),42 SEC Docket 570.

77Release No. 34-27148 (August 18, 1989),44 SEC Docket 599.

78Release No. 33-6835 (May 18, 1989),43 SEC Docket 1577.

79Release No. 33-6836 (June 19, 1989),43 SEC Docket 1952.

80Release No. 33-6823 (March 2, 1989), 42 SEC Docket 1784.

81Release No. 34-26598 (March 6, 1989), 43 SEC Docket 22.

82Release No. 34-26599 (March 6, 1989), 43 SEC Docket 32.

83Release No. 33-6815 (February I, 1989), 42 SEC Docket 1370.

84Release Nos. 33-6825 (March 14, 1989),43 SEC Docket 664, 33-6811

(December 20, 1988),42 SEC Docket 753, and 33-6812 (December 20, 1988),

42 SEC Docket 754.

85Staff Accounting Bulletin No. 81 (April 4, 1989),42 SEC Docket 1010 (Gain

Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged

Entity); Staff Accounting Bulletin No. 82 (July 5, 1989), 43 SEC Docket 2417

(Transfers of Nonperforming Assets by Financial Institutions; and Disclosure of

the Impact of Financial Assistance from Regulators).

86Staff Accounting Bulletin No. 80 (November 21, 1988),42 SEC Docket 481

(Application of Rule 3-05 in Initial Public Offerings); Staff Accounting Bulletin

No. 83 (July 31, 1989),44 SEC Docket 404 (Earnings per Share Computations

in an Initial Public Offering); Staff Accounting Bulletin No. 84 (July 31, 1989),

44 SEC Docket 408 (Accounting for Sales of Stock by a Subsidiary); Staff

Accounting Bulletin No. 85 (September 18, 1989), 44 SEC Docket 1291

(Amortizing Capitalized Costs of Oil and Gas Properties; Inclusion of Methane

Gas within Proved Reserves); and Staff Accounting Bulletin No. 86 (September

28, 1989), 44 SEC Docket 1460 (Certain Matters Related to Quasi.

Reorganizations).

87Staff Accounting Bulletin No. 87 (December 12, 1989), 45 SEC Docket 192

(Property-Casualty Insurance Reserves for Unpaid Claims Costs; Contingency

Disclosures).

88Letter to David C. Mulford, Under Secretary for International Affairs, U.S.

Department of the Treasury, from Edmund Coulson, Chief Accountant, SEC, and

Linda C. Quinn, Director. Division of Corporate Finance, SEC, dated July 14,

1989.

89Report of the National Commission on Fraudulent Financial Reporting

(October 1987). The National Commission on Fraudulent Financial Reporting,

also known as the Treadway Commission, was jointly sponsored and funded by

the American Institute of Certified Public Accountants, the American Accounting

Association, the Financial Executives Institute, the Institute of Internal Auditors,

and the National Association of Accountants.

90 Financial Reporting Release No. 31 (April 12, 1988), 40 SEC Docket 1140.

91Financial Reporting Release No. 34 (March 2, 1989), 42 SEC Docket 1779.

92Release No. 33-6789 (July 19, 1988),41 SEC Docket 681.

9317 CFR 229.302(a).

94Release No. 33-6837 (June 20,1989),43 SEC Docket 2080.

95Release No. 34-27153 (August 21, 1989), 44 SEC Docket 655.

96H.R. 975, 101st Congress, 1st Session (1989).

97Proposed Statement of Financial Accounting Standards, Employers'

Accounting for Post-retirement Benefits Other than Pensions (February 14, 1989).

110
98Statement of Financial Accounting Standards No. 103, Deferral of Effective

Date of FASB Statement No. 96 (December 1989).

99Statements of Financial Accounting Standards No. 101, Regulated

Enterprises-Accounting for the Discontinuation of Application of FASB Statement

No. 71 (December 1988), and No. 102, Statement of Cash Flows-Exemption of

Certain Enterprises and Classification of Cash Flows from Certain Securities

Acquired for Resale (February 1989).

100FASB Technical Bulletins No. 88-1, Issues Relating to Accounting for Leases

(December 28, 1988) and No. 88-2, Definiuon of Right of Setoff (December 28,

1988).

101Letter to Jack Kreischer, Chairman of AcSEC, from Edmund Coulson,

Chief Accountant, SEC, dated December 20, 1989.

102Exposure Draft of Statement of Position, Reporting by Financiallnslilutions

of Debt Securities Held as Assets, publication forthcoming.

103Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans

(August 1989).

104SEC Practice Section, Annual Report 1987-1988 at 19.

I05Release No. 33-6695 (April I, 1987),37 SEC Docket 1825.

1061nternational Accounting Standards Committee Exposure Draft 32 (January

1, 1989).

107Securities Exchange Act Release Nos. 26198 (October 19,1988),42 SEC

Docket 43; 26386 (December 12, 1988),42 SEC Docket 795; 26368 (December

16, 1988),42 SEC Docket 767; 26218 (October 26, 1988),42 SEC Docket 127;

and 26440 (January 10, 1989),42 SEC Docket 1129.

108See note 155 and accompanying text, infra.

109See, Report of the Presidential Task Force on Market Mechanisms (January

1988) pp. 64-66.

l10See subsection "National System for Clearance and Settlement," infra.

III Group of Thirty, Clearance and Settlement in the Worlds Securities Markets

(March 20, 1989).

112Securities Exchange Act Release No. 34-27445 (November 16,1989),44

SEC Docket 2037.

113Securities Exchange Act Release No. 26402 (December 28, 1988), 42 SEC

Docket 910. See also Securities Exchange Act Release No. 26580 (March 1,

1989), 42 SEC Docket 1827.

114Securities Exchange Act Release No. 27044 (July 18, 1989),44 SEC

Docket 16.

115The Commission's proposals were originally introduced in the House by

Chairmen Dingell and Markey as H.R. 1609, and in the Senate by Chairman

Dodd and Senator Heinz as S. 648.

116Securities Exchange Act Release No. 27178 (August 24,1989),44 SEC

Docket 719.

I 17Securities Exchange Release No. 27472 (November 24,1989),44 SEC

Docket 2286.

118Securities Exchange Act Release No. 26545 (February 14, 1989), 42 SEC

Docket 1581.

119Securities Exchange Act Release No. 27012 (July 10, 1989), 43 SEC

Docket 2465.

120Securities Exchange Act Release No. 27329 (October 2, 1989), 44 SEC

Docket 1495.

111
121Securities Exchange Act Release No. 26991 (June 29, 1989), 43 SEC

Docket 2265.

122Securities Exchange Act Release No. 27229 (September 7, 1989), 44 SEC

Docket 961.

123Securities Exchange Act Release No. 26790 (May 5, 1989), 43 SEC Docket

1397.

124See, e.g., SEC, Division of Market Regulation, The October 1987 Market

Break, Chapter 10 (February 1988), and Interim Report of the Working Group on

Financial Markets (May 1988).

125Securities Exchange Act Release Nos. 26627 (March 14, 1989),43 SEC

Docket 682; 26783 (May 4, 1989),43 SEC Docket 1366; 27074 (July 28, 1989),

44 SEC Docket 268; 27152 (August 18, 1989),44 SEC Docket 649; and 27582

(December 29, 1989), 45 SEC Docket 469.

126Securities Exchange Act Release No. 26773 (May 1, 1989), 43 SEC Docket

1338.

127Securities Exchange Act Release No. 27044 (July 18, 1989), 44 SEC

Docket 16. See also Securities Exchange Act Release No. 26300 (November 21,

1988),42 SEC Docket 415, for text of SCG Agreement. See subsection "Market

Reform Initiatives," supra.

128Securities Exchange Act Release No. 26840 (May 19, 1989), 43 SEC

Docket 1721.

129Securities Exchange Act Release No. 27534 (December 13, 1989),45 SEC

Docket 118.

130Securities Exchange Act Release No. 27410 (October 31, 1989), 44 SEC

Docket 1898.

131 Securities Exchange Act Release No. 27104 (August 8, 1989), 44 SEC

Docket 427.

132S. 648, 101st Cong., 1st Sess., and H.R. 3656, 101st Cong., 1st Sess.

133Securities Exchange Act Release No. 27581 (December 29, 1989), 45 SEC

Docket 467.

134Securities Exchange Act Release No. 26671 (March 28, 1989),43 SEC

Docket 868.

135Securities Exchange Act Release No. 27006 (July 7, 1989), 43 SEC Docket

2446.

136 See Securities Exchange Act Release No. 26450 (January 12, 1989), 42

SEC Docket 1142.

137883 F.2d 537 (7th Cir. 1989).

138The Commission subsequently determined that the OTC option trading

system is not an exchange, and a new order granting registration was issued in

January 1990. See Securities Exchange Act Release No. 27611 (January 12,

1990), 45 SEC Docket 617.

139See Policy Statement on Regulation of International Securities Markets,

Securities Act Release No. 6807 (November 14, 1988), 53 FR 46963, 42 SEC

Docket 334.

140Securities Exchange Act Release No. 27017 (July 11, 1989),43 SEC

Docket 2471.

141Securities Exchange Act Release No. 27018 (July 11, 1989),43 SEC

Docket 2492.

142Letter regarding S.G. Warburg Securities (November 9, 1989).

143Letter regarding NFC PLC (February 2, 1989).

144Letter regarding NOVA Corporation of Alberta (August 14, 1989).

112
145Letter regarding Pacific Dunlop Limited (May 9, 1989) and Letter regarding

National Australia Bank Limited (July 31, 1989).

146Letter regarding Cable and Wireless PLC (September 26, 1989).

147Letter regarding PolyGram N.V. (December 12, 1989).

148Letter regarding Rhone-Poulenc S.A. (November 13, 1989).

149Letter regarding Benetton Group S.p.A. (June 8, 1989).

15°Letter regarding Repsol S.A. (May 9, 1989).

151Securities Exchange Act Release No. 26812 (May 12, 1989), 43 SEC

Docket 1616.

152Securities Exchange Act Release No. 26626 (March 14, 1989), 43 SEC

Docket 680.

153Securities Exchange Act Release No. 27470 (November 24, 1989),44 SEC

Docket 2250.

154The twelve countries are Australia, Canada, France, West Germany, Hong

Kong, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom,

and the United States.

155Securities Exchange Act Release No. 26198 (October 19, 1988), 42 SEC

Docket 43.

156Securities Exchange Act Release No. 26198 (October 19, 1988), 42 SEC

Docket 43.

157Securities Exchange Act Release Nos. 27159 (August 21, 1989),44 SEC

Docket 664; 27075 (July 28, 1989),44 SEC Docket 270; and 27186 (August 25,

1989), 44 SEC Docket 848.

158Securities Exchange Act Release No. 26870 (May 26, 1989),43 SEC

Docket 1793.

159Letter dated January 9, 1990 from Richard C. Breeden, Chairman, SEC, to

James R. Jones, Chairman, Amex; Alger B. Chapman, Chairman and CEO,

CBOE; John Phelan, Chairman, NYSE; Dr. Maurice Mann, Chairman and

CEO,PSE; and Nicholas Giordano, President, Phlx.

160Securities Exchange Act Release No. 26871 (May 26, 1989), 43 SEC

Docket 1807.

161Securities Exchange Act Release No. 26709 (April II, 1989), 43 SEC

Docket 1039.

162Chicago Mercantile Exchange v. SEC, 883 F.2d 537. The Court later denied

a petition for rehearing filed by the Commission. Chicago Mercantile Exchange v.

SEC, (Nos. 89-1538, 89-1763, 89-1786 and 89-2012) slip. op. (October 23,

1989).

163Securities Exchange Act Release No. 26938 (June 21, 1989), 43 SEC

Docket 1998.

164Securities Exchange Act Release No. 26271 (November 10, 1988), 42 SEC

Docket 340.

165Letter dated October 11, 1988 from Jonathan G. Katz, Secretary, SEC, to

Dr. Paula Tosini, Director, Division of Economic Analysis, CFTC.

166Letter dated October 7, 1988 from Jonathan G. Katz, Secretary, SEC, to Dr.

Paula Tosini, Director, Division of Economic Analysis, CFTC.

167Letter dated June 16, 1989 from Jonathan G. Katz, Secretary, SEC, to Jean

A. Webb, Secretary, CFTC.

168Securities Exchange Act Release No. 27047 (July 19, 1989), 44 SEC

Docket 22.

169Securities Exchange Act Release Nos. 27185 (August 25, 1989),44 SEC

Docket 846, and 26952 (June 21, 1989), 43 SEC Docket 2105.

113
170Securities Exchange Act Release No. 26755 (April 21, 1989),43 SEC

Docket 1254.

171 See Chapter "Enforcement Program," supra.

172Securities Exchange Act Release No. 27160 (August 22, 1989), 44 SEC

Docket 665

173Securities Exchange Act Release No. 27247 (September 14, 1989),44 SEC

Docket 1072.

174Pub. Law No. 100-704, lnsider Trading and Securities Fraud Enforcement

Act of 1988 (November 19, 1988).

175Securities Exchange Act Release No. 26985 (July 10, 1989), 43 SEC

Docket 2245.

176Securities Exchange Act Release No. 26100 (September 22, 1988), 41 SEC

Docket 1402.

17715 U.S.c. 78bb(e).

178 Roundtable on Commission Dollar and Sale of Order Flow Practices (July 24,

1989).

179pub. L. No. 101-73, 103 Stat. 183 (August 9, 1989).

180Securities Exchange Act Release No. 27231 (September 8, 1989),44 SEC

Docket 1047.

18115 U.S.c. 78c(aX12XAXv).

182Securities Act Release No. 6844 (September 8, 1989),44 SEC Docket

1015.

183Securities Exchange Act Release No. 34-27249 (September 15, 1989).

184Securities Exchange Act Release No. 26402 (December 28, 1988),42 SEC

Docket 910. See also Securities Exchange Act Release No. 26580 (March 1,

1989), 42 SEC Docket 1827.

185Securities Exchange Act Release No. 26608 (March 8, 1989),43 SEC

Docket 58.

186Letter dated March 2, 1989 from Michael A. Macchiaroli, Assistant

Director, Division of Market Regulation, to Frances R. Bermanzohn, Senior Vice

President and General Counsel, Public Securities Association.

187Securities Exchange Act Release No. 27047 (July 19, 1989), 44 SEC

Docket 22.

18854th Annual Report at 58.

189 Higgins v. SEC, 866 F.2d 47 (2d Cir. 1989).

1905ecurities Exchange Act Release No. 26523 (February 7, 1989),42 SEC

Docket 1462.

191Securities Exchange Act Release No. 27292 (September 26, 1989), 44 SEC

Docket 1325.

1925ecurities Exchange Act Release Nos. 26487 (January 24,1989),42 SEC

Docket 1294 and 27164 (August 22, 1989),44 SEC Docket 685.

193Securities Exchange Act Release No. 27035 (July 14, 1989), 44 SEC

Docket 5.

194See section "Securities Markets, Facilities and Trading," supra, for

additional information on NASD rule changes in 1989.

1955ecurities Exchange Act Release No. 26907 (June 8,1989),43 SEC Docket

1899.

1965ecurities Exchange Act Release No. 26915 (June 12, 1989),43 SEC

Docket 1975.

197Securities Exchange Act Release No. 26920 (June 12, 1989), 43 SEC

Docket 1979.

114
1985ecurities Exchange Act Release No. 27494 (December 1, 1989),45 SEC

Docket 9.

1995ecurities Exchange Act Release No. 26794 (May 8, 1989),43 SEC Docket

1407.

200Securities Exchange Act Release No. 26626 (March 14, 1989),43 SEC

Docket 680.

201Securities Exchange Act Release No. 27139 (August 14, 1989), 44 SEC

Docket 548.

202Securities Exchange Act Release No. 27389 (October 25, 1989),44 SEC

Docket 1815.

203Securities Exchange Act Release No. 26805 (May 10, 1989),43 SEC

Docket 1417.

204Securities Exchange Act Release No. 27093 (August 2,1989),44 SEC

Docket 292.

205Securities Exchange Act Release No. 27187 (August 25, 1989),44 SEC

Docket 854.

206Securities Exchange Act Release No. 27341 (October 5, 1989), 44 SEC

Docket 1513.

2071nthe Matter of Chicago Board Options Exchange, Inc., Securities Exchange

Act Release No. 26809 (May 11, 1989).

208/n the Matter of Proposed Association of Joseph Frymer with an NYSE

Member Firm, Administrative Proceeding File No. 4-347. See also, Antoniu v.

SEC, 877 F.2d 721 (7th Cir. 1989), petition for cert. filed, No. 89-835 (U.S.

October 30, 1989).

209Rule 19d-l authorizes certain SROs to report certain technical violations

quarterly in chart form. In fiscal year 1989, the number of cases reported in this

abbreviated format was as follows: American Stock Exchange-II, New York

Stock Exchange-46, Philadelphia Stock Exchange-107, and Pacific Stock

Exchange-23. These cases are included in the text discussion and chart.

210Securities Investor Protection Act Release No. 149 (September 9, 1988),41

SEC Docket 1366.

211Investment Company Act Release No. 16766 (January 23, 1989), 42 SEC

Docket 1267.

2121nvestment Company Act Release No. 16845 (March 2, 1989),42 SEC

Docket 1784.

2131nvestment Company Act Release No. 17085 (July 26, 1989),44 SEC

Docket 193.

2141nvestment Company Act Release No. 17091 (July 28, 1989),44 SEC

Docket 231.

2151nvestment Company Act Release No. 17294 (January 8, 1990), 45 SEC

Docket 517.

2161nvestment Company Act Release No. 16842 (March 1, 1989),42 SEC

Docket 1869.

217Investment Company Act Release No. 17077 (July 21,1989),44 SEC

Docket 173.

2181nvestment Company Act Release No. 17084 (International Series No. 110)

(July 26, 1989),44 SEC Docket 188. .

2191nvestment Company Act Release No. 17357 (International Series No. 119)

(February 26, 1990),45 SEC Docket 1255.

22°lnvestment Company Act Release No. 17097 (August 3,1989),44 SEC

Docket 326.

115
221Investment Company Act Release No. 17096 (August 3, 1989), 44 SEC

Docket 317.

222Holding Company Act Release No. 24815 (February 7,1989),42 SEC

Docket 1515.

223Holding Company Act Release No. 24891 (May 17, 1989),43 SEC Docket

1667.

224Holding Company Act Release No. 25058 (March 19, 1990), 45 SEC Docket

1577.

225Holding Company Act Release No. 25059 (March 19, 1990),45 SEC Docket

1582.

2261nvestment Company Act Release No. 16899 (March 30, 1989), 43 SEC

Docket 916 (Notice); Investment Company Act Release No. 16938 (April 25,

1989), 43 SEC Docket 1291 (Order).

2271nvestment Company Act Release No. 17116 (August 22, 1989), 44 SEC

Docket 750.

2281nvestment Company Act Release No. 17257 (December 8, 1989),45 SEC

Docket 167 (Notice); Investment Company Act Release No. 17303 (January 11,

1990), 45 SEC Docket 601 (Order).

2291nvestment Company Act Release No. 17198 (October 31, 1989),44 SEC

Docket 1953 (Notice); Investment Company Act Release No. 17242 44

(November 29, 1989), SEC Docket 2347.

230American Funds Distributors, Inc. (pub. avail. October 16, 1989).

231Investment Trust of Boston Funds (pub. avail. April 13, 1989).

232T. Rowe Price Funds (pub. avail. June 30, 1989).

233Resolution Funding Corporation (pub. avail. October 20, 1989).

234Equitable Variable Life Insurance Company (pub. avail. August 9, 1989).

2351nvestment Advisers Act Release No. 1170 (June 14, 1989),43 SEC Docket

2065 (Notice); Investment Advisers Act Release No. 1178 (July 11, 1989), 43

SEC Docket 3568 (Order).

236Holding Company Act Release No. 24908 (June 22, 1989),43 SEC Docket

2115.

237Holding Company Act Release No. 24879 (May 5, 1989), 43 SEC Docket

1465.

238Holding Company Act Release No. 24872 (April 25, 1989), 43 SEC Docket

1268.

239Holding Company Act Release No. 24956 (September 26,1989),44 SEC

Docket 1368.

240Central and South West Corporation; CSW Credit, Inc., Administrative

Proceeding File No. 3-7027.

241Holding Company Act Release No. 24619 (April 7, 1988), 40 SEC Docket

1108.

242Holding Company Act Release No. 24764 (December I, 1988),42 SEC

Docket 522.

243Holding Company Act Release No. 24959 (September 28, 1989), 44 SEC

Docket 1395.

244SEC v. First City Financial Corp., 688 F. Supp. 705 (D.D.C. 1988), eit'a, 890

F.2d 1215 (D.C. Cir.1989).

245United States v. Chestman, No. 89-1276 (2d Cir.).

246 SEC v. Leoine, 881 F.2d 1165 (2d Cir. 1989).

247The Business Roundtable v. SEC, No. 88-1651 (D.C. Cir.).

248 Chicago Mercantile Exchange v. SEC, 883 F.2d 537 (7th Cir. 1989).

116
249Arthur Young & Co. v. Reves, 856 F.2d 52 (8th Cir. 1988), cert. granted, 109

S.Ct. 3154 (1989).

250SEC v. \.v.J. Howey Co., 328 U.S. 293 (1946).

251Holloway v. Peat, Marwick, Mitchell & Co., 879 F.2d 772 (l Oth Cir. 1989),

cert. granted, 110 S.Ct. 1314 (1990).

252Manne Bank v. Weaver, 455 U.S. 551 (1982).

253Foremost Guaranty Corp. v. Mentor Savings Bank, Nos. 88-3164, 88-3165,

88-3172 (4th Cir.).

254Hollinger v. Titan Capital Corp., No. 87-3837 (9th Cir.).

255Wilson v. Seuniine Exploration & Dnllinq Corp. (Ruffa & Hanover, P'C), 872

F.2d 1124 (2d Cir. 1989).

256Pinter v. Dahl, 108 S.Ct. 2063 (1988).

257Lebman v. Aktiebolaget Electrolux, 854 F.2d 1319 (5th Cir. 1988)(Table),

cert. denied, 109 S.Ct. 3214 (1989).

258Ceres Partners v. GEL Associates, No. 89-7666 (2d Cir.).

259Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir. 1988), cert. denied,

109 S.Ct. 3176 (1989).

260Consolidated Gold Fields, PLC v. Minorco, S.A., 871 F.2d 252 (2d Cir. 1989).

261Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir.

1989).

262SEC v. Zale, 866 F.2d 1419 (5th Cir. 1989)(Table).

263United States v. Swift & Co., 286 U.S. 106 (1932).

264SEC v. Goldcor, lnc., 883 F.2d 77 (11th Cir. 1989)(Table).

265Federal Deposit Insurance Corporation v. Jenkins, 888 F.2d 1537 (11th Cir.

1989).

266SEC v. Carl N. Karcher, Misc. No. 89-15 (D.D.C.).

267SEC v. Carl N. Karcher, et el., Civil Action No. 88-02021-ER (Tx) (C.D.

CaL).

268Occidental Petroleum Corp. v. SEC, 873 F.2d 325 (D.C. Cir. 1989).

269The district court Order had required the Commission to take additional

procedural steps to determine Occidental's claim for confidential treatment of

documents requested by a third party under the FOIA. The Commission had

argued on appeal that its existing procedures gave confidential treatment

requestors adequate notice and the opportunity to submit evidence to the FOIA

officer and the General Counsel, who conducts de novo review.

270Safecard v. SEC, No. 84-3073 (D.D.C. August 18, 1989), appeal pending,

No. 89-5374 (D.C. Cir. September 13, 1989).

271Suter v. Ruder, No. 89 C 3292 (N.D. III. June 28, 1989).

272Appeal No. 89-3317.

273Lin v. SEC, C-89-20104-RFP (N.D. Cal. August 23, 1989), app. pending,

No. 89-16511 (9th Cir.)

274Admin. Proc. File No. 3-6776 (September 5, 1989).

275The respondents have appealed to the Commission from Judge Murray's

decision. Their appeal is pending.

276Admin. Proc. File No. 3-7155 (August 11, 1989), 44 SEC Docket 515.

277Deutsch v. SEC, No. 88 CY 6016 (S.D.N. Y. February 24, 1989); Mandell v.

SEC, No. 89-0427 (S.D. Cal. September 5, 1989); Sprecher v. SEC, No.

89-C-203-J (D. Utah November 27, 1989; Rutan V. SEC, No. 89-8-1568 (D.

Colo. November I, 1989).

2781nMandell v. SEC, the district court rejected plaintiff's claim that the

117
subpoenaed bank records were protected by the attorney-client privilege because

they were held in an attorney's customer trust-fund account.

In Sprecher v. SEC, the court held that the First Amendment did not preclude

the Commission from obtaining the bank records of a purported religious

organization.

2791n the Matter of the Application of Hamilton Bohner, lnc., John R. McKowen

and John E. Sherman, Securities Exchange Act Release No. 27232 (September

8, 1989), 44 SEC Docket 1297.

280In the Matter of Robert J. Check, Securities Exchange Act Release No.

26367 (December 16, 1988),42 SEC Docket 760.

281The Commission subsequently concluded that the provisions of the

original proposal should be enhanced. In testimony before the Securities

Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs

on February 1, 1990, Chairman Breeden described the recommended changes.

First, the revised proposal would expressly authorize the Commission to issue

cease-and-desist orders for violations of the federal securities laws. Second, the

Commission would be empowered to order disgorgement in its administrative

and cease-and-desist proceedings. Third, the Federal Criminal Code would be

amended to permit a court to authorize disclosure to the Commission of grand

jury information concerning potential securities law violations. Fourth, the

express authority of courts to impose officer and director bars would be limited

to violations of certain scienter-based antifraud provisions. Because of the

cease-and-desist authority contained in the revised proposal, the Commission

would not seek authority to impose such sanctions administratively, nor does

the revision contain the proposed amendments to Section 15(cX4)that are in S.

647.

282After the House Subcommittee voted to report out the revised proposal on

clearance and settlement, the revision was introduced as a separate bill, H.R.

3566.

283A companion bill was introduced in the Senate as S. 438.

284Request for Public Comments on the Role of the Securities and Exchange

Commission in Reorganization Cases under Chapter 11 of the Bankruptcy Code,

Corporate Reorganization Release No. 384, Release No. 34-27300 (September

27, 1989), 54 Fed. Reg. 40760 (October 3, 1989).

2851n re Continental Information Systems Cotp., et el., No. 89-B 10073-84

(Bankr. S.D.N.Y.)(granted) and In re Sahlen & Associates, lnc., et el., Nos. 89 B

11234 through 89 B 11244 inclusive (PBA) (Bankr. S.D.N.Y.)(U.S. Trustee

agreed to appoint committee).

2861n re Continental Information Systems Corp., et ei., No. 89-B10073-84

(PBA) (Bankr. S.D.N.Y.).

2871n re Angicor Ltd., No. 3-88-2209 (Bankr. D. Minn.).

288/n re Johns-Manville Corp., 801 F.2d 60 (2d Cir. 1986).

2891n re Sahlen & Associates, lnc., No. 89 B 11234-44 (Bankr. S.D.N.Y.August

17,1989), appeal pending, Civ. No. 89-6120-DNE(S.D.N.Y.).

290ln re The Charter Co., 76 B.R. 191 (M.D. Fla. 1987), affd, No.

86-1079-Civ-J-16 (M.D. Fla.), reo'd, 876 F.2d 866 (11th Cir.), petition for cert.

filed, 58 U.S.L.W.3291 (U.S. Oct. 10, 1989) (No. 89-579). See 54th Annual

Report at 96.

291In re American Reserve, 80 B 4786 (Bankr. N.D. III.April 12, 1985), reu'd,

71 B.R. 32 (N.D. III. 1987), reo'd, 840 F.2d 487 (7th Cir. 1988).

292See In re Standard Metals Corporation, et al., 817 F.2d 625 (10th Cir.), rev'd

118
in part on rehearing, 839 F.2d 1383 (10th Cir. 1987) (per curiam), cert. dismissed,

109 S.Ct. 201 (1988). Petitioner agreed to dismiss the writ of certiorari because

the parties had reached a settlement agreement providing for relief on a class

basis.

293/n re LTV Corp., 104 B.R. 626 (S.D.N. Y. 1989), appeal pendmq, No. 89-5040

(2d Cir.).

294/n re Johns-Msnoille, 53 B.R. 346, 350-51 (Bankr. S.D.N. Y. 1985).

2951n re Texas International Co.• No. 88-02672-BH (Bankr. W.D. Okla.

November 10, 1988), appeal pending, Civ. No. 89-77R (W.D. Okla.).

2961n re Allegheny International, Inc., appeal pending, No. 89-2039 (W.D. Pa.).

2971n re Kaiser Steel Corp. (Kaiser Steel Resources, Inc. v. Jacobs), 110 B.R. 514

(D. Colo. 1990).

298/n re Kaiser Steel Corp., et al., (Kaiser Steel Resources, Inc. v. Jacobs), No.

89-K-1731 (D. Colo. Jan. 22, 1990).

299/n re Texas International Co., No. 88-02672-BH (Bankr. W.D. Okla.).

300 See, e.g., In re Custom Laboratories, lnc., 53rd Annual Report at 74

(objection to disclosure statement); In re Energy Exchange Corp. and Vulcan

Energy Corp. and In re Storage Technology Corp., 53rd Annual Report at 74-75

(objection to confirmation of reorganization plan).

119
i 

The Securities Industry 

Revenues, Expenses, and Selected 

Balance Sheet Items 

Broker-dealers that are registered 

with the Commission produced revenues of $66.7 billion in calendar year 

1988, one percent above the 1987 

level. The traditional securities activities, the brokerage business in particular, suffered from weak investor interest 

in 1988. 

As a result of low volume, revenues 

from the brokerage business declined 

by $6.4 billion (26 percent) in 1988. 

Virtually all of this decline resulted 

from a decrease in revenues from retail. 

ing securities products(securities commissions and revenues from the sale of 

mutual funds). Margin interest declined 

by a modest $300 million. 

Business in traditional dealer activi. 

ties also was stagnant. Revenues from 

trading and investments rose by $2.4 

billion (17 percent) in 1988, but this 

reflects the abnormally low 1987 fig. 

ures. These revenues were substantially 

below the 1986 levels. Underwriting 

profits declined by $100 million (two 

percent). 

"All other revenues," which are domAppendix 


inated by interest income from securities purchased under agreements to 

resell and fees from handling private 

placements, mergers, and acquisitions. 

rose $4.6 billion (21 percent) in 1988. 

These revenues accounted for 40 percent of total revenues in 1988, compared to 33 percent in 1987. 

Like revenues, expenses showed little 

gms change in 1988, increasing by $300 

million (under one percent). Declines in 

transaction-related expenses, such as 

registered representatives' cornpensation (a $2 billion decline) and commissions and clearance paid other broken 

(a $700 million decline), were compensated for by a $3.3 billion increase in 

interest expenses. 

Pre-tax income rose $300 million to 

$3.5 billion in 1988. The predax return 

on equity in 1988 was 9.6 percent, 

comparable to the return in 1987 but 

substantially below those of earlier 

years. 

Assets rose by 18 percent to $560.9 

billion at year-end 1988, with liabilities 

also rising 18 percent to $523.8 billion. 

Ownership equity increased $2.8 billion during 1988 to $37.0 billion. 
Table 1

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER.DEALERS

1984-1988'

(Millions of Dollars)

1984 1985 1986 1987' 1988P

RflII9nues

1 Securities comrrussrons $ 9,2697 $ 10,9550 $ 13,976.5 $ 16,5741 $ 11,9923

2. Gains (losses) In trading and

Investment accounts .... ... .. 10,7609 14,5492 18,1450 14,4230 16,8381

3 Profits (losses) from underwriting

and seiling groups .. 3,248 6 4,9867 6,7426 5,7194 5,608.3

4. Margin Interest .. .. 2,970.8 2,746 0 3,0216 3,493.3 3,180 0

5. Revenues from sale of Investment

company shares .•...... 1,4520 2,7536 4,540 3 4,069.3 2,644 3

6 All other revenues .••.....•... ... ... 11,9052 13,8538 17,9978 21,8253 26,4378

7 Total revenues $ 39,6071 $ 49,8443 $ 64,4238 $ 66,1044 $ 66,700 8

Expenses

8. Registered representatives' compensation

(Part II only) 2 ••• • ••• ••• ••• •• $ 6,1712 $ 8,184.0 $ 10,7010 $ 11,0422 $ 9,011.4

9 Other employee compensalton and

benefits ..•. 6,756.7 8,1490 11,002.6 12,1109 12,2741

10. Compensation to partners and voltng

stockholder officers ., 1,5030 1,n8.9 2,232.7 2,429.6 2,2839

11 Commissions and clearance paid

to other brokers .....••... .. 1,9068 2,3142 2,994.5 3,562.6 2,858 0

12 Interest expenses ... ...... 10,6931 11,4698 14,232.9 16,4734 19,730 8

13. Regulatory fees and expenses ......... 2258 3397 416.5 4324 4920

14 All other expenses 2 ..... .... 9,493.9 11,1064 14,5424 16,843 4 16,504.7

15. Total expenses ... ............ .. $ 36,750 6 $ 43,341.9 $ 56,1226 $ 62,8945 $ 63,154 8

Income and Profitability

16. Pre-tax Income •....•••.... $ 2,856.6 $ 6,5024 $ 8,301.2 $ 3,2099 $ 3,546 0

17. Pre-tax profit margin ...... 7.2 13.0 129 49 53

18 Pre-tax return on eqUity 15.2 267 268 94 96

Assets, Dabliitles and Gapltal

19 Total assets .. $313,8217 $452,463.3 $520,940 5 $4n,4424 $560,854 9

20 liabilities ................

a Unsubordlnated liabilities ......... 290,255.1 421,5938 478,990.6 430,4983 509,7057

b Subordinated liabilities . 4,761.3 6,553 6 10,944.7 12,686.8 14,1136

c. Total liabilities. 295,016.4 428,1474 489,935 3 443,1851 523,8193

21. Ownership EqUity .. $ 18,8053 $ 24,3159 $ 31,0052 $ 34,257.3 $ 37,035.6

Number of firms 8,272 8,957 9,436 9,515 9,247

1 Calendar, rather than fiscal, year data IS reported In tms table.

2 Registered representatives' compensation for firms that neither carry nor clear ISIncluded In "other expenses" as thts expense

Item ISnot reported separately on Part IIA of the FOCUS Report

Figures may not sum due to rounding

r=revlsed

p preliminary

Source FOCUS Report

121

=
Table 2

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER.DEALERS

DOING A PUBLIC BUSINESS

1984-19881

(Millions of Dollars)

1984 1985 1986 1987' 1988P

R61Iflnues

1 Securl!les cornrmssions $ 8,9539 $10,5371 $13,4882 $16,0162 $11,558.7

2. Gains (losses) In trading and

Investment accounts 9,6993 12,9966 16,264 5 12,393.4 15,358.6

3 Profits (losses) from underwriting

and seiling groups .... 3,244.2 4,9813 6,737.9 5,7185 5,6071

4. Margin Interest .. 2,950 1 2,683.6 2,9994 3,467.0 3,160.9

5 Revenues from sale of Investment

company shares. .. 1,4518 2,753 4 4,5398 4,069.5 2,643.6

6 All other revenues 11,321.3 13,343 5 17,388 7 21,4502 26,194.1

7 Total revenues $37,6206 $47,2956 $61,3985 $63,1148 $64,5230

Expenses

8 Registered representatives' compensation

(Part II only) 2 • • • • $ 6,1623 $ 8,1616 $10,653 6 $11,032.4 $ 9,0004

9 Other employee compensatIOn

and benefits. 6,621.7 7,984 9 10,777 0 11,869.7 11,969.9

10 Compensallon to partners and voting

stockholder officers 1,3676 1,6430 2,037.2 2,1852 2,068.1

11 comrmssions and clearance paid

to other brokers ....... , 1,7941 2,1784 2,n62 3,3558 2,6744

12 Interest expenses. 10,1224 10,8427 13,6117 16,179.1 19,384 9

13 Regulatory fees and expenses 202.9 3132 3844 3999 452.4

14 All other expenses 2 9,129.1 10,708 7 13,983.1 16,284.1 16,040 0

15 Total expenses $35,400 0 $41,8326 $54,223.2 $61,306 0 $61,5902

Income and Profltab/llty

16 Pre-tax Income ... $ 2,2206 $ 5,4630 $ 7,175.3 $ 1,8088 $ 2,9328

17 Pre-tax profit margin 59 116 117 29 4.5

18 Pre-tax return on equrty .. 133 253 25.8 57 85

Number of firms 5,350 5,890 6,225 6,307 6,015

1 Calendar, rather than fiscal, year data is reported In thrs table

2 Registered representatives' compensation for firms that nenher carry nor clear ISIncluded In "other expenses" as trus expense

item is not reported separately on Part IIA of the FOCUS Report

Figures may not sum due to rounding

r=revlsed

p preliminary

Source FOCUS Report

122

=
Table 3

UNCONSOLIDATED BALANCE SHEET FOR BROKER.DEALERS

DOING A PUBLIC BUSINESS

YEAR-END, 1984-1988 1

(Millions of Dollars)

1984 1985 1986 1987' 1988P

Assets

1 Cash ..... ... ................ $ 4,217 3 $ 6,6182 $ 8,9163 $ 7,538 9 $ 9,6398

2. Receivables from other broker-dealers .. 29,801.0 63,289.8 65,2792 61,9531 69,9240

3 Receivables from customers ..... ............ 30,5374 47,6323 54,1323 38,7064 40,5314

4 Receivables from non-customers .......... 1,4176 2,6036 3,5727 3,3701 3,0622

5 Long positions In securities and

commodities 108,2035 150,834 3 164,6556 118,1502 134,9434

6 Securities and Investments not readily

marketable. 651.2 4259 4903 4604 6287

7 Securities purchased under agreements

to resell (Part II only) 2. ...... .. 107,8593 140,634 2 185,4827 213,9350 264,8398

8 Exchange membership .... .... .... . . 256.6 268 4 2929 3454 374.5

9. Other assets 2 . ...... .. ................... 12,2257 16,066.2 20,2862 21,3391 23,6508

10. Total assets ..... ........... ... ..... $295,169.6 $428,3729 $503,1082 $465,7986 $547,5945

LJabllltJes and EqUity Gapltal

11 Bank loans payable . $ 27,351.0 $ 41,344.8 $ 38,4712 $ 20,7560 $ 22,968 0

12 Payables to other broker-dealers ............... 24,9993 52,275.9 50,9876 43,1381 48,4967

13 Payables to non-customers .... 1,691.9 3,197.1 3,4031 4,1731 4,2150

14 Payables to customers.... ..... ... 19,997.9 31,7236 40,6710 34,3287 40,0813

15 Short positions In secunues and

commodities .. 45,n96 79,162.2 76,8510 73,7258 96,4394

16. Securities sold under repurchase

agreements (Part II only) 2.... .. 134,9193 164,9503 220,965 8 213,0499 250,0741

17. Other non-subordinated liabilities 1 19,290.1 28,197.4 34,024.9 32,6810 37,0624

18 Subordinated liabilities ...... 4,425.0 5,965 2 9,9041 12,3064 13,6726

19 Total liabilities .. $278,454.1 $406,816.6 $475,2786 $434,158.9 $513,0094

20 EqUity capital $ 16,7155 $ 21,5563 $ 27,829.6 $ 31,6396 $ 34,5851

Number of firms. ........... .. 5,350 5,890 6,225 6,307 6,015

1 Calendar, rather than fiscal, year data IS reported In this table

2 Resale agreements and repurchase agreements for firms that neither carry nor clear ISIncluded In "other assets" and "other

non-subordinated liabilities" respectlV9ly as these Items are not reported separately on Part IIA of the FOCUS Report

Figures may not sum due to rounding

r=revised

p preliminary

Source FOCUS Report

123

=
Securities Industry Dollar In

1988 For Carrying and

Clearing Firms

Data for carrying and clearing

firms which do a public business is

presented here to allow for more

detail as reporting requirements for

firms which neither carry nor clear

differ and data aggregation of these

two types of firms necessarily results

in loss of detail. Carrying and clear.

ing firms are those firms which clear

securities transactions or maintain

possession or control of customers'

cash or securities. This group produced 86 percent of the securities

industry's total revenues in calendar

year 1988.

Brokerage activity accounted for

about 24 cents of each revenue dollar in 1988, a substantial decrease

from 35 cents in 1987. Securities

commissions were the most important component, producing 16 cents

of each dollar of revenue, while margin interest and revenues from

mutual fund sales generated six

cents and three cents, respectively.

The dealer side produced 70 cents

of each dollar of revenue. Twenty-five

of these cents came from trading and

investments. nine cents from underwriting, and 36 cents from other

securities. related revenues. The latter is comprised primarily of interest

income from securities purchased

under agreements to resell and fees

from handling private placements,

mergers, and acquisitions.

124

Total expenses consumed 96 cent!

of each revenue dollar, compared tc

98 cents in 1987. The result was a

pre-tax profit margin of four cents

per revenue dollar, compared to two

cents in 1987.

In 1988. interest became the most

important expense category, consuming 33 cents of each revenue dollar,

compared to 29 cents in 1987. As a

percent of revenues, employee.rel~te~

expenses (registered representatIves

compensation and clerical and administrative employees' expenses) fell to

33 cents from 38 cents in 1987.

Total assets of broker-dealers carry.

ing and clearing customer accounts

rose by $83.4 billion to $539.5 billion

at year-end 1988. Resale agreements

accounted for the majority of this

growth, increasing by $50.9 billion to

$264.8 billion. Resale agreements

now account for almost half of all

assets. Long positions rose $16.6 blllion to $132.3 billion but in dollar

terms still remain below the levels

maintained in 1985 and 1986. Most of

the remaining assets represented

receivables, either from customers or

other broker-dealers.

Total liabilities increased $80.5 bil.

lion, or 19 percent, to $508.3 billion in

1988. Short positions and repurchase

agreements accounted for abou~

three. fourths of this increase. Owners

equity rose 10 percent. from $28.2

billion in 1987 to $31.2 billion in

1988.
..,.

e'" '" ~5 "0'" -gO) 0::<0 '" .. ", U> .. 0:: 0:: 0:: ~c g~ 0:: 0

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uo

w

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-c

CIl w CX) CIl Z CX) W

0- en x

,!

w

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.-

E... as ii: -- C) 0 c: C .-...

as

CI)

.!! .... (3 .c

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c: "C .- C e - ... rn as

CD

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CD

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125

~~

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Table 5

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER.DEALERS1

(Millions of Dollars)

Revenues

Dollars

1987'

Percent

of Total

Revenues Dollars

1988P

Percent

of Total

Revenues

Percent

Change

1987-1988

1 Sec unties cornrmssrons

2 Gains (losses) In trading and

Investment accounts .....

3 Profits (losses) from underwntlng

and seiling groups ..

4 Margin Interest

5 Revenues from sale of Investment

company shares

6 Other secunties related revenues ...

7 All other revenues

8 Total revenues

Expenses

9 Registered representanves'

compensatron .

10 Other employee compensation

and benefits

11 Compensation to partners and vOllng

stockholder officers ......

12 Commissions and clearance paid to

other brokers

13 commumcencns ......... ..

14 Occupancy and equipment costs.

15 Data nrocessrnq costs

16 Interest expenses. ....... ......

17 Regulatory fees and expenses

18 Losses In error accounts and

bad debts

19. All other expenses

20 Total expenses

Income and ProfltabllJty

21 Pre-tax Income

22 Pre-tax profit margin.

23 Pre-tax return on equity ...

Number of firms

Figures may not sum due to roundIng

r= revised

p preliminary

$12,959.6

11,714.2

5,3844

3,467.0

2,744.8

16,047.3

3,1475

$55,464.7

$11,0324

9,n30

1,599.2

2,3142

2,n64

2,986.8

828.6

16,0134

3327

1,175.0

5,382.3

$54,213.9

$ 1,250.8

1,195

23.4%

21.1

97

6.3

4.9

28.9

57

100.0%

199%

17.6

2.9

42

50

5.4

15

28.9

06

21

9.7

97.7%

2.3

4.4

$ 9,007.5

14,4730

5,3216

3,160.9

1,881.9

20,555.3

3,2162

$57,616.3

$ 9,0004

10,030.7

1,402.0

1,9121

2,nl.9

3,338.4

808.5

19,240.2

384.5

460.0

5,717.0

$55,065.7

$ 2,550.6

1,095

156%

251

92

55

33

357

56

100.0%

156%

174

2.4

33

48

5.8

1.4

33.4

0.7

08

9.9

956%

4.4

8.2

(305)%

23.6

(12)

(88)

(314)

281

22

39%

(184)%

2.6

(123)

(17.4)

(2)

118

(2.4)

202

15.6

(60.9)

62

1.6%

1039%

1 Calendar, rather than fIscal, year data IS reported In tms table

Note Includes Information for firms dOing a public business that carry customer accounts or clear secunnes transaetrons

Source FOCUS Report

126

'"

•

'"

=
Table 6

UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING BROKER-DEALERS1

(Millions of Dollars)

Year-end 1987' Year-end 1988P

Percent Percent Percent

of Total of Total Change

Dollars Assets Dollars Assets 1987-1988

Assets

1 Cash. $ 6,9651 15% $ 8,9525 17% 285%

2 Receivables from other broker-dealers . 58,4745 128 68,590.1 127 173

a. Securllles failed to deliver 8,3726 18 13,4055 25 601

b. Securities borrowed 42,450.0 93 46,4641 86 95

c Other .. 7,6518 17 8,720 5 16 140

3 Receivables from customers 38,706.4 85 40,5314 75 47

4 Receivables from non-customers 2,1552 05 1,648 1 03 (235)

5 Long positions In securities and commodines .. 115,6618 254 132,2727 245 144

a Bankers acceptances, certificates of deposit

and commercial paper. 11,0782 24 12,6919 2.4 146

b U S and Canadian government obligations. 63,9532 140 67,6373 12.5 58

c State and rnurucipal government obligations 8,2376 18 7,4738 14 (93)

d Corporate obllgallons ... 17,4553 38 27,1270 50 554

e Stocks and warrants 9,8837 22 11,5981 21 173

f Options 5663 01 658.9 01 164

g Arbitrage. 3,1755 07 3,1479 06 (.9)

h Other secunties . 754.9 02 1,475.0 03 954

I Spot commodities ... .... ... 3566 01 2591 (273)

6 Secuntres and Investments not readily marketable 3414 01 4788 01 402

7 Securities purchased under agreements to resell 213,9350 469 264,8398 491 238

8 Exchange membership .. 300 1 0.1 338.7 0.1 129

9 Other assets 19,5378 43 21,8565 41 11.9

10. Total assets. $456,077 3 1000°11> $539,508.7 100.0% 18.3%

/.JabllltIes and EqUity Capital

11 Bank loans payable $ 20,7073 45% $ 22,9364 43% 108%

12 Payables to other broker-dealers .. 42,846.9 94 47,971 5 89 12.0

a Securities failed to receive. 7,6255 17 12,604 3 23 653

b Secunties loaned ... 29,1479 64 27,9567 5.2 (41)

c Other ... 6,0735 13 7,4106 14 220

13 Payables to non-customers .. 3,200 4 07 3,043 3 6 (49)

14 Payables to customers .. ........ .. 34,328.7 75 40,0813 74 168

15 Short posrnons In securities and commodities 70,2959 154 95,3205 177 356

16 Securities sold under repurchase agreements 213,0499 467 250,0741 464 174

17 Other non-subordinated liabilities ... 31,7013 70 35,9205 6.7 133

18 Subordinated liabilities 11,7055 26 12,9433 24 106

19. Total liabilities .. $427,8360 938% $508,290.9 942% 188%

20 EqUity capital $ 28,2413 62% $ 31,2178 58% 10.5%

Number of firms. 1,195 1,095

Figures may not sum due to rounding

under 05%

r= reviSed

p preliminary

1 Calendar, rather than nscal, year data IS reported In this table

Note Includes mtormatron for firms dOing a public business that carry customer accounts or clear secunnes transactions

Source FOCUS Report

127

•

=
Self-Regulatory Organizations:

Expenses, Pre-Tax Income and

Balance Sheet Structure

Aggregate clearing agency service

revenue decreased over 12%, or $44

million, in calendar year 1988 due to

decreases in securities trading volume and use of depository services.

Total depository service revenue

decreased $33 million including revenue decreases of $21 million at the

Depository Trust Company (DTC), $2

million at the Midwest Securities

Trust Company (MSTC) and $3 million at the MBS Clearing Corporation (MBSCC). MBSCC, which was

organized to service the mortgagebacked securities industry, left the

depository business. Service revenue

of clearing corporations decreased

almost $11 million, or 8 %, largely as

a result of decreases of almost $7

million at the Options Clearing Corporation (OCC) and $1.5 million at

the National Securities Clearing Corporation (NSCC).

Total depository pre-tax income was

up $9.6 million. The main factor was

MBSCC's reorganization and its cessation of business. MBSCC lost $7.5

million in 1987. In addition, DTC

earned $1.5 million more than the

previous year by retaining fees in order

to increase shareholders' equity. DTC,

as with all clearing agencies, adjusts

refunds of fees and its fee structure to

provide the amount of earnings which

it wishes to retain.

The depositories continued to

expand their base for service revenues

by increasing the number of shares on

deposit and the face value of debt

securities in custody. At the end of

1988, the total value of securities in

the depository system reached $3.5

trillion, of which DTC alone held over

128

$2 trillion, not including over $1 trillion in certificates held by transfer

agents as DTC's agent. This movement of certificates into depositories

was due to further expansion of

depository-eligible issues and the

desire of participants to avail themselves of depository services. The

MSTC had 715,000 eligible issues at

year end, up 11%, and DTC had

609,000, up 24%. Eligibility for all

types of securities increased; however,

the number of municipal bond issues

increased 24%, and now more than

three-fourths of the principal amount

of all municipal bonds currently outstanding in the United States is in the

depository system.

As a group, the clearing corporations recorded a net decrease in pretax income of almost $9 million.

NSCC posted a pre-tax earnings

decrease of $1.6 million; OCC

recorded an increase of three-fourths

of a million; and the MBSCC reported

a loss of $4 million as compared to

earnings in 1987 of about $4 million.

In April 1987, the PSE announced

the closure of the clearance and

depository functions not essential to

PSE's trading operations. As a result,

$47 billion of securities were moved to

DTC's custody during midyear 1987.

NSCC now processes almost all of

PSE's clearing volume. The Pacific

Clearing Corporation (PCC)incurred a

pre-tax loss of $1.2 million after a loss

of $2.6 million in 1987. Of the 1988

loss, $1 million was attributable to

costs of discontinued operations. The

Pacific Securities Depository Trust

Company (PSDTC) reported only

interest income of $1.6 million versus

$517,000 of pre-tax income in 1987.

In 1988, all expenses relating to

PSDTC were absorbed by PSE and

charged to an accrual for costs of dis-
position established in 1987. Additional expenses of $275,000 were

absorbed by PSE in 1988 compared to

almost $2.4 million in 1987. The combined stockholders' equity of PCC and

PSDTC was $1 million at the end of

1988. PSE members' equity totaled

$15.7 million at the end of 1988.

The aggregate net worth of all

clearing corporations and depositories rose almost $4.4 million to a new

high of almost $50 million. Participant clearing fund contributions

decreased by $16 million, less than

2%, to $900 million. These funds

provide protection to the clearing

agencies in the event of a participant

default.

129
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131

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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 other disclosure or

insider trading provisions of the Act

where such exemption is consistent

with the public interest and the protection of investors. Twenty four applications were pending at the beginning of

fiscal year 1989 and 56 applications

were filed during the year. Of the total

80 applications, 25 were granted and

55 were pending at the end of the

fiscal year.

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. The most significant of these exemptions is that

contained in subparagraph (b), which

provides an exemption for certain

132

foreign issuers that submit on a cur.

rent basis the material specified in

the rule. Such material includes that

information about which investors

ought reasonably to be informed and

which the issuer: (1) has made public

pursuant to the law of the country in

which it is incorporated or organized;

(2) has filed with a foreign stock

exchange on which its securities are

traded and which was made public by

such exchange; and (3) has distributed

to its security holders. Periodically, the

Commission publishes a list of those

foreign issuers that appear to be current under the exemptive provision.

The most current list, as of September

29, 1989, contains a total of 1,056

foreign issuers.

FINANCIAL INSTITUTIONS

There were 3,544 companies registered under the Investment Company

Act of 1940 as of September 30, 1989.

New registrations totaled 304 with

157 registrations being terminated

during the fiscal year. This compares

with fiscal year 1988 figures of 3,497

total registrations, 338 new registrations, and 124 terminations.
Table 9

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940

(As of September 30,1989)

Approximate

New Market Value of

Registrations Terminations Assets of Active

DUring DUring Companies

FY '89 FY '89 (Billions)'

124 90 $ 969

52

4 3 8

69 24

73 27

36 30 138

0 0 2

71 10 107

304 157 $1,276

Management Open-End (Mutual Funds). ..•.... ..

(Non-Insurance Company)

Management Closed-End.

SBICs.

All others ... .... ... . ... ..

Subtotal.. .. ..... .

Umt Investment Trust . . .

(Non-Insurance Company)

Face Amount Certificates

Insurance Company, Both

Open-End Management and

Unit Investment Trust .

TOrALS for Fiscal Year '89

Total Number of Active Registered Investment Companies as of September 30,1989.3,544

There are approximately 382 Inactive companies registered Inactive refers to registered companies wruch, as of

September 30, 1989, were In the process of being hquidatsd or merged, or have flied applications pursuant to Section

8(f) of the Act for dereglstratlon, or which have otherwise gone out of existence and remain only until such lime as the

Commission Issues an order under secnon 8(f) terminating their registrations

Calculated uSing vanous published services as well as staff estimates

SECURITIES ON EXCHANGES

Market Value and Share Volume

The market value of equity and

option transactions (trading in stocks,

options, warrants, and rights) on registered exchanges totaled $1.7 trillion

in 1988. Of this total, $1.6 trillion, or

93 percent, represented the market

value of transactions in stocks, rights

and warrants and $114 billion or seven

percent in equity (including exercises)

and non-equity options transactions.

The value of equity/option transactions on the New York Stock

Exchange (NYSE) was $1.4 trillion,

down 31 percent from the previous

year. The market value of such transactions fell 42 percent to $59.1 billion on the American Stock

Exchange (Amex) and by 35 percent

to $262.7 billion on all other

exchanges. The volume of trading in

stocks on all registered exchanges

totaled 52.5 billion shares, an 18

percent decline from the previous

year, with 84 percent of the total

accounted for by trading on the

NYSE.

The volume of options contracts

traded on options exchanges

(excluding exercises) was 196 million

contracts in 1988, 36 percent lower

than in 1987. The market value of

these contracts decreased 47 percent

to $62.6 billion. The volume of contracts executed on the Chicago Board

Options Exchange dropped 39 percent to 111.8 million; option trading

on the Amex declined 37 percent;

contract volume on the Philadelphia

Stock Exchange fell 21 percent; and

option trading on the Pacific Stock

Exchange decreased 31 percent.

133

•
Table 10

MARKET VAWE OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES 1

(Thousands of Dollars)

Total EqUIty Opnons

Market Non.Equl~

Value Stocks 2 Warrants RIghts Traded Exercised Opnons 5

All RegIstered Exchanges lor Past SIX Years

Calendar Year 1982 $ 693,850,963 $ 602,669,878 $ 423,236 $ 1,152 $53,659,796 $37,046,803 $ 50,098

1983 1,082,241.196 957,139,047 1,162,124 2,997 59,598,740 3 59,714,431 4,623,857

1984 1,059,716,263 950,654,453 430,292 9,754 33,822,259 55,640,028 19,159,4n

1985 1,308,353,791 1,199,419,614 744,715 25,162 29,952,739 49,182,960 29,028,581

1986 1,867,887,058 1,705,123,953 1,663,395 359,764 40,054,282 72,827,659 47,887,805

1987 2,491,720,836 2,284,165,520 2,713,954 23,314 53,123,325 85,946,102 65,748,621

1988 $1,702,047,768 $1,587,011,727 $ 884,269 $ 54,n3 $27,163,915 $51,4n,128 $35,455,956

Breakdown of 1988 Data by RegIStered Exchanges 7

All RegIstered Exchanges

Amencan Stock

Exchange s 59,063,416 s 31,110,730 $ 55,738 $ 1,547 $ 9,069,181' $15,502,764 $ 3,323,449

Boston Stock

Exchange 21,298,524 21,298,522 0 0 0 0 0

cincmnan Stock

Exchange 7,720,038 7,720,038 0 0 0 0 0

Midwest Stock

Exchange 86,642,123 86,642,123 0 0 0 0 0

New York Stock

Exchange 1,380,302,569 1,3n,717,084 668,459 45,575 450,319 1,278,104 143,028

PaCIfiCStock

Exchange 49,080,370 41,457,763 153,072 7,651 2,6n,966 4,619,896 164,023

Philadelphia Stock

Exchange 34,101,695 21,058,111 7,001 0 2,954,040 5,953,291 4,129,251

Spokane Stock

Exchange 7,355 7,355 0 0 0 0 0

Chicago Board

of Trade 3 s 63,831,681 $ 0 $ 0 $ 0 $12,012,403 $24,123,073 $27,696,205

Note For footnotes see Table 11. Thrs table has been changed to reflect more meaningfully current changes In the

market

134
Table 11

VOWME OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES 1

(Data in Thousands)

Equity Options

Stocks 2 Warrants Rights Traded Exercised 4 Non-Equi~

(Shares) (Units) (Units) (Contracts) (Contracts) Options 5

All Registered Exchanges for Past Six Years

calendar Year: 1982 22,423,023 56,053 21,500 137,266 9,202 41

1983 30,146,335 157,942 11,737 134,2863 13,629 14,399

1984 30,456,010 77,452 13,924 118,925 11,917 77,512

1985 37,046,010 108,111 33,547 118,553 10,512 114,190

1986 48,337,694 195,501 47,329 141,931 14,545 147,234

1987 63,770,625 238,357 74,014 184,432 17,020 140,698

1986 52,533,283 118,862 13,709 114,928 11,395 80,999

Breakdown of 1988 Data by Registered Exchanges

All Registered Exchanges

American Stock Exchange 2,575,760 25,288 5,217 37,471 3,519 7,530

.Boston Stock Exchange 693,859 0 0 0 0 0

.Cincinnati Stock Exchange 203,864 0 0 0 0 0

Midwest Stock Exchange 2,771,497 0 0 0 0 0

New York Stock Exchange 44,018,410 76,314 6,464 1,903 260 724

Pacific Stock Exchange 1,575,809 16,423 2,027 13,069 1,313 281

"Philadetphla Stock Exchange 681,041 637 0 13,093 1,504 10,073

Spokane Stock ExChange 13,043 0 0 0 0 0

.Chicago Board of Trade 3 0 0 0 49,393 4,798 62,391

Figures may not sum due to rounding

N.A. Not Available

Data of those exchanges marked with an asterisk covers transactions cleared during the calendar month; clearance usually

occurs within five days of the execution of a trade. Data of other exchanges covers transactions effect trade dates fallin9 within

the reporting month.

1 Data on the value and volume of equity security sales is reported in connection with fees paid under Section 31 of the Securities

Exchange Act of 1934 as amended by the Securities Acts Amendments of 1975. It covers odd-lot as well as round-lot transactions.

2 Includes voting trust certificates, certificates of deposit for stocks, and American Depository Receipts for stocks but excludes

rights and warrants.

3 Options only; data for June 1, 2, and 3, 1983 is not included.

4 Exercised Contracts do not include January and February 1985 data.

5 Includes all exchange trades of call and put options in stock indices, interest rates, and forei9n currencies.

6 Trading in non-equity options began on October 22, 1982.

7 Total market value for individual exchanges does not include data for eqUity options exercised.

Source: SEC Form R-31 and Options Clearing Corporation Statistical Report.

135

•

•

= •
NASDAQ (Volume and Market

Value)

NASDAQ share volume and market value information for over-thecounter trading has been reported

on a daily basis since November 1,

1971. At the end of 1988 there were

5,144 issues in the NASDAQ system

as compared to 5,537 a year earlier

and 2,582 at the end of 1978.

Share volume for 1988 was 31.1

billion as compared to 37.9 billion in

1987 and 2.8 billion in 1978. This

trading volume encompasses the

number of shares bought and sold by

market makers plus their net inventory changes. The market value of

shares traded in the NASDAQ system was $347.1 billion during 1988

as compared to $499.9 billion in

1987 and $36.1 billion in 1978.

136

Share and Dollar Volume by

Exchange

Share volume on all registered

exchanges totaled 52.5 billion, a

decrease of 18 percent from the previous year. The New York Stock

Exchange accounted for 84 percent of

the 1988 share volume; the American

Stock Exchange, five percent; the Midwest Stock Exchange, five percent;

and the Pacific Stock Exchange, three

percent.

The market value of stocks, rights,

and warrants traded was $1.6 trillion,

a 31 percent drop from the previous

year. Trading on the New York Stock

Exchange contributed 87 percent of

the total. The Midwest Stock Exchange and Pacific Stock Exchange

contributed five percent and three

percent. respectively. The American

Stock Exchange accounted for two

percent of dollar volume.
Table 12

SHARE VOWME BY EXCHANGES 1

In Percentage

Total Share Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other 2

1945 ..... 769,018 6587 21.31 177 298 106 066 005 630

1950 .... 893,320 7632 13.54 216 311 097 065 009 316

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 64.99 2558 222 3.41 079 030 004 267

1962 ...... .... 1,711,945 7131 20.11 234 295 087 031 004 207

1963 ...... ..... 1,880,793 7293 1883 2.32 282 083 029 004 194

1964 ............. ..... 2,118,326 7281 1942 243 2.65 093 029 003 144

1965 ..... ................. 2,671,012 6990 2253 2.63 233 081 026 005 149

1966 ..... ..... 3,313,899 6938 2284 256 268 086 040 005 123

1967. 4,646,553 6440 2841 235 246 087 043 002 106

1968 .... 5,407,923 61.98 2974 263 264 089 078 001 133

1969 ... 5,134,856 63.16 27.61 2.84 347 122 051 000 119

1970 .... ............. 4,834,887 7128 19.03 3.16 368 1.63 0.51 002 069

1971 .... ............ .. . 6,172,668 7134 1842 352 372 191 043 003 063

1972 .. ... 6,518,132 7047 18.22 3.71 413 2.21 059 003 064

1973 .. 5,899,678 7492 13.75 409 368 219 071 004 062

1974 ....... 4,950,842 78.47 1028 440 348 182 086 005 064

1975 ... 6,376,094 8099 897 397 326 154 085 013 029

1976 ... ....... ... 7,129,132 8005 935 387 393 142 078 044 016

1977 ..... 7,124,640 7971 956 396 372 149 066 064 026

1978. 9,630,065 7953 1065 356 384 149 060 016 017

1979. ..... ... .... ... 10,960,424 7988 10.85 330 327 164 055 028 023

1980 15,586,986 7994 1078 384 2.80 154 057 032 021

1981. 15,969,186 8068 932 4.60 287 155 051 037 010

1982 ........... 22,491,935 8122 6.96 509 362 218 048 038 0.07

1983 ........ 30,316,014 8037 745 548 3.56 220 065 0.19 0.10

1984 . 30,548,014 82.54 526 6.03 331 1.79 085 018 004

1985 37,187,567 8152 578 612 366 147 127 015 003

1986 48,580,524 8112 6.28 573 368 1.53 133 030 002

1987 64,082,996 8309 557 519 3.23 130 128 030 004

1988 . ... 52,665,654 8374 495 5 26 3.03 129 1.32 039 002

r revised

, Share volume for exchanges oncludesstocks, rights, and warrants, calendar, rather than fiscal, year data IS reported ontrustable

2 Includes all exchanges not listed IndiVidually

Source SEC Form R-31

137

'"

=
Table 13

DOLLAR VOLUME BY EXCHANGES 1

In Percentage

Total Dollar Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX aSE CSE Other 2

1945 ................... 16,284,552 82.75 10.81 2.00 1.78 0.96 1.16 0.06 0.48

1950 ................................ 21,808,284 85.91 6.85 2.35 2.19 1.03 1.12 0.11 0.44

1955 ................................ 38,039,107 86.31 6.98 2.44 1.90 1.03 0.78 0.09 0.47

1960 ................................ 45,309,825 83.80 9.35 2.72 1.94 1.03 0.60 0.07 0.49

1961 ................................ 84,071,623 82.43 10.71 2.75 . 1.99 1.03 0.49 0.07 0.53

1962 ................................ 54,855,293 86.32 6.81 2.75 2.00 1.05 0.46 0.07 0.54

1963 ................................ 84,437,900 85.19 7.51 2.72 2.39 1.06 0.41 0.06 0.66

1984 ................................ 72,461,584 83.49 8.45 3.15 2.48 1.14 0.42 0.06 0.81

1965 ................................ 89,549,093 81.78 9.91 3.44 2.43 1.12 0.42 0.08 0.82

1966 ................................ 123,697,737 79.77 11.84 3.14 2.84 1.10 0.56 0.07 0.68

1967 ................................ 162,189,211 77.29 14.48 3.08 2.79 1.13 0.66 0.03 0.54

1958 ................................ 197,116,367 73.55 17.99 3.12 2.65 1.13 1.04 0.D1 0.51

1969 ................................ 176,389,759 73.48 17.59 3.39 3.12 1.43 0.67 0.D1 0.31

1970 ................................ 131,707,946 78.44 11.11 3.76 3.81 1.99 0.67 0.03 0.19

1971 ................................ 186,375,130 79.07 9.98 4.00 3.79 2.29 0.58 0.05 0.24

1972 ................................ 205,956,263 77.77 10.37 4.29 3.94 2.56 0.75 0.05 0.27

1973 ................................ 178,863,622 82.07 6.06 4.54 3.55 2.45 1.00 0.06 0.27

~974 ................................ 118,828,270 83.63 4.40 4.90 3.50 2.03 1.24 0.06 0.24

,975 ................................ 157,256,676 85.20 3.67 4.84 3.26 1.73 1.19 0.17 0.14

1976 ................................ 195,224,812 84.35 3.88 4.76 3.83 1.69 0.94 0.53 0.02

1977 ................................ 187,393,084 83.96 4.60 4.79 3.53 1.62 0.74 0.75 0.01

1978 ................................ 251,618,179 83.67 6.13 4.16 3.64 1.62 0.61 0.17 0.00

1979 ................................ 300,475,510 83.72 6.94 3.83 2.78 1.80 0.56 0.35 0.02

1980 ................................ 476,500,688 83.53 7.33 4.33 2.27 1.61 0.52 0.40 0.D1

1981 ................................ 491,017,139 84.74 5.41 5.04 2.32 1.60 0.49 0.40 0.00

1982 ................................ 603,094,266 85.32 3.27 5.83 3.05 1.59 0.51 0.43 0.00

1983 ................................ 958,304,168 85.13 3.32 6.28 2.86 1.55 0.66 0.16 0.04

1984 ................................ 951,318,448 85.61 2.26 6.57 2.93 1.58 0.85 0.19 0.00

1985 ................................ 1,200,127,848 85.25 2.23 6.59 3.06 1.49 1.20 0.18 0.00

1986 ................................ 1,707,117,112 85.02 2.56 6.00 3.00 1.57 1.44 0.41 0.00

1987 ................................ 2,286,902,788 86.79 2.32 5.32 2.53 1.35 1.33 0.35 0.00

1988 ................................ 1,587,950,769 86.81 1.96 5.46 2.62 1.33 1.34 0.49 0.00

r revised

1 Dollar volume for exchanges includes stocks, rights and warrants; calendar, rather than fiscal, year data is reported in this table.

2 Includes all exchanges not listed individually.

Source: SEC Form R-31

138

=
Value and Number of Securities

Listed on Exchanges

The market value of stocks and

bonds listed on U.S. exchanges at

the end of calendar year 1988 was

$4.0 trillion, an increase of five percent over the previous year. The market value of stocks was $2.5 trillion,

an increase of $250 billion over a

year earlier. The value of listed bonds

decreased three percent. Stocks

listed on the New York Stock

Exchange had a market value of $2.4

trillion and represented 96 percent of

the value of common and preferred

stocks listed on registered exchanges.

Those listed on the American Stock

Exchange accounted for almost all of

the remaining three percent of the

total and were valued at $84.1 billion,

a decrease of two percent over the

previous year.

Table 14

SECURITIES LISTED ON EXCHANGES 1

December 31,1988

EXCHANGE COMMON PREFERRED BONDS 1UTAL SECURITIES

Market Market Market Market

Value Value Value Value

RegIstered Number (Million) Number (Million) Number (Million) Number (Millon)

Amencan 876 $ 80,707 100 $ 3,360 305 $ 20,876 1,281 $ 104,943

Boston 114 1,615 0 0 5 30 119 1,644

Cmcmnati 4 155 1 1 7 140 12 297

Midwest 13 748 3 16 3 NA 19 764

New York 1,566 2,323,567 588 42,539 3,014 1,550,848 5,168 3,916,954

PacIllc 56 1,284 14 463 94 5,114 164 6,861

Philadelphia 35 471 15 197 23 NA. 73 668

Spokane 41 7 0 0 0 0 41 7

Total 2,705 $2,408,554 721 $46,576 3,451 $1,5n,008 6,8n $4,032,138

Includes foreign

Stocks

New York rr $ 90,337 5 $ 1,018 92 $ 10,183 174 $ 101,538

Amencan 54 25,606 2 768 2 68 58 26,442

Pacmc 1 43 0 0 0 0 1 43

Philadelphia 1 21 0 0 0 0 1 21

Total 133 $ 116,007 7 $ 1,786 94 $ 10,251 234 $ 128,044

N A Not Available

+ Less than 1 million

1 Excludes secunnss which were suspended from trading at the end of the year and secunnes Which,because of macnvity, had

no available quotes

Source SEC Form 1392

139

=

=
Table 15

VAWE OF STOCKS LISTED ON EXCHANGES

(Billions of Dollars)

New York Amencan Exclusively

Stock Stock On Other

Dec 31 Exchange Exchange Exchanges Total

1938 475 10.8 583

1939 ...... ,..... 46.5 101 56.6

1940 .... ..., .,. 419 86 50.5

1941 .... 35.8 7.4 43.2

1942 ... .... 38.8 7.8 46.6

1943 .. 476 9.9 57.5

1944 .. 555 11.2 667

1945 .. .. 738 14.4 882

1946 68.6 13.2 81.8

1947 ..... 68.3 12.1 80.4

1948 ... 670 11 9 30 819

1949 .... ... 763 12.2 31 91.6

1950 ............. . ... .... 93.8 13.9 3.3 111.0

1951 ...... 1095 16.5 32 1292

1952 120.5 169 31 1405

1953 .. .... 1173 153 2.8 135 4

1954 ..... 169.1 221 36 1948

1955 ... .... 2077 27.1 40 238.8

1956 .......... 219.2 310 38 254.0

1957 .... .... 1956 255 31 224.2

1958 .. , . .... ... 276.7 31.7 43 3127

1959 307.7 254 42 337.3

1960 307.0 242 4.1 3353

1961. 3878 33.0 5.3 426.1

1962 ... .. 3458 24.4 4.0 3742

1963. 411.3 26.1 43 4417

1964. ..... ..... 474.3 282 43 5068

1965 .. 5375 30.9 47 573.1

1966 ... .. 4825 27.9 40 514.4

1967 .... 605.8 430 3.9 652.7

1988 692.3 612 6.0 759.5

1969 629.5 477 54 882.6

1970 636.4 395 48 680.7

1971 741.8 491 4.7 795.6

1972 .. 8715 556 5.6 9327

1973 ... .... 721.0 387 4.1 7638

1974 ., ..... ..... ..... .. 5111 233 2.9 537.3

1975 ... 6851 29.3 4.3 718.7

1976 ....... .... 858.3 360 42 898.5

19n. n6.7 376 4.2 8185

1978 8227 39.2 29 864.8

1979 9606 57.8 3.9 1,022.3

1980 .. ... ... 1,242.8 103.5 29 1,3492

1981 1,143.8 89.4 5.0 1,2382

1982. 1,305.4 n.6 6.8 1,389.7

1983 .. 1,522.2 80.1 66 1,608.8

1984 ... .. 1,529.5 520 58 1,5873

1985 ., .... 1,8827 632 5.9 1,951.8

1986 ... .... . ... ..... 2,128.5 703 65 2,2053

1987 2,132.2 670 59 2,205.1

1988 2,3661 84.1 49 2,4551

Source: SEC Form 1392

140

'"

'"
Table 16

CERTIFICATE IMMOBILIZATION TRENDS

1988 1987 1986 1985 1984 1983

Book-entry Deliveries at DTC

(in thousands) •. . .......... 67,200 78,000 66,700 55,800 48,000 50,000

Total of All CertIficates

WIthdrawn .. ...... ........ .... ....... 7,500 10,600 9,600 9,300 10,100 13,600

Book-entry Deliveries per

Certs Withdrawn .. ... ... .... ., 9.0 7.4 6.9 60 48 37

Certificate lmmoblllzatlon

Book-entry deliveries continued to

outdistance physical deliveries in the

settlement of securities transactions

among depository participants. This

tendency is illustrated in Table 16.

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 include

Direct Mail by Agents but exclude

municipal bearer bonds. In 1988,

while the number of shares traded in

U.S. markets decreased almost

15%. the total certificates withdrawn

decreased over 29%. and the ratio of

book-entry deliveries to certificates

withdrawn continued to grow. In

1988, the ratio was almost 2.5 times

the 1983 figure of 3.7 book-entry

deliveries rendered for every certificate withdrawn.

141

'"
Table 17

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constituting.

and Basis for, Enforcement ActIOn

Broker-dealer, municipal securities dealer,

government securities dealer. transfer agent,

investment adviser or assC"lated person

Willful vrolanon of secunties laws or rules, aiding or

abetting such vrolatron, failure reasonahly to SUpervise

others, willful misstatement or ormssron In filing with the

Commission, conviction of or mumcnon against certain

cnmes or conduct

Registered secunnes association

Vrolatron of or mabihty to comply with the 1934 Act.

rules fhereunder, or ItS own rules, unjustified failure to

enforce compliance with the foragolOg or with rules of

the MUnicipal secunnes Rulemaklng Board by a

member or person associated with a member

Member of registered securities

association, or associated person

Entry of Cornrrussron order aqainst person pursuant to

1934 Act, Section 15(b), Willful vrolanon of securities

laws or rules thereunder or rules of Municipal Secuntles

Rulernakmq Board, eHectlOg transaction for other person

With reason to believe that person was committing

Violations of secuntres laws

National securities exchange

Violation of or inability to comply With 1934 Act, rules

thereunder or ItS own rules, unjusufred failure to enforce

compliance With the Ioreqomq by a member or person

associated With a member

Member of national securities

exchange, or associated person

Entry of Comrmssron order aqamst person pursuant to

1934 Act, Section 15(b), Willful Violation of secunnes

laws or rules thereunder, eHecllOg transaction for other

person With reason to believe that person was

comrmttmq Violation of securmes laws

Registered clearing agency

Violation of or mabihty to comply WIth 1934 Act, rules

thereunder, or ItS own rules, failure to enforce

compliance With ItS own rules by participants

Particlpe rt In registered clearing agency

Entry of Comrrnssron order against parncipant pursuant

to 1934 Act. Section 15(b) (4), willful Violation of clearing

agency rules, eHectlOg transacnon for other person with

reason to believe that person was committing Violations

of sec unties laws

142

Sanction

Censure or limitation on acllvities. revocation,

suspension or demal of raglstrallon; bar or suspension

from association (1934 Act, Sections 15(b) (4H6),

158(c) (2H5), 15C(c) (lH2), 17A(c) (3H4), Advisers

Act, Section 203(eHf).

Suspension or revocation of raglstratlon, censure or

limitation of acnvlties, functions, or operanons (1934 Act,

secnon 19(h) (1».

Suspension or expulSion from the association, bar or

suspension from association with member of association

(1934 Act. Section 19(h) (2H3».

Suspension or revocation of rag,strat,on, censure or

limitation of acnvrnes, functions. or operations (1934 Act,

Section 19(h) (1)).

Suspension or expulSion from exchange, bar or

suspension from association With member (1934 Act,

Section 19(h) (2H3».

Suspension or revocation of raglstratlon, censure or

limitation of activities, functions, or operations (1934 Act,

Section 19(h) (1»

suspension or expulSion from clearing agency (1934

Act, secnon 19(h) (2».
Securities Information processor

Violation of or inability to comply with provisions of 1934

Act or rules thereunder.

Any person

Willful violation of 1933 Act, 1934 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 1934 Act, rules thereunder or the

organization's own rules; willful abuse of authority or

unjustified failure to enforce compliance.

Principal of broker-dealer

Officer, director, general partner, ten-percent owner or

controlling person of a broker-dealer for which a SIPC

trustee has been appointed.

1933 Act registration statement

Statement materially inaccurate or incomplete.

Person subjeclto Sections 12, 13, 14 or 15(d)

of the 1934 Act or associated person

Failure to comply with such provisions or having caused

such failure by an act or omission that person knew or

should have known would contribute thereto.

Securities registered pursuant to

Section 12 of the 1934 Act

Noncompliance by issuer with 1934 Act or rules

thereunder.

Public interest requires trading suspension.

Registered Investment company

Failure to file Investment Company Act registration

statement or required report; filing materially incomplete

or misleading statement or report.

Company has not attained $100,000 net worth 90 days

after 1933 Act registration statement became effective.

Attorney, accountant, or other

professional or expert

Lack of requisite qualifications to represent others;

lacking in character or integrity; unethical or improper

professional conduct; willful violation of securities laws

or rules; or aiding and abetting such violation.

Censure or limitation of activities; suspension or

revocation of registration (1934 Act, Section 11A(b) (6)).

Temporary or permanent prohibition against serving in

certain capacities with registered investment company

(Investment Company Act, Section 9(b».

Removal from office or censure (1934 Act, Section 19(h)

(4)).

Bar or suspension from being or becoming associated

with a broker-dealer (SIPA, Section 14(b)).

Stop order refusing to permit or suspending

effectiveness (1933 Act, Section B(d)).

Order directing compliance or steps effecting

compliance (1934 Act, Section 15(c) (4)).

Denial, suspension of effective date, suspension or

revocation of registration; (1934 Act, Section 12(j)).

Summary suspension of over-the-counter or exchange

trading (1934 Act, Section 12(k)).

Suspension or revocation of registration (Investment

Company Act, Section B(e».

Stop order under 1933 Act; suspension or revocation of

registration (Investment Company Act, Section 14(a)).

Permanent or temporary denial of privilege of appearing

or practicing before the Commission (17 CFR Section

201.2(e) (1».

143
Attorney suspended or disbarred by court; expert's

license revoked or suspended; conviction of a felony or

of a misdemeanor involving moral turpitude.

Permanent injunction against or finding of securities

violation in Commission-instituted action; finding of

securities violation by Commission in administrative

proceedings.

Member or employee of Municipal

SecuritiesRulemaking Board

Willful violation of 1934 Act, rules thereunder, or rules of

the Board; abuse of authority.

Automatic suspension from appearance or practice

before the Commission (17 CFR Section 201.2(e) (2».

Temporary suspension from practicing before the

Commission; censure; permanent or temporary

disqualification from practicing before the Commission

(17 CFR Section 201.2(e) (3».

Censure or removal from office (1934 Act, Section

15B(c) (8».

CiViL PROCEEDINGS IN FEDERAL DiSTRiCT COURTS

Persons Subject to Acts Constituting,

and Basis for, Enforcement Action

Any person

Engaging in or about to engage in acts or practices

violating securities laws, rules or orders thereunder

(including rules of a registered self-regulatory

organization).

Noncompliance with provisions of the laws, rules, or

regulations under 1933, 1934, or Holding Company Act,

orders issued by Commission, rules of a registered

self-regulatory organization, or undertaking in a

registration statement.

Trading while in possession of material non-public

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.

Issuer subject to Section 12 or 15(d)

of the 1934 Act, officer, director, employee or agent

of issuer; stockhoider acting on behalf of issuer

Payment to foreign official, foreign political party or

official, or candidate for foreign political office, for

purposes of seeking the use of influence in order to

assist issuer in obtaining or retaining business for or

with, or directing business to, any person.

Securities investor Protection Corporation

Refusal to commit funds or act tor 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 1934 Act, rules or

orders thereunder, or rules of the exchange or

association.

144

Sanction

Injunction against acts or practices constituting

violations (plus other equitable relief under court's

general equity powers) (1933 Act, Section 20(b); 1934

Act, Section 21(d); Holding Company Act, Section 18(e);

Investment Company Act, Section 42(d); Advisers Act,

Section 209(d); Trust Indenture Act, Section 321).

Writ of mandamus, injunction, or order directing

compliance (1933 Act, Section 20(c); 1934 Act, Section

21(e); Holding Company Act, Section 18(f).

Maximum civil penalty: three times profit gained or loss

avoided as a result of transaction (1934 Act, Section 21A

(a)-(b».

Maximum civil penalty: $10,000 (1934 Act, Section

32(c».

Order directing discharge of obligations and other

appropriate relief (SIPA, Section 11(b».

Writ of mandamus, injunction or order directing such

exchange or association to enforce compliance (1934

Act, Section 21(e».
Registered cleanng agency

FaIlure to enforce compliance by Its parncrpants wrth Its Writ of mandamus, injunction or order directing clearing

own rules agency to enforce compliance (1934 Act, Section 21(e))

Issuer subject to Section 15(d) of 1934 Act

Fatlure to fIle recurred information, documents or

reports

Registered Investment company

Name of company or of security Issued by It deceptive

or misleading

Forfeiture of $100 per day (1934 Act, Secllon 32(b»

Injunction against use of name (Investment Company

Act, Section 35(d»

Officer, director, member of advisory board, adviser,

depositor, or underwnter of investment company

Engage In act or practice consntuunq breach of nduciary lruuncuon against actmq In certain capaciues for

duty InvolVing personal misconduct Investment company and other appropriate relief

(Investment Company Act, Section 36(a»

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons Subject to Acts Constuunnq,

and Basis for, Enforcement Action

Any person

Willful viotanon of secuntres laws or rules thereunder,

wlllfull misstatement In any document required to be

filed by secunnes laws or rules, Willful misstatement In

any document required to be flied by self-regulatory

orqaruzanon In connecuon WIth an apphcatron for

mernbersrup or aSSOCIatIonWIth member

Issuer subject to Section 12 or 15(d) of the

1934 Act: officer or director of issuer; stockholder

acting on behalf of Issuer; employee or agent

subject to the jurisdiction of the United States

Payment to foreIgn offiCial, foreign pohncat party or

official, or candidate for foreign pclmcal ornce for

purposes of seeking the use of Influence In order to

assist Issuer In obtammq or retalnong busmess for or

With, or directing business to, any person

Sanction

MaXimum penalties $1,000,000 fIne and ten years

Imprisonment for mdivrduals, $2,500,000 fine for

non-natural persons (1934 Act, Sections 21(d), 32(a»,

$10,000 fine and fIve years Imprisonment (or $200,000 If

a public utility holding company for VIolations of the

Holdrnq Company Act) (1933 Act, SectIons 20(b), 24,

Investment Company Act, Sections SectIons 42(e), 49,

Aovrsers Act, Sectrons 209(e), 217, Trust Indenture Act,

Sectrons 321, 325, Holding Company Act, secnons

18(1),29)

Issuer-$2,OOO,000, officer, director, employee, agent or

stocknotder-sreo.oon and nve years Imprisonment

(Issuer may not pay fine for others) (1934 Act, SectIon

32(c»

Statutory references are as follows "1933 Act," the Securities Act of 1933, "1934 Act," the Securities Exchange Act

of 1934, "Investment Company Act," the Investment Company Act of 1940, "AdvIsers Act," the Investment AdvIsers Act

of 1940, "Holding Company Act," the Public UtIlity HoldIng Company Act of 1935, "Trust Indenture Act," the Trust

Indenture Act of 1939; and "SIPA," the secunnee Investor Protection Act of 1970

145

•
Table 18

Fiscal 1989 Enforcement Cases

Listed by Program Area

(Each case rrunated has been Included In only one category hsted below, even though many

cases Involve multiple allegations and may fall under more than one category)

Program Area-Braker-Dealer. Back Office

Name of Case Date Flied Release No

In the Matter of Sehgman Secunnes Inc 112188 34-26296

In the Matter of Prudential-Bache Sec unties, Inc 092889 34-27313

SEC v Habersheir Secuntres, Inc . 021389 LR-11999

Pragram Area-Braker-Dealer. Fraud Agamst Customer

Name of Case Date Filed Release No

In the Matter of Danoel B Ptak 110288 34-26239

In the Matter of Oscar Gomez 122788 34-26394

In the Matter of Michael W Rehtonk 011289 34-26456

In the Matter of Gary M Woznoak 011389 34-26459

In the Matter of Wilham Ray White . 012389 34-26481

In the Matter of Leslie H Roberts 020989 34-26531

In the Matter of Alvle Loretta Asta .-. 021689 34-26554

In the Matter of Nicholas A Boccella 022789 34-26574

In the Matter of Wilham L Vieira. 022889 34-26576

In the Matter of Steven Jay Moddelmog 040489 34-26690

In the Matter of The Stuart-James Co , Inc, et al 040589 34-26700

In the Matter of Profile Investments Corp, et al 041489 34-26726

In the Matter of Doy L Danoels, Jr 050989 34-26798

In the Matter of Gordon E Harry 051589 34-26822

In the Matter of Wilham R Beach 061389 34-26919

In the Matter of Wilham H Bratton 081489 34-27138

In the Matter of Craig L. Silverman 082189 34-27158

In the Matter of Waddell Jenmar seconnee Inc, et al. 082589 34-27188

In the Matter of Gary W Chambers. 092789 34-27298

In the Matter of William E Parodi, Sr , et al. .. 092789 34-27299

In the Matter of John F Garvan 092889 34-27314

In the Matter of Thomas 0 Pixley 092989 34-27316

In the Matter of Wilham S HogllJnd 092989 34-27317

SEC v Jose LUIS Hernandez. 111488 NONE

SEC v Wilham S Hoglund 040489 LR-12100

SEC v Michael R Vierra, PI al 060289 NONE

SEC v Waddell Jenmar Sscuntres Inc, et at 072489 LR-12234

SEC v Leonard Myers 092089 LR-12120

SEC v Marc Stuart Weiner 092989 LR-12261

Pragram Area-Braker-Dealer MUnicipal Secuntles

Name of Case Date Flied Release No

In the Matter of Roger J Burns 051989 34-26843

In the Matter of George W BenOit 051989 34-26842

In the Matter of Matthews & Wnght Inc 051989 34-26841

SEC v Matthews & Wnght Group Inc, et al .. 042789 AAER 224

Pragram Area-Braker-Dealer Other

Name of Case Date Flied Release No

In the Matter of Patnck Rooney 122088 34-26372

In the Matter of Amencan Investors of Pittsburgh. et al 122788 34-26393

In the Matter of Leonard S Berman 011889 34-26467

In the Matter of Richardson, Greenshlelds Secuntras, Inc 012789 34-26494

In the Matter of Outwater & Wells, Inc 020389 34-26516

In the Matter of Mark L Stahl 031689 34-26633

In the Matter of Howard A Rubin 040389 34-26686

In the Matter of Leurm secunues Corp, et al 041289 34-26716

In the Matter of The Davrd-Maxwell Co , Inc, et al 051589 34-26823

In the Matter of Salomon Brothers Inc . 051989 34-26838

In the Matter of Andrew Amadio Tarantino 062689 34-26972

In the Matter of Wilham J Kelley. 092889 34-27308

In the Matter of Gilbert C SChulman, et al 092989 34-27319

In the Matter of Metropohtan Stock Transfer Co , et al 092989 34-27318

146

_

_
SEC v Lon Roy Kavanaugh, Jr ..

SEC v Sleven Telsey. .. .. ...

Program Area-Contempt-G1vI1

Name 01 Case

SEC v George R Carter, el al .... .•. ..... ....

SEC v. HOrizons Research Lab... .........•..•••

SEC v Goldcor Inc, el al. ..••....••••.•..••••... ..... ...

SEC v Roc Hatfield, et al..... . ....

SEC v Cenlun Mining Corp, el al

SEC v. Carl Porto, el al. ....

SEC v EdWin 0 Wood, II, et al

SEC v David Wlksell, el al .. . .. ...••.. ..

SEC v William H Bartlelt .... ..... ....

SEC v Leonard Meyers .... ...•.. ..••.. . •.. .•

SEC v Cali Computer Inc, et al ......••....••. , ...

SEC v Mysore S Sundra.. .... ..... ...

SEC v William H. Keller ..

Program Area-Contempt-GnmlnaJ

Name 01 Case

US ex rei SEC v. George R. Carter, at al ..

US v William Robert Melte .... .... .... .. ..

Program Area-Corporate Control: Beneficial Ownership

Name 01 Case

In Ihe Malter 01 William R Gran!.... .... .. .., .. .

In the Malter 01 Merry Land & Investmenl Co. Inc .

In Ihe Malter 01 Sequa Corp..... .... .. ..

SEC v Paul A Bllzenan, el al.... .. ... ....

SEC v Amsler & Co ..

Program Area-Corporate Control. Other

Name 01 Case

SEC v Rana Research, Inc, el al.

Program Area-Corporate Control Tender Offer

Name olCase

In Ihe Ma'ter of Paul David Herrlinger... ..

SEC v Frederick J Ball, Jr ... . ..

Program Area-Delinquent Filings: Forms 3 & 4

Name 01 Case

SEC v Charles Toth, et al. .

Program Area-Delinquent Filings. Issuer ReportIng

Name 01 Case

SEC v. AuloSpa Corp., et al. ..

SEC v Xlex Resources Inc.. . .

SEC v Stephen Read .

Program Area-Fraud Against Regulated Entities

Name 01 Case

In Ihe Malter James Warren Hogue.. ..

SEC v Clarence Long, el al ... .. .

SEC v. Jury Malt Hansen, et al.. .. .. .. .

Program Area-Insider Trading

Name of Case

In Ihe Malter 01Arthur B Silverman...... .. .... .

In Ihe Malter 01 Stephen SUI-Kuan Wang Jr. .. .. .

In Ihe Malter 01 William H. Malhls ..

In Ihe Malter of Norman Sieln.... . .. .. ..

In the Malter 01 Lawrence S. Adler .. ..

In Ihe Malter 01Glenn Golenberg .. .

In the Malter 01TraVISB Keltner IV.. .. ..

In the Malter 01J. Christopher Rodeno .

SEC v. Ted K SChwarzrock.... ... .

111888 LR-11921

071389 NONE

Date Filed Release No

111488 LR-12013

120888 NONE

121588 LR-12064

121689 LR-11968

121688 LR-11968

012489 LR-11996

031089 LR-12040

031689 NONE

052589 LR-12121

052689 LR-12120

060989 NONE

070689 LR-12183

080789 NONE

Date Filed Release No

021589 LR-12013

032289 LR-12060

Dale Filed Release No

120588 34-26339

123088 34-26410

051989 34-26839

053189 LR-12144

120588 LR-11928

Dale Filed Release No

033089 LR-12049

Dale Filed Release No

060789 IA-1169

090789 LR-12242

Date Filed Release No

030889 LR-12022

Date Flied Release No

021689 LR-11998

042489 LR-12069

072489 NONE

Dale Filed Release No

060789 IA-1168

042489 LR-12070

080289

Date Filed Release No

120988 34-26347

020289 34-26511

030189 34-26586

050289 34-26777

050889 34-26796

050889 34-26795

071789 34-27038

081189 34-27133

110288 LR-11906

147

'"
SEC v Jerry Sparks, et al .. ..

SEC v Joel D. WeIsman ..

SEC v Arthur B Silverman ..

SEC v Leo Manaru ..

SEC v Harvey Alan Dohner

SEC v Don S Peters, et aJ...

SEC v Mana lseppr, et al ..

SEC v Jerome B Cronin

SEC v Selig Solomon, et al. ...

SEC v Jack N Polevoi, et al

SEC v William S. Banowsky .

SEC v Glenn Golenberg, et al

SEC v Robert C DIGennaro

SEC v William WolskI, et al

SEC v Kerry A Hurton, et al

SEC v Daniel 0 Chenf.

SEC v Seymour G. Ruderman

SEC v David Hellberg, et al .....

SEC v Leonard J Mullen

SEC v Douglas Frye, et al

SEC v William J Dillon, et al . . .. .

SEC v Howard Passov, et al........ .. .

SEC v Shirley A Sluffman, et al. . ....... ... ..

SEC v Raymond Daddano , .., .

SEC v Richard scnreroer.... .. . .. .. ..

SEC v Bnan S Campbell, et al.... . .

SEC v. Denms W Evans .. .

SEC v Shayne A Walters.. .. .

SEC v Gerald A. Horwitz. .. ..

SEC v Morton Shapsro, et al, ..

Program Area-Investment Adviser

Name of Case

In the Maner of Pnde Investors Corp, et al. .. .

In the Maner of Managed AdvIsory Services, Inc, et al... .. .

In the Maner of Jeffers, Lavelle, Maxwell & Assoc. Agency Inc, et al. .. ..

In the Maner of North Coast Advisors, Inc.. et al. .. ..

In the Matter of Patnck A. Carne, at .... .. ....

In the Maner of Harvest Financial Group, Inc, et al. ..

In the Maner of Frank Breitweiser .. .. ..

In the Maner of Investment Management Associates, et al.... .

In the Maner of Thomas Walter McKibbin, et al .. .. .

In the Maner of Paramount Capital Group Inc.. .., .

In the Maner of George Sem Lin .. ... ....... .., .. ..

In the Maner of Jason Baker Tunle Sr., at al........ ... .. ..

In the Maner of Makrod Investment Associates Inc., et al.... .. ..

In the Maner of Tax ProfeSSIonals Inc, et al .. ..

In the Maner of Bogey Enterpnses, Inc. ... . .. ..

In the Maner of Waltzer & Associates, et al...... . .

In the Maner of Benchmark Internallonallnvestment Corp., et al. ..

In the Maner of James Paul Holhs, Jr .. .. ..

In the Maner of IRI Asset Management lnc., et aI. .. .

In the Maner of Fredenck 0 WoodSIde, CPA.... .

In the Maner of MoOJlored Assets Corp, et al. .. .., . ..

In the Maner of Forbes Portfolio Management, at aI.... ...

In the Maner of Dave Mason, R.I.A., Inc, et al .. ..

In the Maner of Roberto C Polo .. ..

SEC v Frank R Breitweiser ..... .. .. ..

SEC v. Thomas Walter McKibbin, et al .. .. ..

SEC v Investment Management Associates, et al.... .., .. .

SEC v MOOllored Assets Corp, et al .. .. ..

SEC v Asco AdvIsory Services Corp .

SEC v MIchael Helvey..... .. .. .

SEC v James P Hollis, Jr .. ." ..

SEC v Dave Mason, et al.... .. .

SEC v. Thomas E. Bernhoft, et al . .. .. ..

SEC v Joseph V. Ohvrera .. . ..•.

148

112188

113088

113088

120688

121488

122888

011789

020189

022189

022189

031489

050189

050989

051089

051689

052189

052589

053189

063089

071189

071189

072489

072489

073189

080389

080789

080989

081789

083189

092689

Date Flied

t13088

t22788

011289

012789

013189

022189

041089

042589

050189

061989

061989

062789

070389

071289

072589

072889

080489

081189

081489

082189

082889

091189

091889

091889

032389

032989

040689

042689

060589

071989

072589

082189

082489

092889

LR-119t6

LR-11938

LR-11933

NONE

LR-11940

LR-11950

LR-11964

LR-11983

LR-12000

LR-12011

LR-12033

LR-12074

LR-12096

LR-12092

LR-12097

LR-12103

LR-12109

LR-12113

LR-12151

LR-12156

LR-12157

LR-12174

LR-12175

LR-12202

LR-12194

LR-12196

LR-12208

LR-12219

LR-12236

NONE

Release No

IA-1145

IA-1148

IA-1151

IA-1152

IA-1154

IA-1155

34-26704

IA-1164

IA-11BS

IA-1173

IA-1174

NONE

IA-1176

IA-11n

IA-1180

IA-1182

IA-ll84

IA-1189

IA-1190

MER 244

IA-1195

IA-1197

IA-1200

1A-1201

LR-l2043

LR-l20n

LR-12068

NONE

LR-12116

LR-121n

LR-12184

MER 243

LR-12241

LR-12272

""

'"
Program Araa-Investment Company

Name of Case

In the Matter of Heine Secunues Corp'

In the Matter of Sea Investment Management, Inc, at al .

In the Matter of Jurek Enterpnses Inc, et al......

In the Matter of Fox, Jr

In the Matter of John Geanoulls ....

In the Matter of Douglas C Adams ..

In the Matter of United Services AdVISOrs,et al. ..

In the Matter of Nachman Bench, et al

SEC V John Peter Galanis, et at...

SEC v. Charles W. Steadman, et al.

Program Area-Issuer Financial Disclosure

Name of Case

In the Matter of John L Van Horn ...

In the Matter of Malnx Science Corp, et al ...

In the Matter of DSC Communications Corp , et al

In the Matter of Edmon A. MOrrison, III.. ..

In the Matter of Richard P Franke, CPA, et al .

In the Matter of Lynne K Mercer, CPA .

In the Matter of Hlex Development USA, Inc ..

PRIVATE PROCEEDING. ..

In the Matter of Marvin 0 Haney, CPA ..

In the Matter of Jack M. Portney, CPA

In the Matter of Noami L Rodnguez Santos ..

In the Matter of MDC Holdings Inc

SEC v. Fredenck S. Plotkin, et al.

SEC V Ronald A Hammond, et al

SEC v. Elana tnc., et al

SEC v Timothy L. Sasak, et al

SEC v. Rocky Mount Undergarment Co , Inc, et al.

SEC v World Resources International, Inc, et al

SEC v. Donald D. Sheelen, et al ..

SEC v Wilderness ElectrOniCS, lnc., et al. .... ..

SEC v. LeVin International Corp, et al

SEC v David N Hanarua, et al

SEC V Gilbert Singerman, et al

SEC v Fredenck A Gross, et al.

SEC v Information Solutions Inc., et al .

SEC v. Hrex Development USA, Inc ..

SEC v Gateway Medical Systems Inc., et al

SEC v. TAX Industnes, Inc, et al

SEC v. Elijah Waldron .

SEC v Ask Corp., et al

SEC v. Terry S Rakoff, et al

SEC v Cliff Engle Inc, et al.

SEC v Eddie Antar, et al

Program Area-Issuer Related Party Transactions

Name of Case

SEC v. Continental Excallbur Corp, et al .

SEC v. Sheldon M Blazar, et al

SEC v. Peter Kolokouns, et al . .... ..

Program Area-Issuer Reportmg Other

Name of Case

In the Matter of Sheldon M. Blazar

In the Matter of Edward M Grushko

In the Matter of Robert E lies, Sr. .

In the Matter of MOnica Miles .

SEC v. DuPont Instruments Corp, et al

SEC v. Edward M Grushko ....

Program Area-Market Manlpulatton

Name of Case

In the Matter of F 0 Roberts secunnes Inc, at aJ

In the Matter of Thomas R Blonquist .

Date Filed Release No

122888 IA-115O

051189 1e-16952

061989 IA-1172

080889 IA-1188

080889 IA-1187

080889 IA-1186

090889 IA-ll96

091989 1e-17141

071089 LR-12154

071789 LR-12167

Dale Flied Release No

110188 MER 209

110188 MER 207

010989 MER 213

022389 MER 216

032489 MER 220

041389 MER 222

041389 MER 221

051189 NONE

071789 MER 237

082189 MER 242

090189 MER 246

090189 MER 245

101788 LR-11895

110188 MER 208

120688 MER 210

122888 MER 214

010989 MER 212

012589 MER 218

020889 MER 215

021589 LR-12018

022389 MER 217

041789 MER 223

050189 NONE

050389 MER 225

051989 LR-12119

053089 LR-12118

062189 NONE

070589 MER 234

070889 MER 235

071989 MER 236

081789 MER 240

082189 MER 241

090889 MER 247

Date Filed Release No

052289 LR-12110

052289 MER 225

061289 LR-12125

Date Flied Release No

052289 MER 226

091889 34-27253

092089 34-27261

092089 34-27262

021389 LR-12051

090589 LR-12252

Date Filed Release No

122288 34-26389

013189 NONE

149

•
In the Matter of Richard C Landerman.. ..... ... . .•• ... •.. ... ... ..

In the Matter of Stephen P Clark, CPA .

In the Matter of Lewis Leeds ., .......•

In the Matter of Brownstone-Smith Secunues Corp, et al ••.. •..• .....•

In the Matter of Drexel Burnham Lambert Inc ... ... .... ....

SEC v. Hughes Capital Corp, et al. . . ..•.. . .

SEC v Vincent John Mliitano, et al .... .... ....•

SEC v Brownstone Smith secunues Corp., et al

SEC v Arnold Klmmes, et al . .

SEC v AMX International Inc, et al ...

SEC v American Pain & Stress Inc, et al

SEC v SSF Inc, et al. . ... ... .... •.•.••••..

Program Area-Offermg Vlo/alJons (By Non-Regu/ated EnIJIJes)

Name of Case

In the Matter of Bruce H Frost

In the Matter of Irwin Schneider

In the Matter of CTI Financial Inc ..

In the Matter of Bnan H Kay ..

In the Matter of Scorpion Technologies, Inc..

In the Matter of Memory Metals, Inc .•

In the Matter of Composite DeSign, Inc ..

In the Matter of Larry A. Dixon .. . .

In the Matter of Paul H. Metzinger. .•... .. .

In the Matter of First seccnues of Amenca, Inc., et al .

In the Matter of Karen L Gavin

In the Matter of Stephen T Haley... .,

In the Matter of Faspaq, Inc ..

SEC v Jerzy Kozlowski .

SEC v Centun Mining Corp, et al

SEC v. Sheldon S. Somerman, et al ..

SEC v Wilham 0 Folz, et al

SEC v Amencan Receivables, Inc, et al . .

SEC v Lynn Paul Martin. .. ... ... ..•

SEC v Bnan H Kay

SEC V EdWin 0 Wood II, et al

SEC v. LOUISiana Real Estate EqUity Ltd., et al

SEC v. E Albert Boone, et al

SEC v Memory Metals Inc, et at, ... . . .... ••... ... .

SEC v Wilham A Bartlett, et at . .. . ,. ....• .,. ..

SEC v Global Investment Brokers Ltd , et al .

SEC v Dean S Lemmon ...

SEC v Rick N Hansen

SEC v Frank A Gnllo, et al ..

SEC v Centrac Associates Inc, et al

SEC v National Gas & Power Co, Inc, et al .

SEC v Gary Van Waeyenberghe, et al ..,

SEC v Plarno 011& Gas.. •.. ... ••

SEC v Jerry Timothy, et al

SEC v Thomas J Reilly, et al

SEC v Arthur 'Iuchmsky, et al ..

SEC v. Union Petroleum Corp, et al. ..

SEC v William F Harkey .

SEC v. Alpha Trust, et al. .. ... ..•

SEC v Knsell International Corp, et al ., ... .. ..... ... .• .•

SEC v Paul W Nielsen.

SEC v Coal Corp of Amenca, et al. .. .

SEC v Thomas E McAeynolds, et at, ..

SEC v Earl Fallen, et al .

SEC v Medlcorp Research Laboratones Corp, et al... .••

Program Area-Offermg Vlo/alJons (By Regu/ated EntJIJes)

Name of Case

In the Matter of Eugene B Garrett

In the Matter of John J Connolly

In the Matter of Talwo S. Inman .. ,

In the Matter of Jack 0 Prosen ..•....... , ..••.

In the Matter of Gary A Kaku

In the Matter of John Wesley George, Jr, et al

150

030189 34-26583

030689 MEA 239

041489 34-26725

061589 34-26936

091189 34-27236

121388 LA-11939

012589 LA-11973

032989 LR-12126

080389 LA-12210

080789 LA-12213

092989 LA-12273

092989 LR-12274

Date Filed Release No

122788 34-26395

102888 34-26224

021089 33-6829

021689 34-26555

021689 33-6817

022289 33-6820

022289 33-6819

031289 MEA 219

031789 34-26640

062689 NONE

092889 34-27309

092889 34-27310

092889 33-6847

110888 LR-11909

110888 LR-11913

122888 LR-11955

011389 LR-11989

011989 LR-11979

012589 LA-11994

020189 LR-11987

020689 LA-12001

020789 LA-12005

021589 LA-12035

022289 LR-12004

022889 LR-12021

030989 LR-12052

032089 NONE

040489 LA-12073

040689 LR-12058

051189 LR-12268

051289 LR-12104

052289 LR-12101

052389 LA-12117

061289 NONE

061489 LR-12129

062689 LR-12155

062789 LA-12152

071089 LR-12153

071189 LA-12163

071489 LR-12200

072089 NONE

080389 LR-12224

082589 LA-12237

092189 LR-12266

092889 LR-12260

Date Flied Release No

110488 34-26251

111088 34-26270

120188 34-1146

120288 34-26335

120588 34-26338

122788 34-26396

'"

•

"

•

•
In the Maller of Victoria E Yates 011189 34-26448

In the Maller of Mark W Sharpe 011189 34-26449

In the Maller of Robert McCormack 011289 34-26454

In the Maller of Robert Vincent Yeo. Jr. et al 030189 IA-1156

In the Maller of Russell C Gray 030689 34-26600

In the Maller of James E Simpson 030689 34-26597

In the Maller of Mark S Wilson. 031689 34-26634

In the Maller of Jeffrey A Sadowski 032089 34-26647

In the Maller of Thomas L Powers. et al 032489 34-26661

In the Maller of Virginia Melhorn 033189 34-26681

In the Maller of Jack S. Staton 040389 34-26684

In the Maller of Steven Hammer 040389 34-26685

In the Maller of Eton Securities Corp. et al 051289 34-26818

In the Maller of Chfford M Reiter 052689 34-26868

In the Maller of John F Toale 052689 34-26869

In the Maller of Edward A Coury 062789 34-26983

In the Maller of Kenneth H Kube 070689 34-27000

In the Maller of Joseph Anthony Belmonte. Jr .. 071389 34-27029

In the Maller of Arthur P Miller. 073189 34-27081

In the Malter of Merhn Blackburn 081489 34-27137

In the Maller of Robert C Grubbs. et al 081489 34-27332

In the Maller of Keith Sheldon 082989 34-27191

SEC v Gilbert Beall. et al. 100568 LR-11883

SEC v Talwo S Inman 101888 R-11897

SEC v William E Pohl 120188 NONE

SEC v Arthur P Miller 011789 LR-11976

SEC v. John Wesley George, Jr 020289 LR-11988

SEC v Stonendqs Secunties, Inc, et al 020389 LR-11995

SEC v Great Lakes Equitres, et al .. 022389 LR-12038

SEC v Walter F Kusay. Jr 051689 LR-12114

SEC v Mysore Sundara & Associates, Inc 062189 LR-12159

SEC v Lawrence Murray, et al 062789 NONE

SEC v Harry Schreiber. et al 062989 AAER 238

SEC v. Keith S Sheldon 072689 LR-12189

Program Area-58" Regulatory Orgamzauon

Name of Case Date Flied Release No

In the Maller of Chicago Board Options Exchange 051189 34-26809

Program Area- Transfer Agent

Name of Case Date Filed Release No

In the Maller of v EffiCient Transfer Inc, et al 102189 34-26208

In the Maller of Wilham Kouns 011289 34-26455

In the Maller of Bonneville Registrar & Transfer, et al 092589 34-27288

151
Table 19

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL 1989 IN VARIOUS PROGRAM AREAS

(Each case imnated has been Included rn only one category listed below, even though many

cases mvolve rnulnple allegations and may fall under more than one category.)

Program Area In Wh.ch a %of

C.vll Acnon or Adm'nlstratlve C.vll Administrative Total

Proceeding Was lmnated ActIons 1,2 Proceedings Total' Cases

Secunties Offering Cases

(a) Non-regulated Entity 32 (109) 13 ( 14) 45 (123)

(b) Regulated Ent.ty 12 ( 36) 28 ( 36) 40 ( 72)

--- Total secunnes Offenng Cases 44 (145) 41 ( 50) 85 (195) 28%

---

Broker-Dealer Cases

(a) Back Office. 1 ( 1) 2 ( 2) 3 ( 3)

(b) Fraud Against Customer ... 6 ( 10) 23 ( 41) 29 ( 51)

(c) MUniCipal secunnes .... .. 1 ( 6) 3 ( 3) 4 ( 9)

(d) Other 2 ( 2) 14 ( 21) 16 ( 23)

--- Total Broker-Dealer Cases .. 10 ( 19) 42 ( 67) 52 ( 86) 16%

---

Other Regulated Entity Cases

(a) Investment Advisers 10 ( 21) 24 ( 46) 34 ( 67)

(b) Investment Companies ... 2 ( 12) 8 ( 13) 10 ( 25)

(c) Transfer Agents ... o ( 0) 3 ( 5) 3 ( 5)

(d) Self Regulatory Orqaruzauons o ( 0) 1 ( 1) 1 ( 1)

--- Total Other Regulated Entity Cases 12 ( 33) 36 ( 65) 48 ( 98) 15%

---

Issuer Financial Statement and

Reporting Cases

(a) Issuer Financial Disclosure 21 (63) 12 ( 23) 33 ( 86)

(b) Issuer Related Party Trans 3 ( 6) o ( 0) 3 ( 6)

(c) Issuer Reporting Other . 2 ( 4) 4 ( 4) 6 ( 8)

Total Issuer Financial Statement

and Reporting Cases 26 ( 73) 16 ( 27) 42 (100) 14%

InSider Trading Cases 31 ( 70) 8 ( 8) 39 ( 78) 13%

Market MempulatJon Cases 7 (45) 7 ( 13) 14 ( 58) 5%

Contempt Proceedings 15 ( 29) o ( 0) 15 ( 29) 5%

Corporate Control Cases 4 ( 14) 4 ( 5) 8 ( 19) 3%

Fraud Agamst Regulated EntJtJes .. 2 ( 11) 1 ( 1) 3 ( 12) 1%

Delinquent Filings

(a) Issuer Reporting .... 3 ( 5) o ( 0) 3 ( 5)

(b) Forms 3 & 4 ... 1 ( 7) o ( 0) 1 ( 7)

--- Total Delinquent Filings 4 ( 12) o ( 0) 4 ( 12) 1%

GRAND TOTALS 155 (451) 155 (236) 310 (687) 101%3

---

I The number of defendants and respondents IS noted parentheucauy

2 Thts category Includes InJunct.veactions, and Civil and cnmlnal contempt proceedings

3 Percentages total more than 100% due to rounding of figures

152
142

Table 20

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1, 1988.. .. .. 944

Opened In fiscal year 1989. .. . 3n

Total . . .. 1,321

Closed In fiscal year 1989. . .. 321

Pending as of september 30,1989.. 1,000

Formal Orders of Investigation

Issued In Fiscal Year 1989 ..

Table 21

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30, 1989

Broker-Dealer Proceedings. . ..

Investment Adviser, Investment Company, Transfer Agent

and Self Regulatory Organization Proceedmgs.. .......

Stop Order Proceedings .. ..

Rule 2(e) Proceedings. .

Disclosure Proceedings (SectIon 15(c)(4) of the Exchange Act) .. .

Suspensions of Trading In secuntles In

Fiscal Year 1989 ..... .... ... ...

Table 22

INJUNCTIVE ACTIONS

93

50

5

20

7

23

Fiscal Year

1980... ....

1981... . .. .

1982 .. ..

1983 .

1984 .. .

1985 ...

1986 . . .. .

1987.... .. .

1988 . .. ..

1989. .. ..

Actions Initialed

103

114

136

151

179

143

163

144

125

140

Defendants Named

387

398

418

416

508

385

488

373

401

422

153
Foreign Restricted List

The Securities and Exchange Commission maintains and publishes a Foreign Restricted List which is designed to

put broker-dealers, financial institutions,

investors and others on notice of possible

unlawful distributions of foreign securities in the United States. The list consists

of names of foreign companies whose

securities the Commission has reason to

believe have been, or are being offered

for public sale in the United States in

possible violation of the registration

requirement of Section 5 of the Securities Act of 1933. The offer and sale of

unregistered securities deprives investors of all the protections afforded by the

Securities Act of 1933, including the

right to receive a prospectus containing

the information required by the Act for

the purpose of enabling the investor to

determine whether the investment is

suitable. While most broker-dealers

refuse to effect transactions in securities

issued by companies on the Foreign

Restricted List, this does not necessarily

prevent promotors from illegally offering

such securities directly to investors in the

United States by mail, by telephone, and

sometimes by personal solicitation. The

following foreign corporations and other

foreign entities comprise the Foreign

Restricted List.

1. Aguacate Consolidated Mines,

Incorporated (Costa Rica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration

Company, Ltd. (Canada)

4. Allied Fund for Capital Appreciation

(AFCA, S.A.) (Panama)

5. Amalgamated Rare Earth Mines,

Ltd. (Canada)

6. American Industrial Research S.A.,

also known as Investigation

Industrial Americana, S.A. (Mexico)

7. American International Mining

(Bahamas)

8. American Mobile Telephone and

Tape Co., Ltd. (Canada)

9. Antel International Corporation, Ltd.

(Canada)

10. Antoine Silver Mines, Ltd. (Canada)

154

11. ASCA Enterprisers Limited (Hong

Kong)

12. Atholl Brose (Exports) Ltd.

(England)

13. Atholl Brose Ltd. (England)

14. Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, Channel

Islands, U.K.)

16. Briar Court Mines, Ltd. (Canada)

17. British Overseas Mutual Fund

Corporation Ltd. (Canada)

18. California & Caracas Mining Corp.,

Ltd. (Canada)

19. Caprimex, Inc. (Grand Cayman,

British West Indies)

20. Canterra Development Corporation,

Ltd. (Canada)

21. Cardwell Oil Corporation, Ltd.

(Canada)

22. Caribbean Empire Company, Ltd.

(British Honduras)

23. Caye Chapel Club, Ltd. (British

Honduras)

24. Central and Southern Industries

Corp. (Panama)

25. Cerro Azul Coffee Plantation

(Panama)

26. Cia. Rio Banano, S.A. (Costa Rica)

27. City Bank A.S. (Denmark)

28. Claw Lake Molybdenum Mines, Ltd.

(Canada)

29. Claravella Corporation (Costa Rica)

30. Compressed Air Corporation,

Limited (Bahamas)

31. Continental and Southern Industries,

S.A. (Panama)

32. Crossroads Corporation. S.A.

(Panama)

33. Darien Exploration Company, S.A.

(Panama)

34. Derkglen, Ltd. (England)

35. De Veers Consolidated Mining

Corporation, S.A. (Panama)

36. Doncannon Spirits, Ltd. (Bahamas)

37. Durman, Ltd. Formerly known as

Bankers International Investment

Corporation (Bahamas)

38. Empresia Minera Caudalosa

de-Panama, S.A. (Panama)

39. Ethel Copper Mines, Ltd. (Canada)

40. Euroforeign Banking Corporation,

Ltd. (Panama)

41. Finansbanker als (Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining S.A. (Canada)
44. Global Explorations, Inc. (Panama)

45. Global Insurance, Company, Limited

(British West Indies)

46. Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

47. Golden Age Mines, Ltd. (Canada)

48. Hebilla Mining Corporation (Costa

Rica)

49. Hemisphere Land Corporation

Limited (Bahamas)

50. Henry Ost & Son, Ltd. (England)

51. Hotelera Playa Flamingo, S.A.

52. Intercontinental Technologies Corp.

(Canada)

53. International Communications

Corporation (British West Indies)

54. International Monetary Exchange

(Panama)

55. International Trade Development of

Costa Rica, S.A.

56. Ironco Mining & Smelting Company,

Ltd. (Canada)

57. James G. Allan & Sons (Scotland)

58. Jojoba Oil & Seed Industries S.A.

(Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon Mining Company

(Canada)

62. KoKanee Moly Mines, Ltd. (Canada)

63. Land Sales Corporation (Canada)

64. Los Dos Hermanos, S.A. (Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bank and Trust s Co.,

Ltd. (Cayman Island)

68. Multireal Properties, Inc. (Canada)

69. J.P. Morgan & Company, Ltd., of

London, England (not to be

confused with J.P. Morgan & Co.,

Incorporated, New York)

70. Norart Minerals Limited (Canada)

71. Normandie Trust Company, S.A.

(Panama)

72. Northern Survey (Canada)

73. Northern Trust Company, S.A.

(Switzerland)

74. Northland Minerals, Ltd. (Canada)

75. Obsco Corporation, Ltd. (Canada)

76. Pacific Northwest Developments,

Ltd. (Canada)

77. Pan-Alaska Resources, S.A.

(Panama)

78. Panamerican Bank s Trust

Company (Panama)

79. Pascar Oils Ltd. (Canada)

80. Paulpic Gold Mines, Ltd. (Canada)

81. Pyrotex Mining and Exploration

Co., Ltd. (Canada)

82. Radio Hill Mines Co., Ltd. (Canada)

83. Rancho San Rafael, S.A. (Costa

Rica)

84. odney Gold Mines Limited

(Canada)

85. Royal Greyhound and Turf Holdings

Limited (South Africa)

86. S.A. Valles s Co., Inc. (Philippines)

87. San Salvador Savings & Loan Co.,

Ltd. (Bahamas)

88. Santack Mines Limited (Canada)

89. Security Capital Fiscal & Guaranty

Corporation S.A. (Panama)

90. Silver Stack Mines, Ltd. (Canada)

91. Societe Anonyme de

Refinancement (Switzerland)

92. Strathmore Distillery Company,

Ltd. (Scotland)

93. Strathross Blending Company

Limited (England)

94. Swiss Caribbean Development &

Finance Corporation (Switzerland)

95. Tam O'Shanter, Ltd. (Switzerland)

96. Timberland (Canada)

97. Trans-American Investments,

Limited (Canada)

98. Trihope Resources, Ltd. (West

Indies)

99. Trust Company of Jamaica, Ltd.

(West Indies)

100. United Mining and Milling

Corporation (Bahamas)

101. Unitrust Limited (Ireland)

102. Vacationland (Canada)

103. Valores de Inversion, S.A. (Mexico)

104. Victoria Oriente, Inc. (Panama)

105. Warden Walker Worldwide

Investment Co. (England)

106. Wee Gee Uranium Mines, Ltd.

(Canada)

107. Western International Explorations,

Ltd. (Bahamas)

108. Yukon Wolverine Mining Company

(Canada)

155
Right to Financial Privacy

Section 21(h) of the Securities

Exchange Act of 1934 (15 U.S.c.

78u(hX6»)requires that the Commission "compile an annual tabulation

of the occasions on which the Commission used each separate subparagraph or clause of [Section 21(hX2»)

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

156

made four applications to courts for

orders pursuant to the subparagraphs and clauses of Section

21(hX2)to obtain access to financial

records of a customer. The Commission obtained access to the financial

records of a customer using the procedures provided by the following

sections of the RFPA:

Section 1104 (applicable to

customer consents) .5

Section 1105 (applicable to

administrative subpoenas) ........92

Section 1107 (applicable to

judicial subpoenas) 7
CORPORATE

REORGANIZATIONS

During fiscal year 1989, the Commission entered its appearance in 53

reorganization cases filed under

Chapter 11 of the Bankruptcy Code

involving companies with aggregated stated assets of about $8.7

billion and about 200,000 public

investors. Counting these new cases,

the Commission was a party in a total

of 163 Chapter 11 cases during the

fiscal year. In these cases, the stated

assets totalled approximately $35.2

billion and involved about 750,000

public investors. During fiscal year

1989, 32 cases were concluded

through confirmation of a plan of

reorganization, dismissal, or liquidation, leaving 131 cases in which the

Commission was a party at year-end.

Table 23

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

A.H. Robtns Co., Inc. . .

ks Joe, Inc. . ..

ADI ElectroniCS .. ..

AlA Industnes, Inc .

Airlift International, Inc' ..

Allegheny International, Inc .. ..

A1hs-Chalmers '..... . . .

Allison's Place ..... ... ..

American Healthcare Mgmt., Inc . .

American Monitor Corp. ..... .. .. ..

American Contmental Corporation .. ....

American earners, Inc. .

Angicor limited.... . ..

Anglo Energy, Inc.'.... .. .

Baslx Corporation. .. .. .

Beehive International ..

Baker Industnes Corp. .. .

Barcor, Inc.' . ..

Berry Industries Corp. ..

Birdview Satellite Oornrnumcanons, Inc. .. .

Boardroom Business Products, Inc.. .

Branch Industries, Inc. .. .

Buttes Gas & Od Co. . .. ..

Calmark Real Estate .. .. .

Camera Enterprises, Inc., at aI. . .

canton Industrial Corp . . ..

Care Enterprises, Inc. . . ..

eastle Industries, Inc.' .. ..

Chalat Gourmet Corp. ..

Charter Co. ...... . ..... .

Crtywlde securities Corp '.. .. ..

CLC 01America'. .. ..

Coated Sales, Inc... .

Coleca Industries, Inc. ..

Commonwealth Od Refining Co, Inc . ..

Connor Corp.' .

FY

District Opened

ED VA 1985

ND. CA 1988

ED. NY 1987

ED PA 1984

SD. FL 1981

W.D. PA 1988

SD. NY 1987

CD CA 1988

ND. TX 1988

SD. IN 1986

D. AZ 1989

D KS 1989

D MN 1989

S.D. NY 1988

SD NY 1988

D UT 1989

S.D. NY 1986

CD. CA 1989

CD. CA 1985

D KS 1988

CD. CA 1989

S.D. NY 1985

S.D TX 1986

S.D TX 1989

D MA 1989

CD. IL 1988

CD. CA 1988

E.D AR 1987

C.D CA 1985

MD FL 1984

SD NY 1985

E.D. MO 1986

SD NY 1988

SD NY 1988

W.D TX 1984

ED NC 1987

FY.

Closed

1989

1989

1989

1989

1989

1989

157
Table 23-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Consolidated 011& Gas ..

Consohdated Companies . .

ContInental Informatton Systems ..

Convenlerll Food Mart .. .

Crazy EddIe, Inc., at al .

Crompton Co., Inc ..

Dakota Minerals, Inc. .. .

Dart Drug Stores, Inc. .. .. ..

DeLaurentlls Entertainment . .. ..

DeItaUS Corp. . .. ..

Dest Corp. .... . ...

Detroit-Texas Gas Gathenng Co.' .. .

Domain Technology, Inc. .. .. .

Eagle Clothes. Inc .. . ..

Eastern Air lines. Inc., at al. ...

Engineered Systems & Development Corp . .

Enterprise Technologies, Inc . .... ..

Equestrian Ctrs. of Amer., Inc .. . .

Evans Products Co '. . .. .. .. . ...

Fashion Channel Network' .. .

Financra] Corporation of America' ....

FinanCial & Bus. serv .• Inc

Finest Hour, Inc .. ........

First Repubhcbank Corp .

General Resources Corp.'

General Exploration Co' ..

Global Manne, Inc ... . ..

Hampton Healthcare. Inc ..

Heck's Inc.'.

Heuonencs, Inc. ... .......

Hohday Resources, Inc. .

Holland Industries, Inc.

ICX, Inc .

Infllght servIces. Inc . .

Interstate AIrlines, Inc.' . . .

Intn'J Pharmaceutical Products, Inc. ..

KaIser Steel Corp ..

Kenai Corp '. .. .. .

King of Video, Inc. .. . .. .

LaPoJrlle Industries, Inc. .. ..

l1V Corporatton .. .

MacGregor Sporltng Goods. Inc ..

Marathon Office Supply, Inc .

Margaux, Inc ..

Mars Stores, Inc., at aI .

Marvin Leon Warner .. ..

Maxicare Health Plus Inc. .. .

McLean Industnes, Inc ..

MCorp (MCorp Financial, Inc.

& MCorp Management) ..

Melndge, Inc.1 ..

Meridl8ll Reserve, Inc ..

MIChigan General Corp. ..

158

F.y.

Olstnet Opened

O. CO 1989

N.D. TX 1989

SO. NY 1989

N.D. IL 1989

S.D. NY 1989

S.D. NY 1985

0 WY 1986

O. MO 1989

C.O. CA 1986

ED. TX 1989

NO. CA 1989

S.O TX 1988

N.D. CA 1989

S.O NY 1989

SO NY 1989

N.O CA 1989

SO. TX 1984

C.O CA 1985

SO. FL 1985

CD. CA 1988

CD. CA 1989

WO. NC 1986

CD. CA 1988

NO. TX 1989

N.D. GA 1980

NO OH 1986

S.O TX 1986

MD. FL 1988

S.D. WV 1987

CD. CA 1986

SO. TX 1987

S.D. NY 1988

0 CO 1987

S.O NY 1987

E.o AR 1988

C.O. CA 1986

O. CO 1987

S.D. NY 1987

O. NV 1989

O. CT 1989

SO. NY 1986

O. NJ 1989

C.O. CA 1988

N.D. CA 1989

O. MA 1989

M.D. FL 1988

C.O. CA 1989

S.D. NY 1987

S.D. TX 1989

O. OR 1988

W.O. OK 1989

N.D. TX 1987

F.Y.

Closed

1989

1989

1989

1989

1989

1989

1989

1989

1989

1989

•
Table 23-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

MId-Amenca Petroleum, Inc.' .

Midland Capital Corp .

Mission Insurance Group, Inc .

Munson Geothermal, Inc. . .

Mustang Resources Corp. .. .

New Brothers, Inc.' .. ..

Nrtram Corporabon 4................... . .. OCCidental Development Fund. .. .

OCCidental Development Fund IV .... ...

OCCidental Development Fund V

Ohio Ferro-Alloys Corp' .

Oliver's Stores ..... .... . .. .

OlR Development Fund. ..........

OlR Development Fund II. ...

Overland Express, Inc. . .

PaCIfic Express Holding, Inc . .

Pengo Industnes, Inc. ......

Peregnne Entertainment, ltd. . ..... ..

Pettibone Corp. ..

Po'Folks, Inc.' ..

Public Sarvlce Co of New Hampshire .

QMax Technology Group, Inc

QT&T, Inc . . ....

Oubix GraphiC Systems.

Radice Corporation'

Ramtek Corporation

Raytech Co. .... . ....... ....

Refinemet International, Inc.

Residential Resources Mortgage

Investment Corporallon.. ....

Revco 0 S. Inc.4...... .. ....

Ronco Teleproducts, Inc.2 •. .. ..

Royale AIrlines, Inc 2. .... ........ ... .

Sahlen & Associates ..

Scientific Micro Systems, Inc. . .. .

Saatraln Unes, Inc. .. .

Servamatic Systems, Inc. .

Shearson-Murray Real Estate Fund, ltd.' ....

SIS Corporation.... .. .

Sooner Defense of Ra.2 ..

Sorg Incorporated. at aI ..

Southern Hospitality Corp.' .

SoUlhmark CorporaIIOIl .. ..

Speciatty Retail Concepts, Inc. .. ..

Spencer Cos., Inc. .. .

Spnng Meadows Associates ..

Standard Metals Corp. .. .

Summit Oilfield Corp. .. ..

Swanton Corp. .. ..

Systems for Heatth Care. Inc .

Telslar Satellite Corp. of America .

Texas International Co. ..

Texas American Bancshares, Inc .

F.Y

Dlstnct Opened

N.D TX 1986

S.D NY 1986

C.D. CA 1987

D. NV 1988

S.D TX 1988

S.D. GA 1985

0 UT 1989

CD. CA 1989

CD. CA 1989

C.D CA 1989

NO OH 1987

ED. NY 1987

C.D CA 1989

CD CA 1989

SO. IN 1988

ED CA 1984

N.D TX 1988

CD CA 1989

NO. Il 1986

MD TN 1988

0 NH 1988

SO OH 1989

E.D NY 1987

NO CA 1989

SO Fl 1988

NO CA 1989

0 CT 1989

CD CA 1988

0 AZ 1989

NO. OH 1988

NO Il 1984

WD. LA 1988

S.D NY 1989

NO. CA 1989

SO. NY 1981

NO. CA 1988

NO TX 1987

N.D. OH 1989

M.D. FL 1988

S.D. NY 1989

MD. TN 1988

N.D. GA 1988

WD. NC 1988

0 MA 1987

CD. CA 1988

0 CO 1984

N.D. TX 1988

S.D. NY 1985

N.D. Il 1988

C.D. CA 1988

W.O. OK 1988

N.D. TX 1989

FY.

Closed

1989

1989

1989

1989

1989

1989

1989

1989

1989

1989

159

•

•
Table 23--Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Texscan Corp ........•.............•.............................................

The Regina Co .

The Key Company' . . .. .

The western Co. of No. America' ..

Tidwell Industnes, Inc .. .

Todd Shipyards Corp .

Tomahawk Industnes, Inc.3 .

Traweek Investment Fund No. 22, Ltd .. ..

Traweek Investment Fund No. 21, Ltd ..

Traweek Investment Fund No. 20, Ltd '............. .. .

Traweek Investment Fund No 18, Ltd ..

Twistee Treat Corporatlon .. ..

United Bldg. SeMce Corp of DE' .. .

UmVllllon, Inc .

UNR Industnes, Inc. .. ..

Wedtech Corp ..

W8spac Investors Trust II ..

Westworld Community Healthcare, Inc. .. ..

Wheeling-Pittsburgh Steel Corp . ..

Worlds of Wonder, Inc.'. . .. .

Zienth Corporation .. .

Zimmer Corp '... .. .

ZZZZ Best Co., Inc. .. .

Total Cases Opened (FY 1989)

Total Cases Closed (FY 1989)

F.y.

Distnel Opened

D. AZ 1986

D. NJ 1989

W.O. NC 1988

N.D. TX f988

N.D. AL 1986

D. NJ 1988

W.D TN 1988

C.D. CA 1988

C.D. CA 1988

C.D. CA 1988

CD. CA 1988

M.D. FL 1989

0 AZ 1989

N.D. CA 1989

NO. IL 1982

SO NY 1987

C.D. CA 1988

C.D. CA 1987

W.D PA 1985

N.D. CA 1988

D. NJ 1988

S.D. FL 1988

CD CA 1987

54

F.Y

Closed

1989

1989

1989

1989

1989

1989

32

, Plan of reorgamzatlon confirmed.

2 Debtor liquidated under Chapter 7.

3 Chapter 11 case dismissed.

160

Debtor's secunnes not regIstered under SecIIon 12(g) of the Exchange Act

Commission appearance authonzed 10FY 1989 but not filed until after the

close of the fiscal year.

•

•

•
Table 24

Appropriated Funds vs Fees * Collected

Dollars MIllions

300

250

200

150

100

APPROPRIATION

50

o FY1976 77 78 79 80 81 82 83 84 85 86 87 88 1989

"excludes disqorqernents from fraud actions

161
:" .,.... : ...... "CD "co "co N N N

N N <Ii

: ... -<0

N

N

: ... -<0

N

N

162

<0

O.

N

re

I

g

co)

I

I

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