J v

1 9

Annual

9 5

Report

United States

Securities and Exchange Commission

THE CHAIRMAN

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D C. 20549

The Honorable Albert Gore, [r.

President of the United States Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Newt Gingrich

Speaker of the House of Representatives

Washington, D.C. 20515

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

Commission (SEC) for fiscal year 1995. The activities and accomplishments

set forth in the annual report continue the Commission's long tradition of

hard work and high achievement. I would like to take this opportunity

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

the major issues facing the Commission.

Munictpal Debt Markets

In recent years, the Commission and the municipal securities industry

have taken several major steps to prepare the debt markets for the twentyfirst century. The Municipal Securities Rulemaking Board has effectively

severed the link between political campaign contributions and municipal

bond underwriting business with its Rule G-37. This rule recently withstood

a challenge in the U.S. Court of Appeals, reaffirming industry and regulatory

efforts to curtail the insidious practice known as "pay-to-play." In addition,

the Commission has undertaken a number of enforcement actions to help

ensure the integrity of this market.

The Commission has also been concerned about inadequate disclosure

in the secondary market for municipal securities. In response, industry and

issuer groups offered recommendations that were incorporated into

Commission rule amendments and will make up-to-date information more

readily available.

In addition, the Commission has met with state and local officials

throughout our nation in an open dialogue about the prudent management

of public funds. We have stressed the importance of safety and liquidity

over risk and return as well as the special responsibilities involved in

seeking capital through our public markets.

iii
Promoting Capital Formation

Throughout its existence, the Commission has balanced the need for

full disclosure and investor protection against the burden that its rules,

regulations, and requirements may impose on capital formation. This year,

we undertook two fundamental reappraisals of the way the agency regulates.

First, an SEC Advisory Cornrruttee on Capital Formation and Regulatory

Processes was appointed to examine our regulatory approach and consider

how it might be improved. The Committee is considering such questions

as whether the Commission should register compames instead of securities.

The Cornrruss ion also created an mterrial Task Force on Disclosure

Simplification, which analyzed the cost to companies (in both time and legal

fees) of complying with the agency's form and filing requirements. The

Task Force reviewed hundreds of forms and regulations and recommended

amendment or elimination of many of them. If implemented in its entirety,

the report's recommendations would eliminate or modify one-half of the

rules and one-fourth of the forms that affect corporate America.

In recent years, the Commission has created a new, simpler registration

and disclosure regime for small businesses seeking capital in the securities

markets. During 1995, the Commission proposed to allow small businesses

to "test the waters" with registered initial public offerings and we shortened

the restricted holding periods for privately placed securities under Rule 144.

The agency also worked with Congress to craft a "safe harbor" provision

in securities litigation reform legislation that might encourage corporations

to disclose forward-looking information by protecting them from some of

the liability concerns raised by frivolous lawsuits.

DIsclosure Developments

The Commission has launched several efforts to simplify and streamline

disclosure. In 1995, the Commission worked with the investment company

Industry and state securities regulators to develop the "profile prospectus,"

a clear, one-page summary that accompanies the regular prospectus and

is designed to give investors a better understanding of the mutual fund they

are considering buying. Pilot "profiles" developed by eight fund groups

have been available to investors since August 1, 1995.

Toward the same end, the Commission proposed improved disclosure

requirements for money market funds. The new standards are designed

to simplify money market fund prospectuses considerably, making them

less costly to prepare and allowing investors to focus on a short document

that contains the most essential Information about the fund.

Enhancing Investor Protections

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

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

investor education activities back up that defense.

iv
In the past year, the Commission continued its traditionally vigorous

enforcement program. Recent notable cases have involved domestic and

international insider trading, Ponzi schemes, government securities fraud,

misleading disclosures, kickbacks or conflicts of interest related to munici pal

securities offerings, broker-dealer sales practice abuses, "prime bank notes,"

and the relatively new problem of unregistered securities offerings over

the Internet.

In May 1995, the Commission consolidated its examination and

inspection activities into the Office of Compliance Inspections and

Examinations (OCIE). The Commission created OCIE to conduct and

coordinate examinations of brokers, dealers, self-regulatory organizations,

investment companies and advisers, and transfer agents. One reason the

office was created was to enable the SEC to better coordinate its examinations

with fellow regulators, and I am pleased to report that we have already

reached an important agreement with our colleagues that will reduce

duplication of effort for us as well as for the firms we examine.

Working with the industry self-regulatory organizations and state

regulators, the Commission also conducted a sales practice sweep of small

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

identify problem brokers and to ensure that appropriate superVIsory

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

enforcement action.

The Commission's Office of Investor Education and Assistance

continued its concerted efforts to reach out to investors. With the help and

cooperation of the securities industry and state regulators, the office

continued its highly popular investor town meetings to offer tips on how

to invest wisely. Other outreach efforts during the year include the creation

of an SEC site on the World Wide Web, which offers corporate financial

information from our Electronic Data Gathering, Analysis, and Retrieval

System (EDGAR) as well as SEC News Digests, litigation releases, speeches,

testimony before Congress, rule proposals, press releases and investor

alerts. For those who lack Internet access, the Commission also created a

toll-free investor information line.

International Listings

During the year, the agency worked to reduce costs for foreign

companies entering the U.S. markets by simplifying the registration and

reporting process while maintaining high Ll.S. disclosure standards. At a

time when cross-border listings in other major markets have either hit a

plateau or declined, foreign issuer participation in the u.s. markets has

grown dramatically in the 1990s-the Commission had a record 738 foreign

listings at the beginning of 1996.

* * *

v
I believe that this is one of the most important periods in the

Commission's existence. The American corporate community, the securities

industry, and our capital markets are changing rapidly. Stocks and bonds

are rapidly becoming the investment vehicles of choice for an increasing

number of Americans. The Commission-working closely wi th the Congress,

the private sector, and the Investors we are bound to serve-is working to

meet the challenges posed by these changes. I have every confidence that

the Commission will continue to perform its responsibilities with the

professionalism and dedication that all of us have come to expect.

Sincerely,

#JL

Arthur Levitt

Chairman

vi
Table of Contents

Commission Members and Principal Staff Officers XI

Biographies of Commission Members xiii

Arthur Levitt" Steven M.H. Wallman

Regional and District Offices xv

Enforcement

Key 1995 Results 1

Enforcement Authority" Enforcement Activities" Investor Education and Assistance Activities" Sources for Further Inquiry

International Affairs

Key 1995 Resul ts 21

Arrangements for Mutual Assistance and Exchanges of Information ..

Enforcement Cooperation" Technical Assistance" International

Organizations and Multilateral Initiatives" Trade Negotiations

Regulation of the Securities Markets

Key 1995 Resul ts 27

Securities Markets, Trading, and Significant Regulatory Issues ..

Oversight of Self-Regulatory Organizations

Investment Management Regulation

Key 1995Resul ts 38

Significant Investment Company Act Matters" Significant Investment Advisers Act Developments" Significant Holding Company

Act Developments

Compliance Inspections and Examinations

Key 1995Resul ts 47

Investment Company and Investment Adviser Inspections" BrokerDealer Examinations" Self-Regulatory Organization Inspections and

Oversight

Full Disclosure

Key 1995 Results 52

Review of Filings .. Rulemaking, Interpretive, and Legislative Matters .. Conferences" Committees and Task Forces

vii
Accounting and Auditing Matters

Key 1995 Resul ts 61

Accounting Related Rules and Interpretations" Oversight of PrivateSector Standard-Setting" Oversight of the Accounting Profession's

Initiatives" International Accounting and Auditing Standards

Other Litigation and Legal Activities

Key 1995 Results 67

Significant Litigation Developments" Significant Adjudication

Developments" Significant Legislative Developments" Corporate

Reorganizations" Ethical Conduct Program

Municipal Securities Initiatives

Key 1995 Resul ts 80

Municipal Securities Disclosure" Technical Assistance

Economic Research and Analysis

Key 1995 Resul ts 82

Economic Analysis and Technical Assistance

Policy Management and Administrative Support

Key 1995 Resul ts 84

Policy Management .. Administrative Support

Endn ote s 90

Appe ndix 99

Enforcement Cases Initiated by the Commission During Fiscal

Year 1995 in Various Program Areas" Fiscal 1995 Enforcement

Cases Listed by Program Area" Investigations of Possible

Violations of the Acts Administered by the Commission ..

Administrative Proceedings Instituted During Fiscal Year Ending

September 30, 1995" Injunctive Actions" Right to Financial

Privacy" Types of Proceedings .. Foreign Restricted List" SelfRegulatory Organizations: Expenses, Pre-tax Income and Balance

Sheet Structure" Consolidated Financial Information of SelfRegulatory Organizations" Self-Regulatory OrganizationsClearing Corporations, 1994 Revenues and Expenses" SelfRegulatory Organizations-Depositories, 1994Revenues and

Expenses" Certificate Immobilization" Investment Companies

and Investment Advisers" Section 13(£)(1)Reports" Exempviii
tions .. Corporate Reorganizations" The Securities Industry:

Revenues, Expenses, and Selected Balance Sheet Items" Unconsolidated Financial Information for Broker-Dealers" Unconsolidated Annual Revenues and Expenses for Broker-Dealers Doing

a Public Business, 1990-1994" Unconsolidated Balance Sheet for

Broker-Dealers Doing a Public Business Year-end, 1990-1994"

Carrying and Clearing Firms" Securities Industry Dollar in 1994

for Carrying/Clearing Firms" Unconsolidated Revenues and

Expenses for Carrying/Clearing Broker-Dealers" Unconsolidated Balance Sheet for Carrying/Clearing Broker-Dealers ..

Securities Traded on Exchanges: Market Value and Volume"

NASDAQ (Share Volume and Dollar Volume)" Share and

Dollar Volume by Exchanges" Market Value of Equity/Options

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

U.S. Securities Exchanges" Share Volume by Exchanges ...

Dollar Volume by Exchanges" Securities Listed on Exchanges ...

Value of Stocks Listed on Exchanges" Appropriated Funds vs.

Fees Collected" Budget Estimates and Appropriations" U.S.

Securities and Exchange Commission Organizational Chart

ix

Commission Members and Principal Staff Officers

(As of November H,1995)

Commissioners*

Arthur Levitt, Chairman

Steven M.H. Wallman, Commissioner

Principal Staff Officers

Michael E. Schlein, Chte] of Staff

Linda C. Quinn, Director, Division oj Corporation Finance

Meredith B. Cross, Deputy Director

William E. Morley, Senior ASSOCIateDIrector

Abigail Arms, ASSOCIateDIrector

Robert A. Bayless, Associate Director

Howard F. Morin, Associate Director

Mauri L. Osheroff, Associate DIrector

Albert S. Dandridge, ill,Associate Director

David A. Sirignano, Senior Legal Advisor

Term Expires

1998

1997

William R. McLucas, Director, DIvision oj Enforcement

Colleen P. Mahoney, Deputy Director

Paul V. Gerlach, Assoczate Director

Thomas C. Newkirk, Associate Director

Gary N. Sundick, Associate Director

Joan E. McKown, Chiej Counsel

Barry R. Goldsmith, Chief Litigation Counsel

Stephen J. Crimmins, Deputy Chief Litigation Counsel

George H. Diacont, Chief Accountant

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

Barry Barbash, DIrector, DIvision of Investment Management

Heidi Starn, Associate Director

Vacant, Associate Director

Jack Murphy, Chte] Counsel

Brandon Becker, Director, Division of Market Regulation

Robert L.D. Colby, Deputy Director

Larry E. Bergmann, Associate Director

Jonathan Kallman, Associate DIrector

Howard Kramer, Associate Director

*Commissioner J. Carter Beese resigned from the Commission on November

14,1994, and Commissioner Richard Y. Roberts resigned from the Cornrnission

on July 17,1995.

xi
Michael A. Macchiaroli, Associate Director

Catherine McGuire, Associate Director/Chief Counsel

Holly Smith, Associate Director

Simon Lome, General Counsel, Office of General Counsel

Paul Gonson, Solicitor and Deputy General Counsel

Phillip D. Parker, Deputy General Counsel (Legal Policy)

Anne E. Chafer, Associate General Counsel

Richard M. Humes, Associate General Counsel

Diane Sanger, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

Lori A. Richards, DIrector, Office of Compliance Inspections and Examinations

Mark Fitterman, Associate Director

Mary Ann Gadziala, Associate DIrector

Gene Gohlke, Associate Director

C. Gladwyn Goins, Associate Director

Paul S. Maco, Director, Office of MUnicipal Securities

Michael H. Sutton, Chte] Accountant, OffIce of the Chief Accountant

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

Judges

Richard R. Lindsey, Chief Economist, Office of Economic Analysis

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

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

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

Fernando L. Alegria, Jr.,Associate Executive Director

Michael Bartell, Associate Executive Director

Wilson A. Butler, Jr.,Associate Executive Director

Vacant, Associate Executive Director

Michael D. Mann, Director, OffIce of International Affairs

Kathryn Fulton, Director, Office of Legislative Affairs

Jennifer Kimball, Director, Office of Public Affairs, Policy Evaluation and Research

Jonathan G. Katz, Secretary of the Commission

xii
Biographies of Commission Members

Chairman

Following his nomination by

President Clinton and his confirmation by

the Senate, Arthur Levitt, Jr. was sworn

in as the 25th Chairman of the Securities

and Exchange Commission on July 27,

1993.

Before being nominated to the

Commission, Mr. Levitt served as the

Chairman of the New York City Economic

Developmen t Corpora tion and, from 1978

to 1989, the Chairman of the American

Stock Exchange.

Throughout his career, Mr. Levitt has been called upon to serve on many

governmental task forces and boards of directors. At the federal level, he has

served on four executive branch commissions, including chairing the White House

Small Business TaskForce from 1978 to 1980. Most recently, he was a member

of the President's Base Closure and Realignment Commission and the Defense

Department TaskForce on the National Industrial Base. In addition to heading

the New York City Economic Development Corporation, he chaired the Special

Advisory Task Force on the Fu ture Development of the West Side of Manha ttan

and the Committee on Incentives and Tax Policy of the New York City Mayor's

Management Advisory TaskForce.

Mr. Levitt has served on 10 corporate and philanthropic boards, including

those of the Equitable Life Assurance Society of the United States, East New

York Savings Bank, First Empire State Corporation, the Revson Foundation,

the Rockefeller Foundation, the Solomon R. Guggenheim Foundation and Williams

College.

Mr. Levitt founded Levitt Media Company in 1986, and served as the

company's Chairman. Its primary holding was Roll Call, the Newspaper of

Congress.

Prior to accepting the Amex chairmanship, Mr. Levitt worked for 16years

on Wall Street. From 1969 to 1978, he was President and Director of Shears on

Hayden Stone, Inc. (today Smith Barney) whose predecessor firm he joined as

a partner in 1962. Itwas during this period that Mr. Levitt first involved himself

with Amex, becoming one ofits governors in 1975 and in 1977 accepting the

additional position of Vice Chairman.

From 1959 to 1962, Mr. Levitt worked at the Kansas-based agricultural

management firm Oppenheimer Industries, where he rose to the position of

Executive Vice President and Director. From 1954 to 1959, Mr. Levitt was

assistant promotion director at Time, Inc.

xiii
Mr. Levitt, 65, graduated Phi Beta Kappa from WillIams College in 1952

before serving two years in the Air Force. Married since 1955 to the former

Marylin Blauner, Mr. Levitt has two grown children, Arthur III and Lauri.

Commissioner

Steven M.H. Wallman was nominated to

the Securities and Exchange Commission by

President Bill Clinton and confirmed by the

Senate on June 29,1994. He was sworn in as

a Commissioner on July 5, 1994. His term

expires in June 1997.

Before being nominated to the Commission,

Mr. Wallman was in private practice with the

Washington law office of Covington and Burling.

He joined the firm in 1978 as an Associate,

becoming a Partner in 1986. While at Covington

& BurlIng, Mr. Wallman specialized in general

corporate, securities, contract and bus mess law. Mr. Wallman also worked

for the Boston Consulting Group in 1978. He is a member of the American

Law Institute and the American Bar Association.

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

Law in 1978. In 1976, he earned an S.M. from the Sloan School of Management

at the Massachusetts Institute of Technology and an S.B. from M.LT. in 1975.

He and his wife live in Great Falls, Virginia.

Mr. Wallman was born on November 14, 1953.

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Central Regional Office

Robert H.Davenport, Regionalfarector

1801 California St., Suite 4800

Denver, CO 80202-2648

(303) 391-6800

Fort Worth District Office

T.Christopher Browne,

DIstnctAdmirustrator

801 Cherry Street, 19th Floor

Fort Worth, TX 76102

(817) 334-3821

Salt Lake District Office

Kenneth D.Israel, District Admirustrator

50 S. Mam Street, Suite 500

Salt Lake City, UT 84144-0402

(801) 524-5796

Midwest Regional Office

Mary Keefe,RegionalDirector

GbcorpCenter

500 W. Madison St., SUIte 1400

Chicago, IL 60661-2511

(312) 353-7390

Northeast Regional Office

Richard H. Walker, Regional Director

7 World Trade Center, Suite 1300

New York, NY 10048

(212) 748-8000

Boston District Office

[uan M. Marcelino, District Adrrunistrator

73Tremont Street

Sixth Floor, Suite 600

Boston, MA 02108-3912

(617) 424-5900

Philadelphia District Office

Donald M. Hoed, DistrictAdministrator

The Curtis Center, SUIte 1005 E.

601 Walnut Street

Philadelplua,PA 19106-3322

(215) 597-3100

xvi

Pacific Regional Office

Elaine M. Cacheris, Regional Director

5670 Wilshire Blvd., 11th Hoor

Los Angeles, CA 90036-3648

(213) 965-3998

San Francisco District Office

David B.Bayless, District Administrator

44 Montgomery Street, Suite 1100

San Francisco, CA 94104

(415) 705-2500

Southeast Regional Office

Charles V. Senatore, Regronal'Oirector

1401 Brickell Avenue, SUIte 200

Miami, FL 33131

(305) 536-4700

Atlanta Disbict Office

Richard P, Wessel,

DIstrictAdmirustrator

3475 Lenox Road, N.E.

Suite 1000

Atlanta, GA 30326-1232

(404) 842-7600
Enforcement

The Commission's enforcement program is designed to protect investors

and foster confidence by preserving the integrity and efficiency of the securities

markets. The enforcement program's principal legislative mandates contain

explicit authority for the agency to conduct investigations and prosecute

violations of the securities laws by bringing enforcement actions in federal

court or instituting administrative proceedings before the Commission. Last

year, as in prior years, the Commission maintained a strong presence in all

areas within its jurisdiction.

Key 1995 Results

In 1995, the Commission ins titu ted a significan t number of enforcemen t

actions in response to a wide range of securities law violations. In its

administrative and judicial proceedings, the Commission sought and

obtained relief from a broad and flexible array of remedies designed to

protect investors and the public interest. Investor complaints and inquiries

continued to provide the Commission with information on potential securi ties

fraud and abuse. During 1995, nearly one-fifth of the investigations initiated

by the Commission stemmed, in part, from investor complaints.

The Commission obtained court orders requiring defendants to disgorge

illicit profi ts of over $994 million. Civil penal ties authorized by the Securi ties

Enforcement Remedies and Penny Stock Reform Act of 1990 (Remedies Act),

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

and Securities Fraud Enforcement Act of 1988 (ITSFEA) totaled over $34

million. In some instances, the payment of disgorgement pursuant to a court

order was waived based upon the defendant's demonstrated inability to

pay. Courts also have noted in some cases that civil penalties were

appropriate but were not imposed because of a demonstrated inability to

pay.

Total Enforcement Actions Initiated

1991 1992 1993 1994 1995

Total 320 394 416 497 486

Civil Injunctive Actions 172 156 172 196 171

Administrative Proceedings 138 226 229 268 291

Civil and Criminal Contempt

Proceedings 9 11 15 33 23

Reports of Investigation 1 1 0 0 1
In Commission-related cases, criminal authorities obtained 92 criminal

indictments or informations, and 98 convictions during 1995. The

Commission granted access to its files to domestic and foreign prosecutorial

authorities in 285 instances.

Over 42,500 complaints and inquiries were analyzed and responded

to dunng 1995, an increase of 10 percent over 1994. Approximately 50

percent of the complaints involved broker-dealers, while the remainder

involved issuers, mutual funds, banks, transfer and clearing agents,

investment advisers, and various financial and non-financial matters. More

than 2,900 complaints were referred to the Commission's operating divisions,

self-regulatory organizations (SROs), and other regulatory entities for review

or action.

Enforcement Authority

The Commission has broad authority to investigate possible violations

of the federal securities laws. Informal investigations are conducted on a

voluntary baSIS, with the Commission requesting persons with relevant

information to cooperate by providing documents and testifying before SEC

staff. The federal securities laws also empower the Commission to conduct

formal investigations in which the Commission has the authority to issue

subpoenas that compel the production of books and records and the

appearance of witnesses to testify. Generally, both types of investigations

are conducted on a confidential, non-public basis.

Traditionally, one of the Commission's principal enforcement

rnecharusrns for addressing violative conduct has been the federal court

injunction, which prohibits fu ture violations. In civil actions for injunctive

relief, the Commission is authorized to seek temporary restraining orders

and preliminary injunctions as well as permanent injunctions against any

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

securities laws. Once an injunction has been imposed, conduct that violates

the injunction is punishable by either civil or criminal contempt, and violators

are subject to fines or imprisonment. In addition to seeking such orders,

the Commission often seeks other equitable relief such as an accounting

and disgorgement of illegal profits. When seeking temporary restraining

orders, the Commission often requests a freeze order to prevent concealment

of assets or dissipation of the proceeds of illegal conduct. The Remedies

Act authorized the Commission to seek, and the courts to Impose, civil

penalties for any violation of the federal securities laws (with the exception

of insider trading violations for which penalties are available under ITSA

and ITSFEA). The Remedies Act also affirmed the existing equitable authority

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

officers or directors.

The Commission has the authority to Institute several types of

adrnirustra tive proceedings, in addition to civil injunctive actions. The

Commission may institute administrative proceedings against regulated

entities In which the sanctions that may be imposed include a censure,

limitation on activities, and suspension or revocation of registration. The

Commission may impose similar sanctions on persons associated with such

2
entities and persons affiliated with investment companies. In addition,

individuals participating in an offering of penny stock may be barred by

the Commission from such participation. In administrative proceedings

against regulated entities and their associated persons, the Remedies Act

also au thorized the Commission to impose penalties and order disgorge men t.

The Remedies Act further authorized the Commission to institute

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

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

violating the federal securities laws, and may require disgorgement of

illegal profits. The Commission also is authorized to issue temporary cease

and desist orders (If necessary, on an ex parte basis) against regulated entities

and their associated persons if the Commission determines that the violation

or threatened violation is likely to result in significant dissipation or

conversion of assets, significant harm to investors, or substantial harm to

the public interest prior to the completion of proceedings.

Section 8(d) of the Securities Act of 1933 (Securitres Act) enables the

Commission to institute proceedings to suspend the effectiveness of a

registration statement that contains false and misleadmg statements.

Administrative proceedings pursuant to Section 15(c)(4) of the Securities

Exchange Act of 1934 (Exchange Act) can be instituted against any person

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

with reporting, beneficial ownership, proxy, and tender offer requirements.

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

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

Rules of Practice (former Rule 2(e)), administrative proceedings can be

instItuted against professionals who appear or practice before the

Commission, including accountants and attorneys. The sanctions that can

be imposed in these proceedings include suspensions and bars from

appearing or practicing before the Commission.

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

or local authorities or SROs such as the New York Stock Exchange (NYSE)

or the National Association of Securities Dealers (NASD). The staff often

provides substantial assistance to the Department of Justice for the criminal

prosecution of securities violations.

Enforcement Activities

Set forth below are summaries of significant enforcement actions

initiated in various areas during 1995. Defendants or respondents who

consented to settlements of actions did so without admitting or denying

the factual allegations contained in the complaint or order instituting

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

In 1995.

Offering Cases

Securities offering cases involve the offer and sale of securities in

violation of the registration provisions of the Securities Act. In some cases,

the issuers attempt to rely on exemptions from the registration requirements

that are not available under the circumstances. Offering cases frequently

3
involve material misrepresentations concerning, among other things, use

of proceeds, risks associated with investments, disciplinary history of

promoters or control persons, business prospects, promised returns, success

of prior offerings, and the financial condition of issuers.

1. Offerings over the Internet

The Internet and the various commercial on-line computer services

have become a popular source of information about many areas of public

interest, including securities. In some cases, however, communications over

the Internet also have been used to solicit the purchase of unregistered

securrties or to further securities frauds. In SEC v. Block,' for example, the

Commission alleged that the defendant used the Internet to advance a

"pnme bank" scheme. (Other prime bank schemes are described below.)

Potential investors were promised that their funds would be doubled in

as little as four months and that their investments were guaranteed against

loss by a "Prime Bank Guarantee" that would be used as security. In fact,

no such prime bank instrument existed, and the defendant failed to disclose

the risks associated with the investments, or how the promised returns

would be generated. On September 14, 1995, the Commission obtained a

preliminary injunction and an asset freeze in these pending proceedings.

The Commission alleged that the defendant in SEC v. Odulo? posted

a false and misleading solicitation on the Internet seeking investors for a

$500,000 offering of$I,OOOdenomination bonds. According to the complaint,

the defendant represented that the bonds would yield a "whopping 20%

rate of return" and were "a very low risk" investment. The defendant failed

to disclose that the proceeds were sought to fund a proposed new venture

involving the acquisition and raising of eels, and failed to disclose his lack

of expertise in the culturing of eels. To lend credibility to the offering, the

defendant created false endorsements of the bonds by fictitious investment

advisers and falsely stated that all investments were insured against possible

loss. The defendant consented to the entry of an injunction.

In SEC v. Pleasure Time Inc.,3 the defendants allegedly recruited investors

for a "multi-level marketing" system by telephone, fax, and postings on the

Internet. Investors were told that they could reap enormous profits from

a world-wide telephone lottery with projected receipts of $300 million. The

defendants failed to disclose the legal, regulatory, and technical obstacles

to starting such a lottery. The Commission obtained a preliminary injunction

m this case, and one of the defendants has consented to the entry of an

injunction.

2. Przme Bank Schemes

Schemes to sell so-called "prime bank" securities continue to appear.

The typical case involves the offer and sale of notes, debentures, letters of

credit, or guarantees purportedly issued by one or more major international

banks. Investors in these schemes are typically promised unrealistic rates

of return, e.g., a 150 percent annualized rate of "profits." In SEC v. Gallard.'

the Commission alleged that John Gallard, Adrian Gallard, and their

4
company, The Aberdeen Group, Inc., defrauded investors through their

operation of a scheme to sell fraudulent "prime bank" securities. The

Commission alleged that, since 1992, defendants defrauded investors of

over $2.3 million in the offer and sale of fictitious securities. Defendants

falsely represented that they could obtain debt instruments issued by "top

world banks" at a deep discount from face value and could arrange for the

resale of the securities at a tremendous profit to investors. In fact, the

securities did not exist, and defendants, instead of delivering the securities

as promised, simply kept the large deposits they had induced investors to

pay, and fabricated defaults by the investors to justify the "forfeiture" of

the "refundable" deposits. This action was pending at the end of the year.

In SEC v. Norton? the Commission charged four individuals with

engaging in a fraudulent "prime bank" scheme that resulted in one investor

losing $765,000 and another investor losing $125,000. According to the

complaint, the defendants raised funds from investors by falsely promising

them extraordinary profits and a risk-free investment if they deposited

funds in an escrow account at a law firm. The investors were told that their

funds would be used to facilitate the purchase and sale of prime bank notes

supposedly issued by the top banks in the world. In fact, as alleged in the

complaint, the investors' funds were misappropriated. These proceedings

are pending.

3. Telecommunications Cases

The Commission also has filed actions arising from the solicitation of

interests in ventures purportedly developing advanced telecommunication

technologies. These cases typically arise from the fraudulent, unregistered

sale ofsecurities in ventures ostensibly involved in wireless cable, specialized

mobile radio, interactive video and data services, and similar

telecommunication technologies. While many telecommunications

technology companies raise capital through legitimate means, the

Commission has uncovered numerous fraudulent ventures, which often

take the form of limited liability companies or partnerships that promoters

falsely represent as outside the registration provisions of the federal securities

laws, and which often are promoted through "infomercials" and highpressure telephone sales pitches.

The Commission's complaint in SEC v. United Communications, Ltd. 6

alleged a scheme that induced approximately 3,000 investors natiorrwrde

to investover$40 million in "membership units" in limited liability companies

that purportedly were developing wireless cable television systems. The

defendants used high pressure "boiler room" telemarketing tactics,

misrepresented the returns that Investors could expect, and omitted to

disclose risks. They represented that investors would receive a return of

up to 400 percent within a few years, at minimal risk, while using millions

of dollars of investor funds for their own purposes. Three individuals and

four companies, including United Communications, Ltd., consented to the

entry of injunctions. In addition, United Communications and two of the

5
settling individuals agreed to disgorge a total of $12,334,040. A relief

defendant, TechniVision, Inc., also agreed to disgorge $7 million. This

action was pending as to other defendants at the end of the year.

In SEC v. Future Vision Direct Marketing, lnc.,' the Commission alleged

a scheme involving the fraudulent offer and sale of "membership interests"

in limited liability companies, and partnership interests in a limited

partnership, formed to fund wireless cable television operations in Venezuela.

The defendants raised approximately $3 million from the sale of membership

interests in the limited liability companies, and approximately $310,000

from sales of limited partnership interests. Offering matenals failed to

disclose material information concerning, among other things, the principals'

primary roles In the offerings, loans from the principals to the limited

liability companies, and prior criminal and/or CIvil fraud actions against

certain of the defendants. Investor funds also were misappropriated by

certain defendants. The Commission obtained a preliminary injunction and

an asset freeze in this action, which was pending at the end of the year.

In SEC v. Telecom Marketing, Inc.,8 the Commission alleged that the

defendants violated the antifraud and registration provisions of the federal

securities laws through the offer and sale of as much as $28.5 million in

investment contracts by Telecom Marketing, Inc. and two other firms. The

investment contracts involved are units in two general partnerships formed

to invest in wireless cable television systems in Mobile, Alabama and Madison,

Wisconsin. The partnership units in question were sold to over 2,600

investors residing throughout the United States at prices ranging from

$3,750 to $5,450 per unit. Both offerings were sold by a network of boiler

rooms. Among other things, the offering materials failed to disclose the

relatively low prices paid by the promoters for the assets to be transferred

to the partnerships, or the correspondingly large profits to be made by the

promoters on the transactions. Finally, the offering materials for both

offerings disclosed sales commissions of 15 percent, when in fact the boiler

rooms received sales commissions of 50 percent of the funds they raised.

The Commission obtained a preliminary injunction, an asset freeze, and the

appointment of a receiver in these pending proceedings.

In SEC v. Qualified Pensions, lnc.i" the Commission alleged that Qualified

Pensions, Inc. (QPI) and Jerry G. Allison misappropriated at least $4.5

million in retirement savings entrusted to QPI to be maintained in individual

retirement accounts (IRA) and other retirement savings plans. More than

14,500 individuals were induced to transfer at least $270 million of their

retirement savings to accounts at QPI, which permitted investors to purchase

illiquid, unregistered securities that generally cannot be purchased in IRA

accounts at banks or broker-dealers. In addition, promoters of speculative

telecommunication technology securities, many of which involve frauds,

sent QPI account opening documents to prospective investors along with

their own promotional materials, and encouraged investors to invest their

retirement savings in the offered securities through QPI. The complaint

alleges that at least $72 million of QPI's customers' funds were invested

6
in telecommunication technology securities. The Commission obtained a

preliminary injunction, an asset freeze, and the appointment of a receiver

in these pending proceedings.

4. Other Offering Cases

The' Commission filed an action against Irwin H. "Sonny" Bloch, a

"consumer advocate" and radio talk show host alleging that Bloch and

entities under his control defrauded investors of $3.8 million in connection

with the sale of unregistered membership interests in three limited liability

companies formed to acquire certain AM radio stations in Florida. In SEC

v. Blocli." the Commission alleged, among other things, that the defendants

distributed offering materials that contained material misrepresentations

and omissions concerning the projected value of an investment, and the

projected revenues, expenses, and growth rate of the radio stations. In

addition, Bloch diverted over $1 million in investor funds to himself and

his spouse and to companies under their control. This action was pending

at the end of the year.

In SEC v. Bennett," the Commission alleged that The Foundation for

New Era Philanthropy and John G. Bennett, Jr. engaged in a massive scheme

by which hundreds of non-profit organizations, including churches, charities,

and universities, were defrauded out of at least $100 million. The defendants

purported to operate an investment program in which non-profit

organizations were induced to invest for a period of six months, with

promises that they would receive back twice the amount of their investments

through a "matching fund" supplied by anonymous benefactors. In fact,

there were no benefactors, and New Era was operating a "Ponzi" scheme,

In which funds obtained from newer investors were used to meet obligations

to prior investors. The Commission obtained a preliminary injunction and

an asset freeze in these proceedings, which were pending at the end of the

year.

The Commission's action in SEC v. lnternattonal Breeders, Inc.12 involved

the fraudulent sale of unregistered partnership interests in ostrich breeding

ventures. The defendants offered the interests through high-pressure,

boiler room sales tactics, and raised at least $6.5 million from over 700

investors. Among other things, the defendants misrepresented to investors

that they could receive returns of 500 percent or more. In addition, defendants

failed to disclose that ostrich breeding is a high-risk, highly speculative

investment, or that many of the defendants had been ordered by several

states to cease and desist the offer and sale of ostrich investments. The

Commission obtained a preliminary injunction and an asset freeze in these

proceedings, which were pending at the end of the year.

In SEC v. Naiman P the Commission alleged that Gary F. Naiman, the

president of Pioneer Mortgage Company, offered and sold $238 million of

trust deed investments to approximately 2,500 elderly investors without

disclosing Pioneer's poor financial condition, the increasing number of

borrowers who were defaulting on the loans underlying the trust deeds,

7
or Naiman's diversion of inves tor funds for unau thorized purposes. Naiman

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

disgorge $164,031,701, plus interest.

Financial Disclosure

Actions involving false and misleading disclosures concerning matters

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

of false financial statements, often are complex and, in general, demand

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

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

Commission brought 71 cases containing significant allegations of financial

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

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

and internal accounting control provisions of the Foreign Corrupt Practices

Act. The Commission also brought 11cases alleging misconduct by accounting

firms or their partners or employees.

In SEC v. First Capital Holdings Corp., Inc.,14 the Commission alleged

that First Capital made material misrepresentations and omissions concerning

the financial condition and results of operations of its subsidiary, First

Capital Life Insurance Company (FCL). FCL sought to increase its statutory

capital and surplus under reinsurance agreements that did not support the

recognition of "reserve credits" under California law; as a result, by yearend 1990, First Capital overstated its subsidiaries' consolidated capital and

surplus by over $65 million. First Capital failed to disclose the negative

effect that any reversal of FCL's accounting treatment of reserve credits

would have on First Capital's ability to continue as a going concern. First

Capital consented to the entry of an injunction. In related proceedings,

First Capital's chief financial officer and chief operating officer each consented

to the entry of cease and desist orders.

In SEC v. Sojtpoini, lnc.i'? the Commission alleged that Softpoint's

earnings and income from 1992 through 1994 were artificially inflated by

the reporting of fictitious software sales in periodic filings and press releases.

Softpoint falsely disclosed the generation of $4.4 million in revenue from

certain sales to foreign distributors (certain of which were under the control

of Softpoint's former president). In addition, Softpoint issued 420,000

shares of its stock to these foreign distributors, the stock then being sold

in the United States purportedly pursuant to Regulation S. Softpoint falsely

disclosed that funds received from these stock sales were payments on the

receivables from the foreign distributors. Softpoint's president and former

president also sold Softpoint stock while in possession of material nonpublic information about the fraudulent scheme. These proceedings were

pending at the end of the year.

The Commission's complaint in SEC v. Digitran Systems, Incorporated"

alleged that Digitran improperly recognized revenue on several transactions.

Digitran's false claims of having sold simulators to customers resulted in

income statements in which total revenue was inflated by 46 percent to 93

percent. Improperly recognized revenue was reflected in periodic filings,

a registration statement, and p:ess releases. In addition, two of the individual

8
defendants sold Digitran stock while in possession of material non-public

information regarding the company's financial condition and operations.

This case was pending at the end of the year.

The Commission filed an action against four former members of senior

management at Kurzweil Applied Intelligence, Inc., who engaged in a

scheme to inflate Kurzweil's revenues and income at the time of the

company's initial public offering in 1993. In SEC v. Bradetreei,'? the

Commission alleged Kurzweil recognized revenue from non-existent sales

and from sales that did not meet the requirements of Generally Accepted

Accounting Principles (GAAP). As a result, Kurzweil reported operating

results for 1993 that overstated revenue by $2,760,000, or 25 percent, and

reported a profit of $154,000 instead of a loss of $2,293,000; for the nine

months ended October 31,1993, Kurzweil overstated revenue by $5,736,000,

or 76 percent, and reported net income of $649,000 instead of a loss of

$5,518,000. These misstated results were included in Kurzweil's Form S-l

registration statement and in quarterly reports filed with the Commission.

Two of the individual defendants also sold Kurzweil stock while in possession

of material non-public information concerning the company's true financial

condition. This case was pending at the end of the year.

The Commission issued a Report of Investigation, pursuant to Section

21(a) of the Exchange Act, In the Matter of The Cooper Companies, Inc.,18

concerning the failure of Cooper's board of directors to respond adequately

to information concerning potential misconduct by Gary Singer, Cooper's

former co-chairman, and his brother, Steven Singer, who was then a Cooper

director and its chief administrative officer. Among other things, Gary

Singer failed to disclose a series of transactions by which he caused $6

million in high-yield bonds to be transferred between Cooper accounts and

accounts in the names of his wife and aunt; these unauthorized transactions

deprived Cooper and its shareholders of profits in excess of $560,000. After

the board learned that he had concealed these fraudulent, self-dealing

transactions and thereby caused the company's outstanding reports to be

inaccurate, the board failed to take immediate and effective action to protect

the interests of the company's investors. The board's inaction also allowed

Steven Singer, who was allegedly involved in a frontrunning scheme that

was under investigation by the Commission, to direct the issuance of a press

release on behalf of the company that falsely denied any knowledge of

wrongdoing. The Commission's report was issued to emphasize the

responsibility of directors to safeguard both the integrity of corporate

statements and the interests of investors, when they become aware of

evidence of fraudulent conduct by management.

The Commission found in In the Matter of Marvin E. Basson, CPA,19 that

the outside auditor of Towers Financial Corporation committed fraud and

engaged in improper professional conduct in connection with his audit and

audit reports on the company's financial statements for the years 1988

through 1991. The financial statements filed by Towers during this period

overstated income and accounts receivable, which were not recorded in

accordance with generally accepted accounting principles. Basson also was

enjoined by consent in related proceedings. The respondent consented to

9
the entry of the Commission's order pursuant to Rule 2(e) (now re-codified

as Rule 102(e» of the Rules of Practice, by which he was denied the privilege

of appearing or practicing before the Commission.

In In the Matter of C. Steven Bolen," the Commission denied the

respondent the privilege of appearing or practicing before the Commission.

Bolen, the former executive vice president and chief financial officer of

Financial News Network, Inc. (FNN), had been enjoined by consent in 1994,

based upon his participation in a fraudulent scheme to inflate FNN's revenues

and earnings for 1989 and the first three quarters of 1990, by, among other

things, causing an overstatement of revenues received from two related

companies and an understatement of the write-off of the assets of a

discontinued FNN business segment. FNN also had been caused to enter

into numerous equipment sale/leaseback transactions in which the quantity,

type, and value of the equipment being sold; the identities of the sellers;

and the disposition of the proceeds from the transactions were falsified.

Bolen consented to the entry of the Commission's order entered pursuant

to Rule 2(e).

Derivative Securities

The Commission conducted several major investigations involving

transactions in the market for derivative securities. The Commission

instituted cease and desist proceedings against BT Securities Corporation,

a broker-dealer subsidiary of Bankers Trust New York Corporation. In In

the Matter of BT Securities Corporation," the Commission found that BT

Securities defrauded a customer, Gibson Greetings, Inc., by misrepresenting

the value of Gibson's derivatives portfolio. The actions of BT Securities

caused Gibson to continue to purchase derivatives. In addition, the false

information supplied by BT Securities led Gibson to understate the extent

of its unrealized losses in financial statements filed with the Commission

and distributed to the public. BTSecurities consented to the entry of orders

issued by the Commission and the Commodi ty Fu tures Trading Commission

that together required the payment of a penalty of $10 million.

In proceedings related to the action against BT Securities Corporation,

the Commission, in In the Matter of Gibson Greetings, Inc.,22 alleged that

Gibson violated the reporting and books and records provisions of the

federal securities laws in connection with its accounting for and disclosure

of certain derivatives that it had purchased on the advice of BT Securities.

Among other things, Gibson failed to establish internal controls sufficient

to identify such derivative positions and require that they be marked to

market, and to ensure that derivative transactions were properly executed.

The respondents in this matter consented to the entry of the Commission's

cease and desist order.

In SEC v. Schulte,23 the Commission claimed that a securities salesman

fraudulently sold millions of dollars in derivative securities to at least 14

Ohio municipalities and school districts. Schulte allegedly failed to describe

the nature of the risks of the securities, failed to inform investors of the

type of securities being sold, and falsely represented to investors that the

derivatives were guaranteed by the U.S. Government. Total losses sustained

10
by the investors have not been determined, but the Commission alleged

that losses by four of the investors alone exceeded $3.4 million. This case

was pending at the end of the year.

In In the Matter of Van Kampen American Capital Asset Management, Inc.,24

the Cornrrussion alleged the intentional mispricing by the respondent's

portfolio manager of certain derivative securities held in Its portfolio. The

mispricing was intended to conceal a decline in the value of the securities,

and resulted in an overvaluing of the portfolio by $6.88million and calculation

of net asset value inflated by as much as 76 cents per share. The respondent

consented to the entry of the order by which it was censured and ordered

to pay a civil penalty of $50,000. In related proceedings, the Commission

also took action against the portfolio manager. In In the Matter of Thomas

M. Rogge,25 the Commission alleged, among other things, the respondent

caused Van Kampen's records to reflect that prices for the securities at issue

had been obtained from brokerage firms, when in fact he was pricing the

securities himself. Rogge consented to the entry of a cease and desist order

by which he was ordered to pay a civil penalty of $11,000; he also consented

to a bar from association with any regulated entity.

In In the Matter of Askin Capital Management, L.P.,26 the Commission

alleged antifraud violations in connection with the valuation of portfolios

invested in mortgage derivative securities and other collateralized mortgage

obligations. Among other things, the respondents, Askin Capital

Management and its chief executive officer, David Askin, disseminated

misleading performance information to advisory clients and prospective

clients in written reports and oral presentations. The respondents consented

to the entry of cease and desist orders. Askin Capital Management's

registration was revoked, and Askin was barred from association with

regulated entities and ordered to pay $50,000 to settle pending or fu ture

claims by or on behalf of one or more of the advisory clients of Askin Capital

Management.

Municipal Securities

The Commission has become increasingly concerned with activities in

the municipal securities markets. In recent years, the individual investor

increasingly has become an important player in the market for municipal

securities, both through direct purchases of municipal bonds and through

investments in mutual funds that hold these instruments. Accordingly, the

Commission's enforcement program has been focusing more attention in

this area, resulting in several important enforcement actions being brought

by the Commission in 1995.

The Commission filed an injunctive action, involving alleged political

corruption, against Terry D. Busbee, an elected board member of the Escambia

County Utilities Authority (ECUA), located in Florida, and Preston C. Bynum,

an employee of a broker-dealer firm. In SEC v. Busbee P the Commission's

complaint claims that Busbee and Bynum entered into an arrangement by

which Busbee received financial benefits from Bynum at a time when Bynum's

firm was selected as the senior underwriter or senior managing underwriter

for several issues of ECUA municipal securities. In connection with the

11
arrangement, Busbee allegedly received bank loans of $36,000, repayment

of approximately $27,000 in principal and interest on these loans, and a

direct payment of $3,500. Busbee and Bynum consented to the entry of

injunctions. In addition, Bynum agreed to pay a civil money penalty in

the amount of $25,000 and, in related administrative proceedings, In the

Matter of Preston C. Bynum,28 consented to the entry of an order by which

he was barred from association with regulated entities.

In In the Matter of Derryl w. Peden i" the Commission settled a portion

of the administrative proceeding instituted last year against Thorn, Alvis,

Welch. According to the order instituting the proceeding, a municipal bond

underwriter allegedly engaged in a scheme in which sham transactions were

used to conceal the payment of issuance costs out of bond proceeds, in excess

of amounts permitted under the Internal Revenue Code. The bonds at issue

were sold to finance certain urban renewal projects. Thorn Alvis's president

and its bond counsel allegedly caused Thorn Alvis falsely to represent that

the developer of the projects was providing cash contributions, when, in

fact, part of the bond proceeds were simply being routed through the

developer-by inflating his fee-to create the appearance of cash

contributions. Peden, the bond counsel, consented to the entry of a cease

and desist order, and agreed to disgorge $35,000. The remainder of the

action was pending at the end of the year.

In SEC v. Stifel, Nicolaus and Company, Inc.,J° the Commission alleged

that, between 1989 and 1993, a broker-dealer accepted millions of dollars

in undisclosed payments from certain third parties who sold investments

to municipal bond issuers advised by the broker-dealer. In advising the

issuers about the purchase of these investments, Stifel defrauded its clients

by failing to disclose its conflict of interest. Stifel consented to the entry

of an injunction and agreed to disgorge $922,741, pay prejudgment interest

on that amount of $263,637, and pay a civil money penalty of $250,000. In

pending proceedings, SEC v. Cochran," the Commission alleged that three

former employees of Stifel failed to comply with their duty to disclose the

same conflicts of interest to the firm's clients.

The Commission alleged in SEC v. Sutliffe,32 that the defendant

defrauded investors by participating in the preparation of false and

misleading municipal bond offering circulars. Sutliffe was the undisclosed

promoter and con trol person of two not-for-profi t corpora tions that

participated in 26 public offerings of municipal and corporate bonds that

raised over $107 million to acquire, renovate, and operate nursing homes.

Among other things alleged by the Commission, the offering circular for

one of the offerings contained material misrepresentations and omissions

concerning the defendant's role as a promoter of the offering, his control

over the issuer, his regulatory history, and the commingling of revenues

from existing nursing homes. Sutliffe consented to the entry of an injunction.

In a related action, SEC v. Goodman P the underwriter's representative and

the underwriter's counsel consented to the entry of injunctions.

In SEC v. Rudi," the Commission alleged the payment of more than

$300,000 in kickbacks to a financial adviser in connection with the offering

of debt securities by New Jersey's Camden County Municipal Utilities

12
Authority. When the financial adviser, Consolidated Financial Management,

Inc., was informed that it would receive a flat fee of $15,000 instead of its

fee in prior offerings of $1 per $1,000 face value of the bonds offered,

Nicholas Rudi, the adviser's president, solicited and ultimately received a

kickback of $200,000 from FIrSt Fidelity Bank, N.A., the underwriter of the

offer. Joseph Salema, at the time the executive vice-president of Consolidated

Financial Management, also solicited and received a $90,000 kickback from

Robert Jablonski, a commissioner of the New Jersey Highway Authority,

in exchange for assistance m securing the selection of First Fidelity as lead

underwriter. Salema and two individuals associated with First Fidelity

consented to the entry of injunctions and agreed to pay a total of $347,000,

representing disgorgement and prejudgment interest. This action was

pending as to Rudi, and a financial advisory firm he owns, at the end of

the year.

Insider Trading

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

information to others who trade. Insider tradmg encompasses more than

trading and tipping by traditional insiders, such as officers or directors who

are subject to a duty to either disclose any materral non-public information

or abstain from trading in the securities of their own company. Violations

also may arise from the transmission or use of materral non-public information

by persons in a variety of other positions of trust and confidence or by those

who misappropriate such information.

In addition to permanent injunctions, the Commission often seeks

ancillary relief, including disgorgement of any profits gained or losses

avoided. The ITSA penalty provisions authorize the Commission to seek

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

the profit gained or loss avoided against persons who unlawfully trade in

securities while in possession of material non-public information or who

unlawfully communicate material non-public mformation to others who

trade. Civil penalties also can be imposed upon persons who control insider

traders. During 1995, the Commission brought 45 cases alleging insider

trading violations.

The Commission filed an action against 17 individuals alleging insider

trading in connection wi th 4 AT&T acquisi tion targets: Parad yne Corpora tion,

NCR Corporation, Digi tal Microwave Corpora non, and Terada ta Corpora tion

!SEC v. Brumfield35). Charles Brumfield, at the time a vice president in

AT&T's Human Resources Department, used his position at AT&T to learn

of the company's acquisition plans. With the assistance of Thomas Alger,

his close fnend and subordinate at AT&T, Brumfield orchestrated widespread

trading in the securities of the four takeover targets through a circle of

family and friends In New York, New Jersey, Illinois, Florida, and North

Carolina. The combined trading profits of the defendants was approximately

$2.6 million. In related proceedings, seven of the defendants in the

Commission's action also pled guilty to criminal charges, and an eighth

defendant was convicted after a jury tnal.

13
The Commission filed an action against seven defendants alleging that

they committed insider trading by purchasing the securities of Grumman

Corporation, or by tipping others so that they could purchase Grumman

secunties, shortly before the announcement of a tender offer by Martin

Marietta Corporation for Grumman's outstanding shares (SEC v. Crocevi.

NIcholas Croce, a Grumman employee directly involved in due diligence

meetings in preparation for the merger, tipped his brother, Frank Croce,

also a Grumman employee, who then tipped their cousin, Frank Sanitate,

who purchased Grumman securities himself and tipped the other defendants.

Frank Sanitate, his five tippees, and six other people to whom these tippees

recommended Grumman securities, realized gains totaling more than

$640,000. The defendants consented to the entry of injunctions. In addition,

they agreed to pay a total of $295,214 representing disgorgement,

prejudgment mterest, and civil penalties. In related proceedings, Lawrence

M. Mathe also consented to an injunction based on his trading in and

recommendation of Grumman securities, and agreed to pay $265,313,

representing disgorgement, prejudgment interest, and a civil penalty.

The Commission alleged that Stephen H. Wagner, an attorney in the

Legal Department of Lockheed Corporation, engaged in insider trading

when he purchased call options for Lockheed stock while in possession of

material non-public information concerning a merger agreement between

Lockheed and Martin Marietta Corporation (SEC v. Wagner3

?). Wagner, who

learned of the merger by virtue of his employment in the Legal Department,

bought options that had an expiration date of only 18 days after the date

of purchase and that were "out of the money" (i.e., had an exercise price

that was substantially in excess of the current trading price of Lockheed

common stock). Wagner consented to the entry of an injunction and an

order requiring him to disgorge $42,188, plus prejudgment interest of

$2,213.87, and to pay an ITSA penalty of $42,188.

The Commission charged two former executives of the Los Angeles

based footwear company, L.A. Gear, Inc., with insider trading (SEC v.

Schwartzberg3R). The defendants, Gilbert N. Schwartzberg, the former chief

administrative officer and a director of the company, and Arden Franklin,

the former controller of the company, also were charged with falsifying LA

Gear's books and records. In addition, Schwartzberg was charged with

causing LA Gear to file a false and misleading financial report with the

Commission. Schwartzberg and Franklin consented to the entry of

injunctions, and agreed to pay $1 million and $20,185.65, respectively,

representing disgorgernent, prejudgment interest, and civil penalties. In

addition, Schwartzberg agreed not to serve as an officer or director of any

public company.

In SEC v. Seioaldv" the Commission alleged that on four separate

occasions between July 1990 and January 1991, Jack D. Seibald, while

employed as an equity research analyst at Salomon Brothers Inc., obtained

material non-public information relating to several public companies he

followed and unlawfully conveyed such information to defendants Bernard

Seibald (his brother and a former stockbroker at Prudential Bache Securities),

Stewart R. Spector (his father-m-Iaw and a former managing director of

14
Furman, Selz Inc.), Eric S. Fessler (his friend), and other persons. The

complaint further alleges that after receiving such informa tion from Seibald,

Bernhard, Spector, and Fessler unlawfully traded in the securities of the

subject companies for their own accounts and, in the case of Bernhard and

Spector, for the accounts of the two incorporated entities named in the

action as relief defendants, whose beneficial owners are related to Seibald

and Bernhard. Fessler consented to the entry of an injunction and agreed

to disgorge $53,000 plus $21,594 in prejudgment interest. The proceedings

were pending against the other defendants at the end of the year.

SEC v. Woodward40 involved charges that Richard W. Woodward, an

attorney formerly associated with Cravath, Swaine & Moore, improperly

caused his brother, John T. Woodward, and a friend to purchase the securities

of 12 issuers that were Cravath clients or possible merger partners of Cravath

clients in advance of possible merger and acquisi tion announcemen ts. Those

mergers and acquisitions included the acquisition of Caesars World by ITT,

the acquisition of Neutrogena by Johnson & Johnson, and the proposed

acquisition of CBS, Inc. by QVC, Inc. John Woodward purchased the

securities of the subjects of such mergers and acquisitions, and caused

others to purchase, resulting in total profits of approximately $578,000.

Richard Woodward's friend, and people he caused to trade, made profits

of approximately $355,000. Richard Woodward and John Woodward

consented to the entry of injunctions. In addition, Richard and John

Woodward consented to disgorge $25,000 and $85,000, respectively.

Section 15(f) of the Exchange Act and Section 204A of the Advisers Act,

which were enacted as part of ITSFEA, require broker-dealers and investment

advisers to establish, maintain, and enforce written policies and procedures

reasonably designed to prevent the misuse of material non-public information

by such regulated entities or by persons associated with them. In In the

Matter of Gabelli & Company, Inc.,41 the Commission alleged that Gabelli &

Company, a registered broker-dealer and an indirect majority-owned

subsidiary of Gabelli Funds, Inc. (GFI), and GAMCO, an investment adviser

and a majority-owned subsidiary of GFI, failed to adopt policies, procedures,

and practices reasonably designed to prevent the misuse of material nonpublic information in connection with the purchase and sale of Lynch

Corporation securities, by accounts maintained at the respondents, prior

to a board meeting at which Lynch's board of directors approved Lynch's

fourth quarter and year-end 1991 financial results, and the release of those

financial results. Specifically, respondents' policies, procedures, and

practices did not adequately take into account the special circumstances

presented by Mario J. Gabelli's role as chairman of the board of directors

and chief executive officer of Lynch and his roles as de facto chief investment

officer of Gabelli & Company and chief investment officer of GAMCO. The

respondents consented to the entry of a cease and desist order, and, among

other things, agreed to each pay civil penalties of $50,000.

15
Regulated Entities

1. Broker-Dealers

Each year, the Commission files a significant number of enforcement

actions against broker-dealer firms and persons associated with them. The

Commission's actions against broker-dealers often focus on violations of the

net capital and customer protection rules, violations of books and records

provisions, or fraudulent sales practices. The Commission also takes action

against broker-dealer firms and their senior management for failure to

supervise employees with a view to preventing violations of the federal

securities laws.

In SEC v. Stratton Oakmont, Inc.,42 the Commission alleged that a brokerdealer firm had failed to comply with a Commission order entered on March

17, 1994, in a prior enforcement action. The administrative order, to which

Stratton Oakmont had consented, found that the firm had engaged in

fraudulent sales practices, made baseless price predictions, permitted

unauthorized trading in customer accounts, and manipulated the price of

a security. Stratton Oakmont was directed, among other things, to implement

sales practice procedures recommended by an independent outside

consultant appointed by the Commission. The consultant recommended

that Stratton overhaul its operations and sales practices and, among other

things, recommended that Stratton tape record all telephone calls made to

and from its customers, hire additional supervisors with acceptable

disciplinary and compliance records, hire additional compliance persons,

revamp the system by which Stratton compensates its brokers, take steps

to ensure that all sales scripts used by Stratton brokers are completely

accurate and up-to-date, and make significant changes to the manner by

which Stratton responds to complaints from customers. Stratton refused

to make any of these changes. Following a non-jury trial, the court entered

a permanent injunction requiring Stratton to comply with the Commission's

order.

The Commission alleged a manipulation in the price of securities

issued by Of Counsel Enterprises, Inc., by three broker-dealer firms, F.N.

Wolf & Co., Inc., Hibbard Brown & Co., Inc., and LiC. Wegard & Co., Inc.,

and three individuals who were their principals (In the Matter of F.N. Wolf

& Co., Inc.43). Respondents purchased the securities at ever-increasing

prices, and Wolf & Co. entered ever-increasing bids into the NASDAQ

system. The firms dominated and controlled the market for the securities

and substantially reduced the float. As a result, the price was manipulated

from $3.25 to $8; the securities were then sold to the public at the inflated

price and the respondents realized profits totaling $5,658,000. These

proceedings were pending at the end of the year.

Stephen Strabala, a former registered representative associated with

a broker-dealer, entered into an agreement with Columbiana County, Ohio,

to invest county funds in U.S. Treasury securities and insured investments

such as certificates of deposit. Strabala subsequently opened a cash and

margin account in the name of "S&S Investments" at a broker-dealer firm

in Omaha, to which a total of $7.735 million in county funds were wired.

16
Strabala used the county's funds to invest in index options, while providing

the county with false confirmations of transactions in Treasury notes and

certificates of deposit. A net trading loss of $3.5 million was incurred on

the trades. Among other things, Strabala also diverted $334,000 from this

account to pay for a condominium and for other personal purposes. In two

other accounts opened in Detroit and Palo Alto with county funds, losses

of $400,000 and $1.82 million, respectively, were generated. Strabala

consented to the entry of an order by which he was barred from association

with any regulated entity (In the Matter of Stephen T. Strabala't). Strabala

also was enjoined in related civil proceedings, and ordered to disgorge

$334,000, plus prejudgment interest (SEC v. Straoala't').

In the Matter of H.D. Vest Investment Securities, Inc.46 arose from activi ties

by a registered representative associated with H.D. Vest, who created an

investment dub, primarily for trading index options, and converted funds

invested in the club to his own use. The registered representative also used

forged authorizations to transfer funds from other customer accounts to a

bank account under his control, which funds he also converted. The

Commission alleged that H.D. Vest failed reasonably to supervise the

registered representative; among other things, the firm failed to place the

employee under heightened scrutiny when it became aware of his

questionable employment background (including an arbitration filed by a

customer related to his association with another broker-dealer) and his

request to have discretionary authority for the investment club even though

he knew or should have known that the arrangement violated the firm's

policy on discretionary trading. H.D. Ves t consented to the entry of an order

by which it was censured, ordered to pay a civil penalty of $50,000, and

required to comply with undertakings concerning supervision and other

matters.

2. Investment Advisers and Investment Companies

The Commission instituted several significant cases involving

investment advisers and investment companies. The Commission alleged

that Sanjay Saxena, a registered investment adviser and the publisher of

a weekly investment newsletter, raised at least $3.2 million through the sale

to at least 165 investors of interests in an unregistered investment pool (SEC

v. Saxena'Y]. Saxena promised annual returns in excess of 50 percent, and

further promised that he would repay one-quarter of any trading losses.

While the pool was Incurring substantial losses, Saxena represented to his

investors that their investments were profitable. After the Commission

commenced its investigation, Saxena represented that he would repay

investors in full; however, he failed to repay at least $656,000 to at least

45 investors, who were sent false monthly statements indicating that their

investments were profitable while their funds were in fact being used to

repay other investors. Saxena consented to the entry of an injunction and

an order requiring him to pay a total of $774,793.04, representing

disgorgement and prejudgment and post judgment interest. In related

administrative proceedings, Saxena consented to the entry of an order

barring him from association with any regulated entity.

17
Account Management Corporation (AMC), a registered investment

adviser, and two individuals, AMC's president and vice-president, were

charged with inadequately disclosing the firm's allocation policy with respect

to certain profitable transactions in "hot issues" (In the Matter of Account

Management Corporation'ri, During an 18-month period in 1992 and 1993,

AMC bought and sold securities in 34 initial public offerings that generated

short-term trading profi ts of approximately $337,000. Ins tead of distribu ting

the shares equitably to all of its eligible accounts, the respondents principally

favored certain accounts maintained for non-fee paying customers who

were close friends of the respondents. In addition, trades by such accounts

frequently involved free-riding; that is, purchases were made when there

were inadequate funds in the accounts, so that the purchases were financed

by the proceeds of the subsequent profitable re-sales. In one instance, an

account was not opened until three days after a profit was realized on a

re-sale. The respondents consented to the entry of a cease and desist order

by which they were censured and AMC was ordered to pay a civil penalty

of $100,000.

Between 1990 and 1992, Roger W. Honour allegedly traded personally

in securities that he also was buying or selling for his investment advisory

clients, Including individuals and investment companies. Honour's trading,

which involved a conflict of interest because of the proximity of his trading

to that of his clients and the low trading volume of the securities in comparison

to the size of the trades made for his clients, resulted in total illegal profits

of $115,615. Honour consented to a cease and desist order by which he

was censured and ordered to disgorge $115,615, plus prejudgment interest,

and to pay a civil penalty of $275,000 (In the Matter of Roger W. Honour'T[.

The complaint against John J. Kaweske, a former portfolio manager

with Invesco, a registered investment adviser and complex of mutual funds,

alleged a fraudulent scheme by which Kaweske concealed from Invesco

management certain secret arrangements by which his son directly and

indirectly received commissions from issuers of securities, based upon

purchases of those securities by funds advised by Invesco and managed by

Kaweske; Kaweske allegedly caused two funds to invest in private placements

of two development stage companies, for which his son received finder's

fees (SEC v. Kaweske50). Kaweske also concealed from Invesco and funds

he managed that he was a founder, director, and shareholder in a corporation

whose shares or subsidiary's shares were purchased by the funds. In

addi tion, Kaweske failed to report a t leas t 47 personal securi ties transactions

to Invesco management; many of these transactions involved securities that

were bought or sold by Invesco funds that Kaweske managed. This case

was pending at the end of the year.

In In the Matter of John Logan Wallace,51 the Commission alleged that

the respondent, a portfolio manager associated with Oppenheimer

Management Corporation, bought shares in a private placement offering

through a personal account at a registered broker-dealer without properly

reporting this transaction to his employer, as required by Section 17(j) of

the Investment Company Act of 1940 and Rule 17j-l(c), within 10 days of

18
the end of the calendar quarter in which the transaction occurred. Wallace

consented to the entry of a cease and desist order by which he was censured

and required to pay a civil penalty of $20,000.

The Commission alleged that Louis Acevedo, a registered investment

adviser, and an entity under his control, Galleon Capital Management,

engaged in a scheme to misappropriate "soft dollar" funds intended for the

benefit of their investment advisory clients (SEC v. Galleon Capital

Management52). "Soft dollar" agreements between an investment adviser and

a broker-dealer typically stipulate that a percentage of commissions generated

in client accounts may be paid to providers of research services for research

that benefits the clients. The defendants created phony invoices for services

provided pursuant to a soft dollar arrangement, and subrru tted these invoices

to brokers. Payments received were transferred to Acevedo and did not

benefit investment advisory clients. Also, brokers were double billed for

certain soft dollar services, or were billed for services that were not

appropriate for soft dollar reimbursement. In addition, the defendants

churned one or more accounts to generate soft dollar credits. The defendants

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

disgorgement of $285,916, representing illegal profits obtained as a result

of the scheme.

The Commission instituted cease and desist proceedings against

Anthony J. Benincasa, who aided and abetted a Ponzi scheme by which Peter

T. Jones, an unregistered investment adviser, raised at least $9.2 million

from over 400 investors (In the Matter of Anthony]. Benincasar'v. Benincasa

opened accounts which falsely identified a company under his control,

Independence Asset Management (lAM), as a partnership involving Jones

and a third party. Among other things, Benincasa continued to use funds

placed by investors in lAM even though he knew that Jones was making

material misrepresentations and omissions to investors. He also told investors

that the fund was doing well when it was actually losing money. During

the relevant period, lAM generated net commissions of $333,000 for

Benincasa. These proceedings were pending at the end of the year. In

separate proceedings, Jones and lAM were enjoined and Jones was barred

from association WIth any regulated entity.

See also In the Matter of Van Kampen American Capital Asset Management,

Inc., and In the Matter of Askm Capital Management, L.P , described above.

Investor Education and Assistance Activities

Investor complaints and inquiries alert the Commission to securities

fraud and abuse and are often the first indicators of wrongdoing. Since

an educated investor provides the best defense against secunties fraud, in

1995 the SEC continued its initiative to improve public awareness and to

educate investors on how to identify securities fraud, and how to report

suspicious activity to securities regulators.

In October 1994, the SEC created a toll-free Investor information line.

The investor information line allows callers to order investor education

materials and learn how the Commission can assist them with their

19
complaints. It also provides access to important recorded investor protection

messages. Since its inception in October 1994, over 75,000 calls have been

received on the mvestor information line (1-800-SEC-0330).

Dunng 1995, the Commission released its second brochure, Invest

Wisely, An Introduction to Mutual Funds which provides basic information

to help investors select mutual funds, identify decisions to be made before

making an initial investment choice, and resolve particular problems that

may arise. Over 277,000 copies of the Invest WIsely brochures have been

distributed since March 1994 when the first brochure was released. In July

1995, the Commission released What Every Investor Should Know about Settling

Trades in Three Days, Introducing T +3, which provides basic information on

when investors must settle their securities transactions. Over 8,000 of the

Introducing T+3 brochures were distributed during 1995.

Emphasis on increased participation of individual investors in

Commission rulemaking activities continued in 1995. Several Commission

rule proposals published in plain English, including how risk ought to be

disclosed in mutual funds, how to improve pnces when buying or selling

stocks, and execu tive and director com pens ation disclosure, resul ted in over

5,000 comments being received from individual investors.

Investor town meetings also continued in 1995with over 3,000 investors

attending meetmgs held in Albuquerque, Dallas, Houston, and Nashville.

Sources for Further Inquiry

The agency publishes the SEC Docket, which includes announcements

regarding enforcement actions. SEC litigation releases describe civil

mjunctive actions and also report certain criminal proceedings involving

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

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

dispositron or status of the case, as well as other information. The SEC Docket

also contains Commission orders instituting administrative proceedings,

making findings, and imposing sanctions in those proceedings, and initial

decisions and significant procedural rulings issued by Administrative Law

Judges. In addition, recent litigation releases, orders 10 administrative

proceedings, and other information of interest to investors are posted on

the Internet at the SEC's World Wide Web site (http://www.sec.gov).

20
International Affairs

The Office of International Affairs (alA) has primary responsibility for

the negotiation and implementation of information-sharing arrangements

and the development of other initiatives tofacilitate international cooperation.

alA coordinates and assists in making requests for assistance to, and

responding to requests for assistance from, foreign authorities. alA also

addresses other international issues that arise in litigated matters, such as

effecting service of process abroad and gaihenng foreign-based evidence

under various international conventions, freezing assets located abroad,

and enforcing judgments obtained by the SEC against foreign parties. In

addition, OIA operates in a consultative role regarding the significant

ongoing international programs and initiatives of the SEC's other divisions

and offices. alA is responsible for the SEC's technical assistance programs

for countries with emerging securities markets. alA also consults with and

provides technical assistance to other Federal agencies regarding traderelated issues relevant to the regulation of securities markets in the United

States.

Key 1995 Results

OIA made 230 requests for enforcement assistance on behalf of the

Commission to foreign governments and responded to337requests for enforcement

assistance from foreign governments.

The SECsigned understandings to assist in law enforcement and regulatory

matters wi th Sou th African au thori ties, incl uding the Financial Services Board

(FSB), the Securities Regulation Panel (SRP) and the Office for Banks (OFB).

In addition, the SEC signed declarations of intent with the two South African

securities regulators, the FSBand the SRP,to enter into comprehensive informationsharing Memoranda of Unders tanding (MOU) once the Sou th African bodies

obtain the necessary authority to do so. Also, the SEC signed a declaration

on cooperation with the United Kingdom Investment Management Regulatory

Organization (IMRO) to facilitate information-sharing and joint inspections of

registered investment advisers.

The SEC's leadership role and active involvement in the Council of

Securities Regulators ofthe Americas (COSRA)and the International Orgamzation

of Securities Commissions (lOS CO) have advanced Commission goals for

international regulatory and market oversight issues on a multilateral basis.

During the past year, the membership of COSRA adopted principles of effective

market oversight which describe the mechanisms needed for establishing and

implementing a self-regulatory system for effective market oversight, with an

emphasis on the critical role of government oversight to ensure a balance between

industry self-interest and the public interest. For example, substantial progress

21

,
has been made on developing in ternationally acceptable accoun ting standards

for cross-border offerings, as evidenced by the agreement of the IOSCO Technical

Committee and the International Accounting Standards Committee (IASC) to

a work plan that, when successfully completed, will result in a comprehensive

core set of international accounting standards (lAS). In addition, the IOSCO

Technical Committee jointly issued a paper with the Basle Committee on Banking

Supervision setting forth a framework for regulators to assess information on

the derivatives activities of securities firms and banks.

Arrangements for Mutual Assistance and Exchanges of Information

The SEC has an increasmg need to obtain foreign-based information to

protect the United States markets and Investors from cross-border fraud and

other violations of the United States securities laws. In this regard, the SEC

has developed ways to enhance international mechanisms for effective market

surveillance and information-sharing, and for cooperation in the investigation

and prosecution of cross-border fraud and market manipulation.

The SEC has worked actively to forge strong bilateral and multilateral

relationships with its foreign counterparts. In particular, the SEC has entered

into approximately 25 MOUs and other less comprehensive agreements, to

establish the means for sharing information and providing comprehensive

enforcement assistance in virtually all facets of the securities markets. Such

mechanisms have improved the SEC's ability to detect and prosecute violations

of the United States securities laws where information is needed from abroad.

The SECisusing the relationships established through MOUs to expand cooperation

beyond specific enforcement matters, including, for example, oversight of

investment management activity with U.K. authorities. In addition, the SEC's

commitment to international securities organizations has augmented its bilateral

and multilateral efforts in the enforcement area.

On March 2, 1995, the SECsigned unders tandings wi th key Sou th African

authorities: the FSB,which regulates financial markets and brokerage institutions;

the SRP,which oversees corporate takeovers and mergers and administers insider

trading laws; and the OFB, which supervises the nation's banks. Three sets

of agreemen ts were utilized to reflect the curren t regula tory structure in Sou th

Africa and to make the broades t provisions of assis tance possible in securities

matters. The understandings signed with the FSB and the SRP include both

communiques, which embody each party's commitment to assist in securities

law enforcement and regulatory matters, and declarations ofintent, which signify

the commi tmen t to en ter comprehensi ve informa tion-sharing Memoranda of

Understanding once the South African regulators have obtained the necessary

authority under South African law to implement such agreements. Adeclaration

signed with the OFB should similarly enhance the ability of that body to share

bank-related information critical to market oversight. Thus, the understandings

are the first step of an evolving relationship with the South African authorities.

In addition, in May 1995, the SEC signed a declaration on cooperation

with the U.K.IMRO. The declaration isthe first bilateral cooperative arrangement

focused on the cross-border investment advisory business. It also builds on

the provisions in the SEC's MOU with the U.K. for sharing information and

22
providing assistance relating to cross-border investment management activity,

including, in particular, assistance in conducting on-site inspections of registered

inves tmen tad visers.

The SEC also has been developing and implementing a framework for the

functional regulation of the securities activities of financial conglomerates. In

this regard, the SEC has undertaken initiatives in a number of countries. In

July 1995, the SEC announced a joint initiative with the U.K. Securities and

Investmen tsBoard (SIB)to conduct in-depth studies of the financial, operational,

and management controIs used by selected securi tiesfirms that cond uct significant

cross-border derivatives and secunties activities. This is the first initiative that

brings together the maj or securi ties regula tors in a practical exercise tha twill

lead to a better understanding of each regulator's approaches and contribute

to better information exchange. Itis expected tha t the ini tiative will be extended

to include authorities and firms in other jurisdictions.

Enforcement Cooperation

The table below summarizes the international requests for assistance made

and received by the SEC.

Fiscal year

Type of Request 1991 1992 1993 1994 1995

SEC Requests to

Foreign Governments

Enforcement Assistance 145 191 213 223 230

Enforcement Referrals 6 7 1 2 6

Technical Assistance 0 2 6 1 2

Total 151 200 220 226 238

Foreign Requests to

the SEC

Enforcement Assistance 160 184 232 296 337

Enforcement Referrals 7 11 16 10 10

Technical Assistance 44 58 59 78 119

Total 211 253 307 384 466

In two insider trading cases, the assistance provided under MOUs was

critical to the SEC's successful prosecution of foreign nationals. The case of

SEC v. Morris, Civil Action No. 94-8518 (CBM) (S.D.N.Y.) provides an

excellent example of how the SEC relies on international assistance in its

investigations. This case Involved insider trading in the securities of Hilton

Hotels Corporation by non-United States persons. The suspect trading all

originated in the U.K.and was conducted by persons with no apparent connection

to Hilton. Using the SEC's MOU with U.K. author ities, the SEC obtained

telephone records that made it possible to trace the flow of the non-public

information on which the trading was based. Based on the telephone records,

23
the SECdetermined within a short time period the source ofthe inside informa tion

and the trail that it followed. The SEC obtained a default judgment against

one of the defendants and settled with two additional defendants. Litigation

against a fourth defendant is continuing. The SEC has obtained an aggregate

of approximately $400,000 in disgorgement and $275,000 in penalties.

In another insider trading case, SEC v. Malavasi, Civil Action No. 95-

1691 (D.D.C.), the SEC relied principally on information compelled by the

Italian CONSOB, pursuant to its MOD with the SEC, to successfully bring this

case. The documents produced pursuant to the MOD included bank account

documents identifying the beneficial owners of accounts through which suspicious

trading took place. On September 6, 1995, the SEC filed and settled a civil

action against Giovanni Malavasi, secretary to the Board of Directors of Luxottica

Group SpA. The complaint alleged Malavasi learned of non-public information

concerning Luxottica's plans fora takeover of U.S.Shoe Corporation, and traded

while in possession of this information. Malavasi agreed to disgorge $100,000

and pay a civil penalty of $42,749. The investigation is continuing.

Technical Assistance

The SECprovides technical assistance to emerging securities markets to

assist them in developing the regulatory infrastructure necessary to promote

investor confidence. The SEC's program is comprised primarily of courses

offered at the SEC's headquarters, where a broad range of topics are addressed

to a wide audience in a cost-effective manner. OIAisresponsible for coordinating

the SEC's overall international technical assistance program.

Each spring the SEC hosts the International Institute for Securities

Market Development (the Market Development Institute), an intensive twoweek, management-level training program covering a full range of topics

relevant to the development and oversight of securities markets. The

Market Development Institute is intended to promote market development,

capital formation, and the building of sound regulatory structures in

emerging market countries. The fifth annual Market Development Institute

was held in the spring of 1995, with 96 delegates from 53 countries in

attendance.

The SEC has expanded upon the successful Market Development

Institute concept with a one-week International Institute for Securities

Enforcement and Market Oversight (Enforcement Institute) for foreign

securities regulators. This program promotes market integrity and the

development of closer enforcement cooperation, and includes practical

training sessions on SEC enforcement investigations, investment company

and adviser inspections, broker-dealer examinations, and market

surveillance. Ninety-eight individuals representing fifty-one countries

attended the second annual Enforcement Institute held during the last week

of October 1995.

International Organizations and Multilateral Initiatives

The SEC benefits from the opportunity to better understand foreign

regulations, markets, and practices through participation in multilateral

organizations. Moreover, through its involvement in international organizations,

24
the SEC has the opportunity to promote its views on important issues that

affect the United States securities markets and the SEC's regulatory program,

and help develop international consensus on these issues. During 1995,

the SEC con tribu ted to the work of the following international organizations

and multilateral initiatives:

The International Organization of Securtttes Commissions

IOSCO is an international forum created to promote cooperation and

consultation among regulators overseeing the world's securities markets. With

over 100 members, most of the world's securities regulators are represented.

The SEC plays a leadership role in IOSCO. Over the years, the SEC has been

actively involved in many aspects of the organization's work, particularly in

work relating to: identifying accounting and auditing standards that would be

used in multinational offerings; regulating the secondary market and market

participants; fostering the international enforcement of securities laws; and

promoting international cooperation in connection with cross-border investment

funds.

At laSCO's 1995 Annual Conference, the Technical Committee and the

Board of the International Accounting Standards Committee (IASC) issued a

joint press release announcing that they had agreed upon a work plan that, when

successfully completed, would result in a comprehensive core set ofinternational

accounting standards. Provided the Technical Committee issatisfied with this

core set, it will then be in a position to recommend endorsement of the standards

for cross-border capital raising and listing purposes. During 1995,several other

reports were prepared by working parties and released by laSCO's Technical

Committee. In addition, continued cooperation with the Basle Comrruttee resulted

in a joint report with the Technical Committee on a Framework for Supervisory

Information about the Derivative Activities of Banks and Securities Firms. The

report represents an important step in the ongoing cooperation between securities

and banking regulators to ensure prudent oversight of the securities activities

carried on by securities firms and by banks.

Council 0/ Securities Regulators 0/ the Americas

COSRA provides a forum for mutual cooperation and communication

to enhance the efforts of each country in the Americas and the Caribbean

to develop and foster the growth of sound securities markets that are fair

to all investors. Formed in 1992 by the securities regulatory authorities of

North, South, and Central America, and the Caribbean, COSRA has proven

to have a significant impact on the international cooperative efforts of

securities regulators throughout the region. The SEC actively promoted

the concept of a regional organization and at the Summit of the Americas,

held in Miami in December 1994, the participating governments endorsed

the work of COSRA. COSRA's membership represents both advanced and

emerging markets, and the organization strives to enhance the efforts of

each country to develop and foster the growth of fair and open securrties

markets. Through the development of pnnciples on Transaction

Transparency, Audit Trails, Clearance and Settlement, Cross-border

25
Surveillance of Investment Advisers, Fundamental Elements of a Sound

Disclosure System, and Enforcement Cooperation, COSRA has contributed

to the development of high regulatory standards in the Americas.

At its annual meeting in 1995, COSRA adopted principles of effective

market oversight which describe the mechanisms needed for establishing

and implementing a self-regulatory system for effective market oversight,

WIth an emphasis on the critical role of government oversight to ensure

a balance between industry self-interest and the public interest. COSRA

also agreed on a future work agenda to cover implementation of the Summit

of the Americas' anti-corruption initiatives, an examination of market

structure issues, and enhancement of the capital formation process. Finally,

the Inter-Amencan Development Bank announced its decision to support

and fund COSRA members' efforts to implement COSRA principles and to

host the 1996 annual meeting in Washington, D.C.

Trade .Negotiations

As a result of the globalization of securities markets, the SEC is now

regularly engaged in discussions with fellow regulators on ways to facilitate

cross-border activities, including offerings, securities trading, and the provision

of advisory services. In addition, the SEC increasingly has provided technical

assis tance to the Administration in its negotiations involving trade and market

access issues.

In January 1995, the U.S.-Japan Framework Agreement on Financial

Services was finalized. Among the most significant developments under the

Agreement is the opening of the Japanese public pension fund market to U.S.

fund managers. The Agreementalso liberalized access by investment companies

to the Japanese markets and, in addition, eased restrictions on introduction of

new securities products in Japan.

United States and ASian Markets

The SEC has been working on a bilateral basis with many countries in

the Asia-Pacific region and has in place Memoranda of Understanding or other

formal arrange men ts wi th the regula tory au thorities of several such coun tries,

mel uding China, Japan, and Indonesia. In Apri11995, Chairman Arth ur Levi tt

and New York Stock Exchange President Richard Grasso met with government

officials and business executives in SoutheastAsia with the goal of developing

a strong relationshi p between Sou theas t Asian and U.S. securi ties markets. The

visit included Thailand, Indonesia, Malaysia, and Singapore. The SEC has

provided technical assistance to China, Thailand, and other countries in the AsiaPacific region. The goals of such assistance are to promote and maintain the

stabili ty, efficiency, and in tegri ty of these emerging securities markets and to

encourage the adoption of U.S.-style market structures that are more likely to

be open to Ll.S, market participants and service providers. The SEC is working

to activate direct cooperation and discussion between the SECand the Securities

and Exchange Board of India as partof the U.S. Department of the Treasury's

(Treasury) initiative to renew the activities of the Indo-U'S. EconomidCommercial

Subcommission. The SECalso is working with the Treasury to foster multilateral

cooperation among the financial and regulatory authorities in the Asia-Pacific

region.

26
Regulation of the Securities Markets

The Division of Market Regulation (Division) oversees the operations of

the nation's securities markets and market professionals. In calendar year

1995, the Commission supervised over 8,500 broker-dealers with 58,119

branch offices and over 505,600 registered representatives, 8 active registered

securities exchanges, theNAS Dand the over-the-counter markets, 15registered

clearing agencies, the Municipal Securities Rulemaking Board, and the

Securities Investor Protection Corporation. Broker-dealers filing FOCUS

reports with the Commission had approximately $1.5 trillion in assets and $89

billion in capital in 1995. The Division also monitors market activity, which

has experienced significant growth. At the end of calendar 1995, equity market

capitalization stood at $8 trillion in the United States and $16.5 trillion

worldwide. Average daily trading volume reached 346.6 million shares on the

New York Stock Exchange and 404.6 million shares on the Nasdaq Stock

Market. The fastest growing area has been derivatives activities, where the

approximate notional amount of contracts outstanding at the 6 most active

derivatives dealers and their affiliates is $5.6 trillion, with an aggregate

current net exposure of approximately $39.9 billion.

Key 1995 Results

The Division proceeded with its efforts to enhance the overall efficiency

of the marketplace through its ongoing review of trading systems and

practices. In 1995, the SEC launched an initiative to form the Derivatives

Policy Group (DPG) to address a broad range of issues pertaming to the

derivatives markets. The clearance and settlement system underwent a

major change as the time for settlement of transactions was shortened from

five to three business days. Issuers were provided greater flexibility in

offering dividend reinvestment and stock purchase plans that allow investors

to obtain shares directly from the issuer. The municipal securrties program

made great strides in the area of disclosure and trading systems (market

transparency). The Commission approved and the industry implemented

a program to enhance training of registered representatives by their brokerdealers and to establish requirements for ongoing industry-wide compu terbased training.

Securities Markets, Trading, and Significant Regulatory Issues

Derivatives

The Division continued to be actively involved in numerous derivatives

related projects. During the year, the SEC initiated the creation of the DPG,

consisting of the unregistered affiliates of the six securities firms most active

in the over-the-counter (OTC) derivatives markets. In March 1995, the DPG

27
submitted a report to the SECestablishing a framework for voluntary oversight

of their OTC derivatives activities. The DPG's framework included

recommendations regarding management controls, enhanced reporting,

evaluating risk in relation to capital, and counterparty relationships. In

add Ition, through the SEC's risk assessment program, the Division reviewed

data concerning the de nvatives activities of the matenal affiliates of

approximately 250 securities firms.

In 1995, the Commission approved proposals by five exchanges and

the National Association of Secunties Dealers, Inc. (NASD) to list and trade

warrants based on broad-based indexes." thereby facilitating the trading of new

financial products. Moreover, the Commission amended Rule 3a12-8 under the

Securities Exchange Act of 1934(Exchange Act) to designate the sovereign debt

ofSpain as exempted securities for the purpose offutures trading." and proposed

a further amendment to Rule 3a12-8 to permit futures on Mexican sovereign

debt." Both of these initiatives reflect the Commission's flexibility in adapting

to the increased internationalization of the derivatives markets. Finally, the

Division prepared a memorandum In response to the October 6, 1994 letter of

Representative James Leach concerning the impact of derivatives activities on

the global financial system. The memorandum discussed a variety of actions

the Commission has taken to address the risks of derivatives products.

The Division was actively involved in the Commission's enforcement action

against BT Securities Corporation (BT), arising from the sale of certain OTC

derivative secunties to Gibson Greetings, Inc.57 Concurrent with the settlement

ofthe Commission's action against BT,the Commission issued an order providing

a temporary exemption for persons acting as brokers or dealers with respect

tocertain categories of OTCderivative instruments, to the extent such instruments

are securities, from the broker-dealer registration requirement under Section

15(a) of the Exchange ACt.58 By order, the Commission extended the temporary

exemption until September 30,1996.59 The extension of the exemption isintended

to avoid any dislocation of existing OTC derivatives markets and to allow those

broker-dealers who have not already done so time to move existing business

covered by the exemption into entities that do not rely on the exemption.

The SEC took a leading role in several international efforts to improve

regulatory oversight of the securities industry. In August 1995, the SEC

announced a joint initiative with the United Kingdom Securities and

Investments Board (SIB) to conduct in-depth studies of the financial,

operational, and management controls used by selected securities firms that

conduct significant cross-border derivatives and securities activities. This

joint initiative builds on the joint statement previously issued by the SEC,

the Commodity Futures Trading Commission, and the SIB that identified

several areas in which regulators can cooperate in their oversight of the

OTC derivatives market. The Division participated in several of these indepth joint reviews on domestic as well as foreign securities firms.

Through the SEC's membership in the Technical Committee of the

International Organization of Securities Commissions (IOSCO), the Division

took part in preparing an IOSCO report enti tled, The Implications for Securities

Regulators of the Increased Use of Value at Risk Models by Securities Firms. That

report raised several important issues regarding the use of models for

28
regulatory purposes and concluded that further information and analysis is

required before IOSCO can consider the use of internal models for the purpose

of setting capital standards for market risk. The Division also participated in

the preparation of a paper, issued jointly by IOSCO and the Basle Committee

on Banking Supervision, establishing a framework for supervisors to assess

information on the derivatives activities of secunties firms and banks. This

effortbuilton previous joint efforts by IOSCO and the Basle Committee in the

area of management control mechanisms for derivatives activities.

Clearance and Settlement

The SEC continued to work to enhance all components of the national

clearance and settlement system. In particular, the SEC worked closely with

the SROs, broker-dealers, and industry groups on implementation of a three

business day settlement period (T+3) for broker-dealer trades pursuant to

Rule 15c6-1 under the Exchange Act. Prior to the implementation of the

three-day settlement period, the SEC responded to concerns raised by the

industry and exempted from the rule sales of certain insurance products

and certain foreign securities. The SEC also amended the rule to permit

new issues of securities to settle on an extended time frame under certain

conditions.

The SEC worked closely with registered clearing agencies, brokerdealers, and federal bank regulators such as the Board of Governors of the

Federal Reserve System (FRB), the Federal Reserve Bank of Philadelphia,

and the Federal Reserve Bank of New York to achieve a safe and efficient

conversion to same-day funds settlement, scheduled for implementation in

1996. In February 1996, the payment systems for securities transactions it.e.,

corporate and municipal securities) and principal and interest payments

converted from next-day funds settlement to same-day funds settlement.

The conversion affects payments for settlements among clearing corporations,

depositories, and financial intermediaries and between financial

Intermediaries and their institutional clients. The conversion does not affect

payments to and from retail investors. The same-day funds settlement

system conversion should help reduce systemic risk by eliminating overnight

credit risk.

Proposals to Improve Order Handling and Execution of Customer Orders

On September 29, 1995, the Commission proposed for comment two

rules and two amendments to an existing rule intended to improve the

handling and execution of customer orders in exchange-traded securities

and securities traded over the counter. The proposed rules are intended

to strengthen transparency, enhance order handling, and promote interaction

of customer orders. The proposal recognizes the importance of fair competi tion

among markets and market partici pants and perml ts the securi ties indus try to

select the means to achieve the ends."

29
Automation Initiatives

Pursuant to Rule 17a-23 under the Exchange Act,61the Division received

96 filings for au tomated trading systems. The rule requires brokers and dealers

that operate automated trading systems to maintain participant, volume, and

transaction records, and to report system activity periodically to the Commission.

The staff continued to perform Au tomation Review Policy (ARP) reviews

of the exchanges, Nasdaq, and clearing agencies." The primary purpose of

the ARP program is to monitor and assess the electronic data processing

facilities supporting the transaction and information dissemination activities

of the SROs in their relationship to the national market system. The staff

completed 10 on-site reviews and issued 7 reports, which included 46

recommendations for improvements. Typical recommendations included

the need for back-up facilities for data centers, enhancements to data security

efforts, and better use of capacity planning tools.

The staff received 10 technology briefings from the SROs to ascertain

recent and planned changes and improvements in their au tomated systems.

The staff also assessed the ability of SROs to respond to systems malfunctions

and examined SRO measures to prevent system outages.

Trading Practices Developments

Specialists, The Commission granted an exemption from Rules 10b6 and 10b-13 under the Exchange Act to allow New York Stock Exchange

(NYSE) specialists to continue to act in their specialist capacity during a

distribution of, or a tender offer for, specialty securities when they otherwise

would be subject to those rules because of their affiliates' participation in

such transaction." The exemption requires specialists and their affiliates to

establish procedures to segregate the flow of confidential, market-sensitive

information between a specialist and its affiliates, and notes the

implementation of certain surveillance and notification procedures by the

NYSE.

Dividend Reinvestment and Stock Purchase Plans. The Commission granted

a class exemption from Rule lOb-6 under the Exchange Act for certain

dividend reinvestment and stock purchase plans (DRSPPS).64The exemption

facilitates access to plans by permitting investors to obtain their first shares

of an issuer's securities directly from the issuer, and expands the availability

of these programs to persons other than the issuer's employees and

shareholders. The staff also clarified that an issuer operating a DRSPP may

be acting as a broker-dealer if it induces or attempts to induce the purchase

or sale of its securities; receives compensation based on securities

transactions; or holds and maintains the funds, securities, and accounts of

DRSPP participants. Thus, an issuer operating a DRSPP in this manner either

must limit its activities through the use of an agent that is a broker-dealer or

bank, or register as a broker-dealer.

30
The Commission, acting by delega ted au thori ty, gran ted exemptions pursuant

to Rule 10b-10(e) under the Exchange Act to permit broker-dealers to confirm

automatic dividend reinvestment transactions through the use of monthly account

statements, rather than with immediate confirmations."

Universal Banks. The Commission issued a letter grantmg exemptions from

Rules 10b~6,10b-7, and 10b-8 under the Exchange Act and addressing the effect

of these rules on a universal bank it.e., a non-U.S. entity that engages in both

commercial and investment banking activitiesj." These exemptions rely on the

establishment, maintenance, enforcement, and audit of information barriers to

insulate the activities of affiliated entities to permit activities that otherwise

would be prohibited during the course of a distribution.

lnternationaltzation. The Commission took a variety of actions pertaining

to multinational offerings. For example, consistent with its Statement of

Policy regarding class exemptions for certain foreign issuers that conduct

distributions in the United States," the Commission granted class exemptions

from Rules 10b-6, 10b-7, and 10b-8 under the Exchange Act for distributions

of securities by certain highly capitalized United Kingdom issuers" and for

distributions of certain highly capitalized Dutch issuers." The exemptions permit

distribution participants to effect transactions in the United Kingdom or in The

Netherlands in the security being distributed and related secu nties, subject to

certain disclosure, recordkeeping, record production, and notice requirements.

Municipal Securities

Price Transparency Initiatives. In January 1995, the Municipal Securities

Rulemaking Board (MSRB) began Phase I of its price transparency program,

during which the MSRB produces a daily report of inter-dealer transactions

in the more actively traded municipal securities. In future phases of the

program, the MSRB will collect and publicly disseminate transaction data

for all municipal securities trades. The Public Securities Association (PSA)

is developing ways to reach the public with price data from the MSRB's

daily report and other sources. The PSA, with two information vendors,

initiated production of a generic yield scale of representative municipal

prices for publication in various print media, and established a telephone

service that reports contemporary and historical municipal securities

transaction data to callers for a fee.

Disclosure. Following the publica tion of the Commission's March 1994

interpretive release discussing the disclosure obligations of participants in

the munici pal securities market under the antifraud provisions of the federal

securities laws." in November 1994 the Commission adopted amendments to

Rule 15c2-12 under the Exchange Act to further deter fraud in the municipal

securi ties market." The amendmen ts prohibit broker-dealers from underwri tmg

primary offerings of municipal securities unless they have determined that

continuing disclosure about the municipal securities, in the form of annual

financial information and notices of certain matenal events, WIllbe provided

to various information repositories, including Nationally Recognized Municipal

Securities Information Repositories (NRMSIRs)and state information depositories

(SIDs). Material event notices also may be provided to the MSRB. The

amendments also prohibit broker-dealers from recommendmg the purchase or

31
sale of a municipal security in the secondary market unless they have procedures

in place that assure that they will receive promptly certain material event

informa tion disclosed abou t tha tsecuri ty.

The amendments, which were phased in between July 3, 1995and January

1,1996, allow municipal issuers and underwriters time to implement necessary

procedures to facilitate compliance with the amendments.

On June 23, 1995 and September 19, 1995, the Division issued letters

to the National Association of Bond Lawyers." These letters provide extensive

guidance about the amendments to Rule 15c2-12.

Information Repositorzes. In 1995, the Division announced the designation

of six applicants as NRMSIRs for purposes of Rule 15c2-12.73 The designated

NRMSIRs are: (1) Bloomberg L.P. of Princeton, NJ; (2) Thomson Municipal

Services, Inc. of New York, NY; (3) Disclosure, Inc. of Bethesda, MD; (4)

Kenny Information Systems of New York, NY; (5) Moody's Investors Service

of New York, NY; and (6) R.R. Donnelley of Hudson, MA.

The Commission also announced the recognition of SIDs located in

Texas, Michigan, and Idaho. In adopting the amendments to Rule 15c2-12/4

the Commission stated that an appropriate SID would be a depository

operated or designated by the state that receives information from all

Issuers within the state, and makes this information available promptly to

the public on a contemporaneous basis." A state may designate a SID through

legislative or executive action.

Broker-Dealer Regulation

Extension of Credit. An important area currently under debate in the

industry and at the Commission is the role that margin should play in

today's securities markets, and what steps can be taken to improve the

present scheme for federal margin requirements. In 1995, the Commission

worked with Congress, the industry, and other regulators to develop margin

proposals that would address concerns raised about the current margin

scheme while maintaining the safeguards arising from margin standards.

The staff also issued several no-action letters clarifying its position

with respect to the application of the extension of credit prohibitions of

Section l1(d)(l) of the Exchange Act. For example, the staff granted noaction relief from Section l1(d)(l) with respect to installment payments for

an ini tial offering of Canadian securities sold to a limited number of Qualified

Institutional Buyers in the United States pursuant to Rule 144A under the

Securities Act of 1933.76 The staff also issued no-action relief under Section

11(d)(1) in connection with the offer and sale by a company of certain

securities issued as units generally consisting of a Treasury note and a

purchase contract under which the holder would purchase stock of the

company at a future date."

Networkzng Arrangements. Having issued numerous no-action letters

addressing networking arrangements among registered broker-dealers,

insurance compames, and insurance agencies in connection with the offer

and sale of insurance securities products, the Division issued a

comprehensive, definitive letter describing in detail the conditions under

which these arrangements may be conducted without the insurance agencies

32
or their unregistered employees registering as broker-dealers under Section 15

of the Exchange ACt.78 In that letter, the Division expressly stated that it will

no longer respond to no-action requests in this area unless the request presents

novel or unusual issues.

Confirmation Disclosure. On November 10, 1994, the Commission adopted

amendments to its confirmation rule, Rule 10b-l0 under the Exchange Act,

to require brokers and dealers to disclose: (1) if they are not members of

the Securities Investor Protection Corporation (SIPC) (except, in limited

circumstances, for transactions in mutual fund shares); (2) when a debt

security is not rated by a nationally recognized statistical rating organization;

(3) the availability of yield information with respect to transactions in

collateralized debt securities; and (4) mark-ups and mark-downs in certain

Nasdaq and regional exchange-listed securities that are subject to last sale

reporting, but are not technically "reported securrties" under Rule llAa3-1

under the Exchange Act.79 The amendments also added a preliminary note

clarifying that the confirmation disclosures required by Rule 10b-l0 may

not represent all the disclosure required under the antifraud provisions of

the federal securities laws. The Cornrrussion deferred acting on a proposal

to require disclosure of mark-ups in riskless principal transactions in debt

securities, to allow the industry time to develop enhanced price mforrnation

in the markets for those securities.

The Commission, acting by delegated authority, exempted certain

limited purpose broker-dealers from the requirement to disclose that they

are not members of SIPC.80 The Commission, acting by delegated authority,

also clarified the confirmation delivery requirements of broker-dealers

regarding accounts managed by third-party fiduciaries and the requirements

with respect to disclosure of the unrated status of a debt security."

Supervision of Conglomerates. The Division participated in an

international effort by securities, banking, and insurance regulators to

address regulation of financial conglomerates. This effort led to the issuance

of a paper in April 1995 entitled, The Supertnsion of Financial Conglomerates,

recognizing several effective methods of grou p supervision of conglomerates.

The Division will pursue work on practical issues in this area through a

recons titu ted tri parti te group.

Application for Broker-Dealer Registration. The Commission proposed

for public comment amendments to Form BD, the uniform broker-dealer

registration form under the Exchange ACt.82 The amendments to Form BD

respond to design updates to the Central Registration Depository system

operated by the NASD, which ultimately will allow for electronic filing of

Form BD, as well as Forms U-4 and U-5 (the uniform form used to terminate

broker-dealers and their associated persons with the Commission, the states,

and the SROs). Amendments to the disclosure section of Form BD, where

most of the changes are proposed to be made, would provide regulators

with better information about an applicant's disciplinary history. The

amendments also propose, among other things, new items to Form BD to

obtain more accurate information with respect to u.s. broker-dealers that

33
have foreign owners, broker-dealers that are affiliated with Ll.S. or foreign

banks, and broker-dealers that conduct securities activities on the premises

of financial institutions.

Money Laundering. The Division continued to work with the Financial

Crimes Enforcement Networkof the Treasury to develop practical approaches

to combat money laundering. The Division participated in the Bank Secrecy

Act Advisory Group and in the United States delegation to the Financial

Action Task Force on Money Laundering, and the independent group of

major financial center countries and regions, which is provided technical

advice with respect to potential enforcement matters.

Arbitration. The Commission worked closely with the principal SRO

arbitration forums to address key challenges facing the arbitration systems

identified by the Commission and others interested in the arbitration process.

Accordingly, the Commission encouraged the work of the NYSE Symposium

on Arbitration and the NASD Arbitration Policy Task Force, which were

established to meet these SRO responsibilities.

The Commission approved proposed rule changes by the NASD and

national secunties exchanges designed to enhance the procedures for

resolving disputes among broker-dealers and between broker-dealers and

investors. In particular, the Commission approved amendments to arbitration

rules that (1) establish a mediation program." (2) implement a pilot program

forseeking injunctive relief in intra-industry disputes." (3)implement a voluntary

pilot program admimstering large and complex cases." and (4) enable the NASD

to discipline members that fail to honor settlement agreements reached in the

arbitration or mediation process."

Unlisted Trading Privileges

Pursuant to rulemaking requirements of the Unlis ted Trading Privileges

(UTP) Act of 1994, the Commission adopted new rules and amendments

to existing rules under Section 12(f) of the Exchange Act on April 21, 1995.87

The rules reduced the period that exchanges must wait before extending

UTP to any listed initial public offering (IPO) from the third trading day

in the IPO, as the UTP Act of 1994 had required temporarily, to the second

trading day in the IPO. The rules also require exchanges to have rules and

oversight mechanisms in place to ensure fair and orderly markets and the

protection of investors with respect to UTP in any security.

The Joint Industry Plan for UTP in OTC Securities (OTC/UTP Plan),

operating under temporary Commission approval, permits exchanges to

trade Nasdaq/national market securities subject to the terms of the OTC/

UTP Plan. On August 14, 1995, the Commission extended the temporary

approval of the Plan, and increased the number of Nasdaq/national market

securities that a participant exchange may trade from 100 to 500.88

Transfer Agent Regulation

The Commission solid ted commen t on the concept of establishing electronic

links between issuer shareholder registration systems and broker-dealer

recordkeeping systems. As discussed in the concept release, one benefit ofsuch

34
links would be the opportunity for issuers to offer" account statements" in lieu

of certificates to their shareholders and for shareholders to move their shares

efficiently to their brokerage firms within the three-day settlement cyclemanda ted

by Rule 15c6-1.89

The Commission adopted Rule 17Ad-16, which requires transfer agents

to notify securities depositories when assuming or terminating services on

behalf of an issuer or when changing their names or addresses. 90 The Commission

also released for comment amendments to its transfer agent rules which are

designed to address investor concerns resul ting from direct registration systerns

and shorter trade settlement time frames it.e , T+3 settlement)."

Lost and Stolen Securities

Rule 17f-1 under the Exchange Act sets forth participation, reporting,

and inquiry requirements for the SEC's Lost and Stolen Securities Program."

Statistics for calendar year 1994 (the most recent data available) reflect the

program's continuing effectiveness. As of December 31, 1994, 24,518

institutions were registered in the program, a 2 percent increase over 1993.

The number of securities certificates reported as lost, stolen, missing, or

counterfeit increased from 1,634,161 in 1993 to 2,954,692 in 1994, an 81

percent increase. The dollar value of these reported certificates decreased

from $4.0 billion in 1993 to $3.8 billion in 1994, a 5 percent decrease. The

aggregate dollar value of the securities contained in the program's database

increased from $92.6 billion in 1993 to $96.4 billion in 1994, a 4 percent

increase. The total number of certificates inquired about by participating

institu tions through the program decreased from 6,553,308 m 1993 to 6,245,375

in 1994, a 5 percent decrease. In 1994, the dollar value of certificate inquiries

that matched previous reports of lost, missing, stolen, or counterfei tsecurities

decreased from $252 million in 1993 to $159 million in 1994, a 37 percent

decrease. The total number of these matches increased from 69,769 in 1993

to 269,001 in 1994, a 286 percent increase.

Oversight of Self-Regulatory Organizations

National Securities Exchanges

As of September 30,1995, there were eight active securities exchanges

registered with the SEC as national securities exchanges: American Stock

Exchange (AMEX), Boston Stock Exchange (BSE), Chicago Board Options

Exchange (CBOE), Cincinnati Stock Exchange (CSE),Chicago Stock Exchange

(CHX), NYSE, Philadelphia Stock Exchange (PHLX), and Pacific Stock

Exchange (PSE). The agency granted exchange applications to delist 91 debt

and equity issues, and granted applications by issuers requestingwithdrawal

from listing and registration for 69 issues.

The exchanges submitted 364 proposed rule changes during 1995. A total

of 317pending and new filings were approved by the Commission, and 46were

withdrawn. Notable rule filings approved by the Commission included proposals:

to adopt uniform enabling rules submitted by the AMEX,CBOE, CHX,

MSRB, NASD, NYSE, PSE, and PH LX for the implementation of a

continuing education program for the securities industry:"

35

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to extend through March 29,1996 the existing pilot program of the CSE

relating to the preferencingof public agency market and marketable limit

orders by approved dealers and proprietary members."

to amend and extend through March 29, 1996 the existing pilot

program of the BSE that permits competing specialists on the floor

of the BSE;95 and

to adopt a minimum voting rights policy for shareholders of publicly

traded securities submitted by the NYSE, AMEX, and NASD.96

National Assoczation of Securities Dealers, Inc.

The NASD is the only national securities association registered with

the SEC and includes more than 5,400 member firms. Through a whollyowned subsidiary, the NASD owns and operates the Nasdaq Stock Market,

which trades more than 5,700 securities and is the second largest stock

market in the United States and the world (after the NYSE).

The NASD submitted 70 proposed rule changes to the Commission

during the year. The Commission approved 66 proposed rule changes which

included proposed rule changes submitted during the year and several

proposed rule changes submitted in prior years. Among the significant

changes approved by the Commission were:

a prohibition against a Nasdaq market maker trading ahead of any

customer limit order in a Nasdaq security sent to it for execution

from another broker-dealer;"

a restriction against certain persons receiving securities prior to

the public offering when these securities trade at a premium in the

secondary market (the rule does not restrict bona fide distributions

of hot issues to the public);"

requirements for filing and review of advertising and sales literature."

a requirement that all NASD members report customer complaints

to the NASD, including quarterly summary statistics concerning

cus tomer com plain ts; 100

establishment of internal procedures relating to the review of requests

for exemptions from Rule G-37 of the MSRB relating to restrictions

on poli tical contribu tions; IOJ

procedures governing the administration of mediation proceedings; 102 and

an amendmen t to allow nonmembers to receive real-time access to view

all orders "broadcast" through the NASD's SelectNet Service.l'"

Munzcipal Securities Rulemaking Board

The MSRB IS charged with the primary rulemaking authority for

municipal securities dealers. The SEC received 18 new proposed rule

changes from the MSRB. A total of 23 new and pending proposed rule

changes were approved by the Commission. In particular, the Commission

approved amendments to MSRB Rule G-15(a) to clarify the current customer

confirmation requirements in municipal securities transactions.l?'

36

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•

•

•

•

•

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Clearing Agencies

Fifteen clearing agencies were registered with the SEC at year-end.

In addition, the SEC extended the temporary registration as a clearing

agency of the Participants Trust Company, 105MBSClearing Corporation.!" Delta

Government Options Corpora tion, 107and the Governmen t Secun ties Clearing

Corpora tion (GSCC).108

Registered clearing agencies submitted 157 proposed rule changes to

the SEC and withdrew 9. The SEC approved 148 proposed rule changes,

including the following:

implementation of the first stage of GSCCs proposed clearance and

settlemen tsystem for repurchase agreemen ts; 109

implementation of the National Securities Clearing Corporation's

(NSCC) Collateral Management Service, which allows clearing agency

participants to view information regarding their cleanng fund and

margin deposits at NSCC and other registered cleanng agencies and

allows registered clearing agencies to view the same type of

information about their participants atother registered clearing agencies; 110

and

implementation of the Options Clearing Corporation's Stock Loan/

Hedge Program for specialist and market maker accounts, which

allows stock loan and borrow transactions in these accounts to

constitute hedges against stock option positions for purposes of

margin calculation."!

Applications for Re-entry

Rule 19h-1 under the Exchange Act prescribes the form and content

of, and is the mechanism by which the Commission reviews, proposals

submitted by SROs to allow persons subject to statutory disqualification,

as defined in Section 3(a)(39) of the Exchange Act, to become or remain

associated with member firms. In 1995, the Commission received 41 filings

submitted by SROs pursuant to Rule 19h-1. Of the 41 filings, the NASD

made 32, the NYSE made 8, and the CHX made 1. No applications were

denied; three were withdrawn.

37

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Investment Management Regulation

The Division of Investment Management oversees the regulation of

investment companies and investment advisers under two companion statutes,

the Investment Company Act of 1940 and the Investment Advisers Act of

1940, and administers the Public Utility Holding Company Act of 1935.

Key 1995 Results

In 1995, a large part of the work of the Division of Investment

Management focused on three areas: (1) improving and simplifying

communications to investment company shareholders; (2) reducing

operational burdens on investment companies; and (3) modernizing the

regulation of public utility holding companies. Key steps taken to improve

disclosures to investment company shareholders included an initiative to

simplify investment company prospectuses and to improve risk disclosure

The Commission permitted a test group of eight mutual fund groups to

provide their Investors with a short prospectus summary, or "profile," that

would accompany the prospectus currently provided to investors. The

Commission also issued a concept release seeking public comments and

suggestions on how to improve the descriptions of risk provided by

investment companies, including whether to require some form of

quantitative risk measure in investment company prospectuses.

The Commission adopted rules under the Investment Company Act

of 1940 (Investment Company Act) to allow a single mutual fund to offer

multiple classes of shares with different sales charge arrangements and to

permit mutual funds to impose certain types of deferred sales loads. These

rules give funds greater flexibility to tailor their sales load arrangements

without having to seek exemptive relief from the Commission. The

Commission also proposed amendments to the Investment Company Act

rule governing the custody of fund assets outside of the United States. The

proposed amendments would reduce the burdens currently placed on fund

directors in reviewing foreign custody arrangements and provide funds

with significantly more flexibility to select foreign custodians without

sacrificing Investor protection.

The Division issued a report, The Regulation of Public Utility Holding

Companies, which describes the results of the staff's study of the regulatory

framework of the Public Utility Holding Company Act of 1935 (Holding

Company Act) in light of recent developments in the gas and electric utility

industry. The primary recommendation of the report is that Congress

should repeal the Holding Company Act and simultaneously provide

necessary authority to state regulators and the Federal Energy Regulatory

Commission to ensure the continued protection of consumers. The report

also recommends a number of proposals for administrative reform.

38

I
Significant Investment Company Act Matters

Rulemaking

The Commission adopted and proposed for amendment several rules

under the Investment Company Act. A description of some of these rules

is provided below.

Multiple Class Structures. In February 1995, the Commission adopted Rule

18f-3, which permits open-end management investment companies to issue

mul tiple classes ofshares with varying arrangements for the distribu tion of their

shares and the provision ofservices to their shareholders.!" Rule 18f-3eliminates

many of the requirements Imposed under prior Commission exemptive orders

governing multiple class structures and enables investment companies to issue

mul tiple classes withou t obtaining exem ptive relief from the Commission. The

Commission also amended the registration form for open-end management

investment companies under the Investment Company Act and the Securities Act

of 1933 (Securities Act). The amendment prescribes prospectus disclosure

requirements for multiple class investment companies and master-feeder

arrangements, which consist of one or more" feeder" investment companies that

invest in the same portfolio, or "master" investment company. A conforming

amendment was made to Rule 12b-1 under the Investment Company Act, which

governs the payment of asset-based sales charges.

Deferred Sales Loads. In February 1995, the Commission adopted Rule

6c-lO, which permits open-end management investment companies to Impose

contingent deferred sales loads (i.e., a sales load paid at redemption that

declines over several years un til it reaches zero) wi thou t obtaining exemptive

relief from the Comrnission.J'? At the same time, the Commission proposed

for comment amendments to Rule 6c-10 that would give open-end

management investment companies greater flexibility to impose a wider

variety of deferred sales loads, such as loads that are paid in a series of

installments.'!' The Commission also proposed for comment amendments to

the registration form for open-end management investment companies under the

Investment Company Act and the Securities Act to modify the prospectus

disclosure requirements for deferred sales loads.

Foreign Custody. In July 1995, the Commission proposed for comment

amendments to Rule 17f-5, which governs the custody of investment company

assets outside the United States.ll5 The proposed amendments would (a) revise

the findings that currently must be made in establishing foreign custody

arrangements to focus exclusively on the safekeeping of investment company

assets, (b) permit an investment company's board of directors to delegate its

responsibilities under the rule to evaluate these arrangements, and (c) expand

the class of foreign banks and securities depositories that could serve as

investment company custodians. The amendments are designed to reduce the

burdens currently placed on investment company directors in reviewing foreign

custody arrangements and to provide investment companies with significantly

more flexibility to select foreign custodians without sacrificing investor protection.

Personal Investment Activities. In September 1995, the Commission

proposed for comment amendments to Rule 17j-1 under the Investment

Company Act, Rule 204-2 under the Investment Advisers Act of 1940

39
(Investment Advisers Act), and investment company registration forms

under the Investment Company Act and the Securities Act.116 The proposed

amendments would effect the recommendations made by the staff in

connection with its 1994 study of the personal Investment activitIes of

investment company personnel by enhancing investment company oversight

of personal investment activities. requiring public disclosure of personal

Investment policies, and making the scope of Rule 17j-1 more consistent

with its purpose.

Rule 24f-2. In February 1995, the Commission proposed for comment

amendments to Rule 24f-2 and new Form 24F-2.117 Rule 24f-2 permits openend investment companies to register an indefinite number of shares under

the Securities Act, to net redemptions agains t sales in determining Securi ties

Act registration fees, and to pay registration fees on an annual basis. The

amendments are designed to clarify the application of certain provisions

of Rule 24f-2, to make the rule's filing deadlines more flexible under certain

circumstances, to improve the accuracy of information required to be filed

under Rule 24f-2, and to improve the agency's ability to process the filings.

The amendments were approved by the Commission in September 1995.

Quarterly Report Proposal. In July 1995, the Commission proposed for

comment new Rule 30b3-1, which would require money market funds to

file electronically with the Commission quarterly reports detailing their

portfolio holdings.'!" The information in the proposed reports would substantially

improve the ability of the examination staff to monitor money market funds

for compliance with the Investment Company Act.

Safe Harbor. In July 1995, the Commission proposed for comment new

Rule 3a-4, which would provide a safe harbor from the definition of

investment company for certain programs under which professional portfolio

management services are provided to numerous individual clients.':" Ifadopted,

the rule would establish a non-exclusive method by which such programs can

opera te wi thou t being subject to the requiremen ts of the Inves tmen t Company

Act.

Exemptive Orders, No-Action Letters, and Interpretations

In 1995, the Commission issued exemptive orders permitting, among

other things, investment advisers of multi-manager funds to hire subadvisers without shareholder approval, the operation of "funds of funds,"

and the sale of interests in unit investment trusts subject to a non-contingent

deferred sales load. The staff issued no-action letters and interpretations

under the Investment Company Act concerning, among other things,

aggregated trades, segregation requirements for short seIling, joint borrowing

arrangements, foreign custody, issuers of asset-backed securities, and

affiliated transactions.

Sub-advisers. The Commission issued orders permitting certain

investment advisers to multi-manager investment companies to hire subadvisers for the funds and to make material changes to sub-advisory contracts

without approval by the funds' shareholders, provided that shareholders

are provided with an information statement containing substantially all

information that would otherwise be included in a proxy statement concerning

new sub-advisers and material changes to the sub-advisory contracts. In addition,

40
the orders allow the funds to disclose sub-advisory fees for each fund in

their prospectuses and other reports in the aggregate, without separately

disclosing each sub-adviser's feeYo-

"Funds of Funds." The Commission issued orders permitting certain

mutual funds to operate as "funds of funds" -funds that invest their assets

in affiliated investment companies.!" The orders supersede prior orders'F and

permitthe funds to acquire up to 100percent of the voting shares of any mutual

fund in the same family of funds. Congress is considering legislation that

similarly would facilitate the operation of mu tual funds that invest substantially

all of their assets in other funds in the same fund farnily.!"

Unit Investment Trusts. The Commission issued orders permitting certain

unit investment trusts (UITs) to be sold subject to a non-contingent deferred

salesload, provided the load isdisclosed in the fee table in the UITs' pros pectuses.!"

Aggregated Trades. The staff stated tha tit would not recommend enforcement

action under Section 17(d) ofthe Investment Company Act,Rule 17d-1thereunder,

or Section 206of the InvestmentAdvisers Act if an investment adviser aggregates

trades on behalf of its mutual fund clients and other clients, including clients

in which the adviser has a proprietary interest, provided that trades are aggregated

and allocated fairly and equitably.!"

Segregation Requirements. The staff, modifying an earlier posi tion, stated

that it would not recommend enforcement action under Section 18(f) of the

Investment Company Act if a fund that engaged in short selling maintained in

a segregated account assets having a value that, when combined with the value

of collateral deposited with a broker in connection with the short sale, equals

the current market value of the security sold short.!" The staffs prior position

required the segregated account to maintain assets at least equal in value to

the current market value of the securities sold short but in no event less than

the market value of the securities when they were sold short.

Committed Line of Credit Arrangement. The staff stated that it would not

recommend enforcement action under Section 17(d) of the Investment Company

Act or Rule 17d-l thereunder if affiliated funds jointly entered into a committed

line of credit arrangement with a bank to provide the funds with a source of

cash to meet unanticipated redemption requests. The arrangement was subject

to condi tions designed to ensure tha teach fund's partici pa tion in the arrangemen t

would be equitable and in the fund's best interests.!"

Custodial Arrangements. The staff stated that it would not recommend

enforcement action under Section 17(f) of the Investment Company Act or

Rule 17f-5 thereunder if a closed-end fund held Russian equity securities

under certain custodial arrangements that were not contemplated when

Rule 17f-5was adopted.!" Under Russia's unique share registry system, equity

securities of Russian issuers are maintained in book-entry form by registrars

located throughoutRussia. The fund's proposed arrangements included monitoring

the registrars, enhancing oversight by the fund's board of directors, and providing

prominent prospectus disclosure of the risks posed by the Russian registry system.

Asset-backed Securities. The staff issued a no-action letter that provided

guidance regarding the scope of Rule 3a-7 under the Investment Company

Act, which excludes certain issuers of asset-backed securities from the

41
definition of investment cornpany.!" The staff emphasized that issuers

relying on the rule must be engaged solely in the business of acquiring and

holding eligible assets, as defined in the rule, and in activities" related or incidental"

thereto, e.g., only those that support or further the entity's business of acquiring

and holding eligible assets.

Investment Series. The staff stated that separate series of a series

investment company should be treated as separate investment companies

for purposes of Section 17 of the Investment Company Act, which generally

prohibits transactions between funds and their affiliated persons and

affiliated persons of such affiliated persons. The staffs position permitted

a broker-dealer to engage In transactions with a particular series of a series

investment company when an affihate of the broker-dealer serves as subadviser to another series of the same company.P?

Separate Investment Accounts. The staff stated that it would not

recommend enforcement action if a fund's total return, as quoted in its

prospectus, statement of additional information, advertisements, and sales

literature, included the performance of certain predecessor unregistered

separate investment accounts (SIAs) for the periods prior to the effective

date ofthe fund's registration staternent.P' Reliefwas based on the representations

that the registered fund would be managed in a manner that is in all material

respects equivalent to the management of the corresponding SIA,and that the

SIAs were created for purposes entirely unrelated to the establishment of a

performance record.

Insurance Company Matters

The staff stated that it would not recommend enforcement action

under Section 17(a) of the Securities Act and Rule 156 thereunder if certain

variable annuity contracts used supplemental sales materials reflecting

hypothetical rates of return illustrating both the accumulation and

distribu tion periods.!" The issuer has developed an interactive compu ter software

program that permits investors to input personalized financial data and then to

compare the hypothetical performance of the annuity with the hypothetical

performance of mutual funds.

The Division clarified the application of Rule 24f-2 under the Investment

Company Act to the two-tier arrangements used in offering variable insurance

contracts to investors.f" Under these arrangements, underlying funds may

calculate and pay their Securities Act registration fees pursuant to Rule 24f-2

based on all of their sales and redemptions during the previous fiscal year,

exclusive ofsales to and redemptions from insurance company separate accounts

that already paid such fees.

Disclosure Matters

The Commission took several key initiatives to improve disclosures

to investment company shareholders, including issuing a concept release

and testing "profile" prospectuses. The most significant initiatives are

described below.

42
Risk Disclosure. In March 1995, the Commission issued a concept release

requesting comment on how investment companies could improve disclosure

about their risks. Toencourage individual investors to comment, the Commission

also issued with the release a summary targeted to individual investors. Over

3,700 comments were received and were being evaluated at year-end. The staff

also worked closely with several fund groups to develop simplified prospectuses

by elimmating technical jargon and legal prose.

Profile Prospectus. InAugust 1995, the Commission permitted a test group

of eight mu tual fund grou ps to provide their investors with a" profile" prospectus,

which would accompany the prospectus currently provided to investors. Each

profile briefly outlines 11disclosure items, including information regarding the

fund's investment objectives; investment strategies; risks and appropriateness

of investment; fees and expenses; past performance; investment adviser; and

purchase, redemption, and distribu tion procedures. The use of profiles is being

undertaken initially for a one-year test period to determine, among other things,

whether investors find them helpful regarding investment decisions.

Reporting of Expenses. In July 1995, the Commission adopted amendments

relating to the reportmgof expenses by investment companies.!" The amendments

require investment companies to reflect as expenses certain of their liabilities

paid by broker-dealers in connection with allocating brokerage transactions to

such broker-dealers and liabilities reduced by certain expense offset arrangements.

The amendments also require investment companies to disclose the average

commission rate paid. The amendments are designed to enhance the information

provided to investors so that they may be better able to assess and compare

investment company expenses and yield information.

Money Market Fund Short Form Prospectus. In July 1995, the Commission

proposed for comment amendments to Form N-1A, the form used by openend inves tmen t companies to register securi ties.!" The proposed amend men ts

are designed to promote the use of money market fund prospectuses that

are shorter, more informative, and readily understandable to investors.

Filings Reviewed

In 1995, the staff reviewed 68 percent of the 2,321 new portfolios filed

(however, more than 90 percent of new open-end and closed-end portfolios

were reviewed), 84 percent of the 711 proxy statements filed, and 12 percent

of the 15,258 post-effective amendments filed with the Commission. The

post-effective amendments included 378 registration statements filed in

connection with fund mergers, which are among the most complex filings

made by investment compames. Increased merger activity by investment

companies resulted in a 36 percent increase in the number of merger

registration statements filed, all of which were reviewed. These figures

include filings by insurance product separate accounts.

43
Significant Investment Advisers Act Developments

Rulemaking

In February 1995,the Commission proposed for public comment new Rule

204-4 and Form ADV-Bunder the Investment Advisers Act that would require

certain investment advisers to provide clients with an annual report regarding

the brokerage commissions they pay and the advisers' receipt of research and

other "soft dollar" benefits from those commissions.!"

No-Action Letters and Interpretations

In 1995, the Division issued no-action letters and interpretations under

the Investment Advisers Act concerning, among other things, registration

and electronic record keeping.

Registration, The staft sta ted tha tit would not recommend enforce men t

action under Sections 203 and 208(d) of the Investment Advisers Act if

certain affiliates of a registered investment adviser did not themselves

register as investment advisers under Section 203, where (a) the affiliates

would not be providing any investment advice, (b) the affiliates and each

of their employees would be deemed "associated persons" of the registered

adviser when provided access to recommendations of the registered adviser,

and (c) the staff would be provided with access to the books and records

of the affiliates to the extent necessary to examine the business of the

registered adviser.!"

Electronic Recordkeeping. The staff stated that it would not recommend

enforcement action under the recordkeepmg rules under the Investment

Advisers Act and Investment Company Act if advisers that use a service

offering on-hne access to research reports do not maintain hard copies of

all reports consulted.!"

Interagency Agreement

The staff also participated in the drafting and negotiation of an

agreement between the Commission and the Office of the Comptroller of

the Currency to conduct joint examinations of national banks, and their

subsidiaries that advise mutual funds, and the funds they advise. This

agreement should minimize the burdens on such banks and bank-advised

funds, reduce regulatory costs, and enable the staff to obtain access to

certain bank records even though the bank itself is not registered as an

investment adviser.

Significant Holding Company Act Developments

Recent Study

In June 1995, the Division issued a report, The Regulation of Public Utilzty

Holding Companies, which describes the results of the staff's study of the

regulatory framework of the Holding Company Act in light of recent

developments in the gas and electric utility industry.!" The primary

44
recommendation of the report is that Congress repeal the HoldingCompany Act

conditioned upon the enactment of provisions (1) to ensure state regulators and

the Federal Energy Regulatory Commission access to books and records of

companies in multi-state, public utility systems and (2) to provide for federal

audit authority and oversight of affiliate transactions. The report also includes

legislative and administrative proposals intended to update and streamline the

regulatory structure governing public utility holding companies.

Rulemaking

The Commission adopted rule amendments that exempt from

Commission review certain additional types of securities that both public

utility and non-utility subsidiaries of registered holdmgcompanies may issue.':"

The Commission also proposed amendments to broaden the exemption to include

all securities issued by a subsidiary company of a registered holding company.!"

The Commission further proposed a new rule that would exempt from CommISSIOn

review the holding company system's investments in energy-related activities

of amounts up to the greater of 15 percent of the holding company's total

capitalization or $50 million. The rule also would exempt without lirrut

investments by registered gas companies in gas-related activities.!"

Registered Holding Compantes

As of September 30,1995, there were 15 public utility holding companies

registered under the Holding Company Act. The registered systems were

comprised of 97 public utility subsidiaries, 14 exempt wholesale generators,

35 foreign utility companies, 229 non-utility subsidiaries, and 47 inactive

subsidiaries, for a total of 437 companies and systems with utility operations

in 26 states. These holding company systems had aggregate assets of

approximately $136 billion and operating revenues of approximately $46

billion as of September 30, 1995.

Financing Authorizations

During 1995, the Commission authorized registered holding company

systems to issue approximately $22.9 billion of fmancing authorizations, an

increase of 31 percent over 1994. The total financing authorizations included

$4.9 billion of investments in exempt wholesale generators and foreign

utility companies, an increase of 1,072 percent over 1994, and investments

of $172 million in enterprises engaged in energy management.

Examinations

The staff examined 9 service companies and 1 special purpose corporation.

The staff reviewed the accounting policies, cost determination procedures,

intercompany transactions, and quarterly reports of these service companies and

special purpose corporations. Through the examina tion program and by uncovering

misallocated expenses and inefficiencies, the Commission's activities during

1995 resulted in savings to consumers of approximately $18.5 million.

45
Applications and Interpretations

In 1995,the Commission issued various orders under the HoldingCompany

Act. Four of the most significant orders are described below.

CINergy Corporation, CINergy Corporation became a new registered

holding company following the Commission's approval ofits acquisition, through

merger, of the Cincinna ti Gas & Electric Company and PSI Resources, Inc.143

Southern Company The Commission authorized the Southern Company

to invest approximately $179 million in a new subsidiary that will provide

wireless communications services toboth associate and nonassociate companies.!"

Also,the Commission approved a percentage limitation upon the new subsidiary's

transactions with nonassociates based on the investment needed to provide

services to associate and nonassociate companies, respectively. The Commission

suggested ItS willingness to consider a more flexible standard in the area of

diversification, consistent with the language of Section 11(b)(1) of the Holding

Company Act. In another decision, the Commission removed a revenue-based

percen tage hrni tation on the acti vities of an energy manage men tsubsidiary of

a registered holding company. Cited, among other things, were the financial

health of the subsidiary; the benefits that consumers had derived from its

operations; and Congress' goal of encouraging energy security, efficiency,

competition, and environmental quality, all of which are promoted by the energy

management services industry.!"

Central and South West Corporation. The Commission authorized Central

and South West Corporation, a registered holdmg company, and its service

company subsidiary, Central and South West Services, Inc. (CSW Services),

to consohda te and cen tralize in CSW Services certain service and managemen t

activities that were previously conducted Individually by the operatmg

companies of the registered system. The Commission determined that (a)

the procedures to be used to authorize, monitor, and control the rendering

of services by CSW Services to the operating companies should be adequate

to enable management to control the cost, quality, and level of services

received from CSW Services, and (b) its approval of the restructuring did

not preclude the state regulatory authorities from scrutinizing and

disallowing the pass-through of costs in rates for services rendered by CSW

Services. 146

Columbia Gas System, Inc. The Commission approved the bankruptcy

reorganization plan of the Columbia Gas System, Inc.147 and, in light of the

extensive disclosure available to investors, integrated its report on the plan

therewith.

46
Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations, together with

the regional office examination staff, conducts the nationwide compliance

inspections and examinations program for regulated entities, as authorized by

the Securities Exchange Act of 1934, the Investment Company Act of 1940,

and the Investment Advisers Act of 1940. These entities include brokers,

dealers, municipal securities dealers, self-regulatory organizations, transfer

agents, investment companies, and investment advisers.

Key 1995 Results

In May 1995, the Commission consolidated its examination and inspection

activities into the Office of Compliance Inspections and Examinations (OClfi}.

The responsibilities for these activities was previously divided between the

Divisions of Market Regulation and Investmen t Managemen t. The Commission

created OClE to streamline the examination process by consolidating the

management of the activities; reducing duplication; and improving coordination

with the regional office examination staff, the Division of Enforcement

(Enforcement), and other regulatory agencies. The office will offer higher

quality training for examiners, better use of resources, and improved planning

of examination strategies.

The inspection staff undertook a number of initiatives to enhance the

joint and cooperative efforts among foreign, federal, and state regulators

and self-regulatory organizations (SRO) in conducting inspections and other

oversight activities of regulated entities. The staff also identified ways to

foster increased cooperative efforts among Commission examiners

responsible for inspecting different types of regulated entities. All of these

joint and cooperative efforts have the objective of increasing the staff's

effectiveness and productivity and enhancing Investor protection.

Furthermore, the staff focused on methods to utilize limited examination

resources as effectively as possible. For example, the emphasis of the

examination program shifted toward a model that selects the registrants

to examine based on risk factors, rather than a cyclical approach.

Investment Company and Investment Adviser Inspections

During the year, the staff completed inspections of 348 investment

company complexes and 1,075 investment advisers. In 82 percent of these

inspections, the staff found deficiencies that needed correction. An additional

seven percent of the inspections completed were referred to Enforcement

for consideration of an investigation and possible enforcement action.

47
Investment Companies

During the year, examiners completed inspections of 348 investment

company complexes with $1.1 trillion under management, indicating an

average frequency of inspection for the 969 investment company complexes

of once every 2.8 years. The complexes inspected managed 3,144 portfolios,

which represented approximately 51 percent of the mutual fund and closedend fund portfolios in existence at the beginning of 1995. This indicated

an average inspection frequency for mutual and closed-end funds of once

every 2 years. The complexes inspected represented a mix of both large

and smaller complexes. Forty-eight of the inspections were done on a "for

cause" basis, which means the staff had some reason to conduct the inspection

other than the simple passage of time.

Of the 348 inspections completed, 23 were referred to Enforcement.

Of those referrals, 48 percent had problems related to net asset value

calculations, 48 percent had problems related to internal controls, and 39

percent had problems related to prohibited transactions.

Mutual Fund Administrators. Approximately 43 percent of all mutual

fund complexes use third party administrators to perform their accounting

and administrative functions. Prior to 1995, administrators were inspected

individually and during inspections of fund complexes. During 1995, the

staff began a special program of comprehensive individual, or stand-alone,

inspections of these administrators to review their activities across their

entire mutual fund client base. Examiners completed 25 inspections of

administrators during the year. Of these, one was referred to Enforcement.

The administrator inspections also resulted in the staff subsequently

conducting three "for cause" examinations of investment company fund

complexes.

Variable Insurance Products. In response to the rapid growth in variable

insurance product assets and the emergence of new channels of distribu tion,

five specialized insurance product examination teams were formed in OCIE

and the regional offices during the year. These teams were charged with

identifying and examining variable life and annuity contract separate

accounts. The teams worked in conjunction with the Division of Investment

Management (Investment Management) in the planning and execution of

the examination program. During the year, 18 insurance company complexes

were examined and deficiency letters were issued in each examination. The

examinations revealed significant internal control weaknesses, as well as

issues that were referred to Investment Management for comment.

Bank Advised Mutual Funds. The Commission and the Office of the

Comptroller of the Currency signed an agreement on June 12, 1995 that

provides for joint examinations of mutual funds advised by national banks

and national banks that provide investment services to funds. As a result

of this agreement, one joint examination was completed and a second was

initiated. These two examinations focused on a review of key internal

control areas as well as an analysis of portfolio transaction data relating

to both mutual fund and trust department client trading. This represents

the first time Commission examiners have been able to compare mutual

48
fund trading to trading by other trust department clients to determine if

there is evidence of overreaching or other abusive investment or trading

practices.

Investment Advisers

During the year, the staff's general approach to targeting investment

advisers for inspection was changed significantly to reflect the large growth

in the number of advisers over the last several years and the lack of growth

in the size of the inspection staff. These changes also recognize that the

level of risk of loss to clients posed by different types of advisers varies

greatly.

New Inspection Approach. Examinations focused on the advisers that

appeared to pose a higher risk to clients, such as those that had actual

custody of client funds and securities and those that had discretionary

management authority over clients' cash and securities. Examiners in the

regional offices were given the pnmary responsibility for conductmg

inspections of all discretionary managers and those non-discretionary

managers with $100million or more under management as well as advisers with

custody of client assets. Regional staff also were responsible for conducting

all "for cause" inspections.

Sweep Inspections. Inspections of the remaimng investment advisers

became the responsibility of the Commission's headquarters staff. The staff

conducted geographical sweep inspections of 90 investment advisers in

Maryland, Washington, and Minnesota. State examiners in all three states were

invited to participate. A majority of the advisers examined were financial

planners. Typically, financial planners prepare financial plans that are implemented

through sales of mutual funds by the planners in therr capacity as a registered

representative of a broker-dealer. Most planners also sell insurance products.

Under this new approach, the inspection staff completed 1,075investment

adviser inspections, including examinations of 893 advisers with discretionary

manage men tau thori ty. The non-inves tmen t com pany assets managed by the

advisers inspected totalled $462 billion. The 893 inspections of discretionary

advisers covered 11percent of all such advisers, indicating an average inspection

cycle for discretionary advisers of once every 8 to 10 years. The overall

inspection cycle for advisers dropped from once every 22 years to once every

20 years.

Deficiency letters were sent in 75 percent of the examinations, 10 percent

were concluded with a conference call, and 1percent was referred to Enforcement.

Deficiencies found during inspections were concentrated in books and records

and brochure disclosures. No deficiencies were found in 14 percent of the

inspections.

Of the 177 "for cause" examinations, 70 were referred to Enforcement.

Of the referrals, 60 percent had problems related to custody of client funds

or securities, 58 percent had problems involving conflicts of interest, and

51 percent had problems related to marketing or performance advertising.

49
Broker-Dealer Examinations

During the year, the OCIE focused on and expanded the activi ties of the

broker-dealer examination program, ini tiating and coordinating projects focused

on particular areas of regulatory concern, such as the recent Joint Regulatory

Sales Practice Examination Sweeps, a follow-up to the Large Firm Report by

the Divisions of Market Regulation and Enforcement.

The staff conducted a sales practice sweep of small and medium-sized

brokerage firms designed to review the hiring, retention, and supervisory

practices of both New York Stock Exchange (NYSE) and National Association

of Securities Dealers, Inc. (NASD) member firms, as well as the sales practices

of identified registered representatives employed by these firms. The

sweep was a collaborative effort by the Commission, the NYSE, the NASD,

and the North American Securities Administrators Association. The objective

of the sweep was to identify problem brokers, and to ensure that appropriate

supervisory mechanisms are in place or, where necessary, to take appropriate

enforcement action against these individuals. The staff completed 179examinations

at 101 different firms and was analyzing the findings of the examinations at

fiscal year-end.

The staff also completed a total of 662 exarrunations of brokers, dealers,

and municipal securities dealers consisting of 393 oversight examinations

and 269 "for cause" examinations. Findings from 158 examinations were

referred to the Division of Enforcement for further consideration. Referrals

to SROs were made in 42 examinations. Many of these examinations focused

on areas of recent concern to the Commission, such as broker-dealers'

Internal controls. As a result, the staff developed and tested a module to

be used to review the internal controls of broker-dealers. The module covers

internal audit, senior management, trading, funding and liquidity, credit

controls, new products, physical premises, SRO examination and workpapers,

and financial Information analysis. The module was used in a number of

comprehensive examinations of broker-dealers' internal controls.

SRO Inspections and Oversight

The staff adopted "Guiding Principles" for conductingSRO inspections.

These principles include coordinating various SRO inspection teams to

ensure consistent reviews and recommendations, to expedite the inspection

process, to develop tracking systems to monitor and track SRO programs,

and to provide follow up to recommendations made in inspection reports.

In addition, inspection teams will meet regularly with all SROs not only

to follow up on recommendations of inspection reports, but also to ensure

that important issues of mutual interest are discussed with the SROs.

The staff completed routine oversight inspections of the enforcement

and sales practice examination programs of the NYSE and the Chicago Board

Options Exchange (CBOE), as well as the sales practice investigations program

of the CBOE. The market surveillance, investigatory, and disciplinary

programs of the Boston Stock Exchange (BSE), the CBOE, the Chicago Stock

Exchange (CHX), the NYSE, the Pacific Stock Exchange (PSE), and the

Philadelphia Stock Exchange (Phlx) were inspected. The staff also inspected

50
the arbitration programs of the NASD and the NYSE and started inspections

of the arbitration programs of the Municipal Securities Rulemaking Board

(MSRB) and the PSE.

Examiners completed several special purpose Inspections, which

included the American Stock Exchange's (Amex) listing program and the

NASD's Public Disclosure Program; the audit trail systems of the Arnex, the

CBOE, the NASD, and the NYSE; the BSE's pilot competing specialist

initiative; and the Cincinnati Stock Exchange's (CSE) pilot preferencing

program. The staff started an inspection of the NASD's enforcement, waiver,

surveillance, and examination program for broker-dealer compliance with

MSRB Rule G-37.

Rou tine oversight inspections of the regulatory programs adminis tered

by the NASD's 14 district offices were conducted. These inspections included

reviews of eight dis trict offices' broker-dealer examina non. financial

surveillance, and formal disciplinary action programs, as well as

investrgatioris of customer complaints, terminations of registered

representatives "for cause," and members' notices of disciplinary action

against their own employees.

Five clearing agencies were inspected: the Government Securities

Clearing Corporation, Philadelphia Depository Trust Company, Stock

Clearing Corporation of Philadelphia, Midwest Securities Trust Company,

and Midwest Clearing Corporation.

SRO Final Disciplznary Actions

Section 19d-1 of the Securities Exchange Act of 1934 and Rule 19d-1

thereunder require all SROs to file reports with the Commission of all final

disciplinary actions. In 1995, the SROs filed 1,105 reports. The Amex filed

14 reports, the BSE filed 1 report, the CBOE filed 46 reports, the CHX and

the CSE filed none, the NASD filed 827 reports, the National Securities

Clearing Corporation filed 5 reports, the NYSE filed 183 reports, the Options

Clearing Corporation filed 3 reports, the Phlx filed 24 reports, and the PSE

filed 2 reports.

51
Full Disclosure System

Thefull disclosure system isadministered by the Division ofCorporation

Finance. The system is designed to provide investors with material

information, foster investor confidence, contribute to the maintenance of

fair and orderly markets, facilitate capital formation, and inhibit fraud in

the public offering, trading, voting, and tendering of securities.

Key 1995 Results

Reflecting a significan t increase in transactions in the la tter half of the

year, the $824 billion in securities filed for registration during the year

represented a slight increase over the $815 billion in 1994. Common stock

offenngs of nearly $400 billion filed for registration In 1995 (compared to

$333 billion in 1994) reflected a substantial increase in merger activity, as

well as a modest increase in stock offenngs. Offerings filed by first time

regrstrants (IPOs) totalled approximately $82 billion, nearly level with 1994.

Foreign companies' participation in the United States public market

continued to show strong growth in 1995. One hundred and eighteen foreign

companies from 28 countries, including Royal Bank of Canada, Jilin Chemical

Company (China), PowerGen pIc and National Power pIc (Uni ted Kingdom),

CRVD (Brazil), Asia Pulp and Paper (Singapore), Portugal Telecom and

Jefferson Smurfit pIc (Ireland), en tered the United States public markets for

the first time. At year-end, there were 709 foreign companies from 43 countries

filing reports with the Commission. Foreign companies registered public

offerings of $41 billion in 1995.

REGISTRATION STATEMENTS FILED

DOLLAR VALUE ($BILLIONS)

52

UNALLOCATED

SHELF OTHER EO

83210% 252

3%

1994

TOTAL - $814.7

UNALLOCATED

SHELF

931 12% OTHER EO

188

2%

1995

TOTAL - $823.6
In the rulemaking area, a package of initia tives was published for comment

by the Commission to streamline and enhance the utility of disclosure. The

proposals would allow the use of abbreviated or summary financial information

in disclosure documents delivered to investors, streamhne director and executive

compensation disclosure in annual proxy and information statements, raise the

total assets threshold for Securities and Exchange Act of 1934 (Exchange Act)

registration, reduce the holding penod requirements in Rule 144 under the

Securities Act of 1933 (Securities Act), and exempt from federal registration

small offerings that are exempt under a California law.

The Commission also revised its prospectus delivery and other rules to

facilitate compliance with prospectus delivery requirements with the change to

a three business day settlement period for securities transactions (T+3). Use

of electronic media to deliver mandated disclosure documents was addressed

and facilitated by the issuance of an interpretive release providing guidance and

a degree of certainty to issuers that use electronic media to deliver or transmit

information to investors.

In addition, broad-based initiatives are being considered that may result

in substantial revisions to the registration and disclosure processes. In 1995,

the Commission established an Advisory Committee on the Capital Formation

and Regulatory Processes, reflecting the Commission's continuing efforts to

minimize regula tory burdens while maximizing investor protection. TheComrruttee

is considering fundamental issues relating to the regulatory framework governing

the capital formation process, such as whether Commission rules should provide

for registration of companies rather than securities.

An internal Task Force on Disclosure Simplification undertook a" top to

bottom" review of all forms and disclosure requiremen ts relating to securi ties

offerings and disclosure obligations of public companies. The purpose of the

review is to streamline and simplify regulations, including the elirrunation of

any requirements that have outlived their usefulness.

In 1995, the staff reviewed 30.8% of the reporting issuers, as well as 1,150

Securities Act and Exchange Act registration statements of first time filers.

Review of Filings

The following table summarizes the principal filings reviewed dunng the

last five years. The levels of reviews of new issuer filings, tender offers,

contested solicitations, and goingpnvate transactions, all of which are subject

to review, reflect the increases and decreases in the number of filings received.

53
FULL DISCLOSURE REVIEWS

1991 1992 1993 1994 1995

Reporting Issuer

Reviews 2,660 3,058 3,531 3,400 3,930

New Issuer

Reviews 'Qj 799 1,147 1,200 1,599 1,150

Major Filing Reviews

Securities Act Registrations

Headquarters

New Issuers 465 831 877 1,167 805

ReIfeat Issuers 758 970 924 863 815

P/ Amdts. f! 308 210 117 114 100

Regions

Retstrations 183 158 189 217 145

P/ Amdts. f! 275 137 103 90 115

Exchange Act Initial

Reg istrations 151 158 148 215 200

Annual Report Reviews

Full 1,122 1,041 1,466 1,085 1,345

Full Financial 712 1,126 1,155 1,405 1,585

Special g; 435 409 360 455 585

Tender Offers

(140-1) 37 27 56 82 140

Going Private

Schedules 68 61 61 75 77

Contested Proxy

Solicitations 65 58 35 42 59

Proxy Statements

Merger/Going Private 188 141 149 163 225

Others w/Financials 214 150 149 180 205

Other fli 160 245 1,143 847 195

Includes companies subject to Exchange Actreporting whose financial statements

were reviewed during the year.

l?/ Includes non-Exchange Actreporting companies whose Securities Actor Exchange

Actregistration statements were reviewed during the year.

f! Includes only post-effective amendments with new financial statements.

Q/ Forms lO-K, lO-KSB,and 20-F reviewed in connection with the review of other

filings. Special reviews in years prior to 1995may have been underrecorded and

therefore are not fully comparable to the 1995number.

f! 1993 and 1994 include reviews in connection with the executive compensation

disclosure project.

54

~

~
Rulemaking, Interpretive, and Legislative Matters

Prospectus delivery In connection unih. T +3 settlement

The Commission proposed and adopted amendments to its rules and forms,

as well as a new rule under the Securities Act, in order to implement two solu tions

to prospectus delivery timing issues arising in connection wi th the change to

T+3 securi ties transaction settlement.':" The amendments and rule are based

on recommendations submitted by representatives of financial intermediaries.

Among other things, the initiatives for the first time allow prospectus disclosure

to be completed through the use of supplements to prospectuses subject to

completion (i.e., term sheets) and the confirmation of sale. In addition, the

Commission amended an exemption from T+3 clearance and settlement for

purchases and sales of securi ties pursuan t to a fum cornrrutmen t offering. This

exemption is now limited to offerings in which an alterna tive settle men t cycle

is agreed to by the issuer and the underwriter.

Electronic delivery of documents to security holders

The Commission issued an interpretive release't? and related rule proposals ISO

addressing the use of electronic media to deliver or transmit to investors

information under the federal securities laws. The Interpretive release provides

guidance and a degree of certainty to issuers who use electronic media In

complying with the applicable delivery requirements of the federal securities

laws. The Interpretive release also contains numerous examples applying these

concepts to specific fact situations and solicits comment on various matters to

assist the Commission in evaluating the need for additional interpretations. The

rule proposals include a number of technical amendments to the Commission's

rules and forms that are intended to codify some of the interpretations set out

in the interpretive release.

June 1995 Initiatives

On june 27, 1995, the Commission issued eight releases, seven proposing

rule changes and one stating interpretive positions, to streamline disclosure,

facilitate capital raising, and deter abusive practices.

1. Abbreviated Financial Statements

The Commission issued a release proposing new rules and amendments

that would allow the use of abbreviated financial statements in annual reports

to shareholders and other disclosure documents that are delivered to inves tors,

such as prospectuses, proxy and information statements, and documents furnished

to investors in connection with tender offers or going private transactions. lSI

The release also seeks comment on other approaches to streamlining the annual

report to shareholders, such as permi tting the use of a summary annual report,

or allowing registrants total flexibility by rescinding the Commission's requirements

for delivery of an annual report to shareholders.

55
2. Streamlining Delivery of Executive and Dzrector Compensation Disclosure

The Commission proposed amendments to Item 402 of Regulation S-Kand

Regulation S-Bto streamline executive compensation disclosure in annual proxy

and information statements and to reformat director compensation disclosure.l"

The amendments would permit registrants to furnish the detailed executive

compensation disclosure currently required to be provided in the proxy or

information statement, in the annual report on Form 10-K. The proposed

amendments also would replace the current narrative disclosure of several

common elements of director compensation with a new tabular presentation in

the proxy statement.

3a Small Offerzng Exemption for Certain California Limzted Issues

The Commission issued a release proposing a new Securi ties Act Section

3(b) exemption from the registration requirements of the federal securities

laws.l" Under the proposed exemption, offers and sales ofsecurities in amounts

of up to $5 million, that satisfy the conditions of a recently-enacted exemption

from California state qualification requirements, also would be exempt from

federal registration. The federal antifraud prohibitions would continue to apply

to all such exempt transactions. The proposed exemption would provide that

purchasers in the exempt transaction receive "restricted securrties." No filing

with the Commission would be required.

3b. Solzcitation of Comment Concerning Prohibitions Against General

Solicztations in Exempt Offerings

In light of the California Exemption, which allows general solicitations

so long as sales are effected only to qualified purchasers, the Commission also

solicited comment on whether general solicitations should be permitted in

Regulation D and private placements.'>' The release includes questions about

whether Regulation D should allow general solicitations, who should be able

to use them, and the extent to which the content ofsuch communications should

be restricted.

4. Solicitations of Interest PrIOr to an Initial Public Offering

The Commission Issued proposals that would allow many issuers that are

not subject to Exchange Act reporting requirements to "test the waters" for

interes t in their company prior to the prepara tion and filing of an IPO regis tra tion

sta tement under the Securi ties ACt.155 The proposed rule is intended to allow

an issuer with no established market for its securities to assess potential investor

interest in the company before incurring the costs associated with the preparation

of a Securities Act registration statement. The proposal would require that

wri tten solicitation documents or broadcast scripts be submi tted to the Commission

on or before first use. If,after"testing the waters," an issuer decided to proceed

with a registered IPO, itwould have to file a registration statement and provide

investors with a prospectus. "Test the waters" solicitations would have to be

discon tmued once a regis tra tion sta temen t was filed. Sales of securi ties would

not be allowed until Zflcalendar days after the last publication or delivery of

the document or broadcast. Regulation Awould be amended where appropriate

so that its "test the waters" provisions would operate in a parallel fashion.

56
5. Relief From Section 12(g) Registration for Small Issuers

The Commission proposed amendments to Its rules under the Exchange

Act governing the total assets threshold for entry into and exit from the full

disclosure systern.!" Under the proposals, issuers would be required to register

pursuant to Section 12(g) of the Exchange Act if they have 500 shareholders

of record and $10 million in total assets, an increase from the current asset

threshold of$5 million. Rules relating to exiting from the Exchange Actreporting

system also would be revised to allow issuers to cease reporting if they drop

below a total ?f'<;et8tlv(~sh0J('~(,[$10 millvir- wh-reve r the present standard IS

$5 million.

6. Reduction of Rule 144 Holding Period

The Commission proposed amendments to the holding period requirements

contained in Rule 144under the Securi ties Act to permi t resales of" restricted"

securities after a one-year, rather than a two-year holding period. IS? Also under

the proposal, securi ties held by non-affilia ted securi ty holders could be resold

withou t restriction after a holding period of two, rather than three years. These

proposals are designed to decrease the costs associated with priva te capital raising

by reducing the discount arising from the length of the holding period. The

Commission also requested comment on whether Rule 144should be revised

to address new trading strategies, such as equity swaps and reminded Section

16 insiders of their obligations to report equity swap transactions.

7a. Streamlining DIsclosure Requirements Relating to SIgnificant Business

Acquisitions

The Commission issued a release proposing amendments to the financial

statement requirements forsignificant acquisitions to eliminate the requirements

to provide audited financial statements for pending and recently completed

business acquisitions in Securities Act registration statements, other than

registrations by "blank check companies."!" The proposed rules are intended

generally to allow issuers to provide information about significant acquisi tions

in Securities Act registration statements on the same time schedule as for

Exchange Act reporting, thereby alleviating the need for such issuers to forego

public offerings and to undertake private or offshore offerings. In addition,

the proposed rules would provide an au tomatic waiver of the earliest year of

required financial statements for completed acquisitions that do not exceed a

specified significance level, ifsuch audited financial statements are not readily

available.

7b. Quarterly Reporting of Unregistered EquIty Sales

In connection with a review of offshore capital raising practices, the

Commission proposed amendments to its annual and quarterly reporting forms

for domestic issuers that would require disclosure ofunregis tered sales of equi ty

securities during the previous fiscal quarter. 159 The proposed amendments are

57
limited to unregistered sales of common equity securities (and common equity

equivalents) because of the significant market impact the issuance of such

secunties often has and the current lack of public information abou tsuch sales.

8 Problematic Practices Under Regulation S

The Commission issued an interpretation of Regulation Sstating its views

with respect to certain practices In connection with offers, sales and resales

ofsecuri ties purportedly made In offshore transactions in reliance on Regulation

5.J60 The release discusses transactions in which circumstances indicate that

securities are in essence being placed offshore temporarily to evade registration

requirements with the result that the incidence of ownership of the securities

never leaves the u.s. market or that a substantial portion of the economic risk

relating thereto is left in or is returned to the u.S. market dunng the restricted

period, or the transaction is such that there was no reasonable expectation that

the securities could be viewed as actually coming to rest abroad. The release

states that such transactions would not be covered by Regulation S or the safe

harbors and would be found not to be an offer and sale outside the U.S. for

purposes ofthe general statement, which provides that the regulatory requirements

under Section 5 of the Secur itres Act shall be deemed not to apply to offers

and sales of securities that occur outside the u.s.

The release also solicits comments on the need to amend Regulation S to

deter abuses and requests general comments as to which types of companies

are using Regulation S, how they are using it, and what mechanisms can be

used to prevent abuse. The Commission specifically requested comment as to

whether Itshould propose amendmen ts to the safe harbor for primary offerings

of domestic companies reporting under the Exchange Act that would (1) extend

the 40-day restncted period, (2) exclude certain discounted offers, (3) restrict

hedging and other risk shifting transactions during the res tricted period, or (4)

prohibit payment with certain types of non-recourse or other types of promissory

notes where the expectation of repayment derives solely from the resale of

securities.

Section 16

The Commission issued a release proposing amendments to the Section 16

rules.": as part of its continuing effort to improve the regulatory scheme

governing the reporting of certain insider holdings and transactions, as well as

the recovery of short-swing profit. In 1994, the Commission solici ted public

commen t on proposed amend men ts to this regula tory scheme.l'" and solici ted

further comment in September 1994as to the treatment of instruments that may

be settled only in cash.!" The most recent release proposes an alternative

amend men t to Rule 16b-3 tha t would exempt virtually all transactions between

an issuer and its officers and directors, in addition to an amendment to the rule

exempting transactions in dividend or interest reinvestment plans that would

reduce regulatory burdens. Comment also was solicited as to whether the

Commission should recommend that Congress rescind Section 16(b) of the

58
Exchange Act. The comment period on the earlier releases was extended to

comport with the close of the comment period relating to this release, and both

the 1994 and 1995 proposals will be considered by the Commission.

Electronic Data Gathering, Analysis, and Retrieval System (EDGAR)

In view of the statutory requirement that the Commission certify that

electronic filings from a significant test group of filers were received and

reviewed for a period of six months before mandating electronic filing for all

registrants, the staff undertook a comprehensive study of the test period results.

Following its review of the study, which concluded that provision ofinformation

through the EDGARsystem ISat least as efficient and effective as through paper

filings, the Commission adopted as final the rules that had been applicable to

electronic filing during the statutorily mandated significant test period and made

them applicable to all domes tic regis tran ts and third parties filing wi th res pect

to those registrants. 164 Phase-in of registrants into the electronic filing system

recommenced on Ianuary 30,1995, and proceeded as outlined in a revised phasein schedule, with completion of phase-in set for May 1996. Minor amendments

to the electronic filing rules also were adopted to reflect the staff's expenence

with the rules since mandated electronic filing began in 1993. On September

28,1995, the Commission instituted its Internet World Wide Web Site, which

includes EDGARfilingsas well as certain Commission releases and announcements.

Public Hearings on Safe Harbor for Portuard-looktng Statements

The Commission issued a concept release In 1994 regarding disclosure of

forward-looking information and the effectiveness of the safe-harbor provisions

for that type of disclosure.!" The release solicited comment from the public

on various alternatives to the safe harbor provision that have been proposed

by several persons and announced public hearings to address these issues further

in a public forum. The hearings were held in Washington, D.C. on February

13, 1995, and in San Francisco, California on February 16, 1995.

Legal Proceedings Involving Directors, Executzve Officers, Signijicani

Shareholders and Others

The Commission proposed amendments that would expand disclosure

requirements relating to legal proceedings involving management, promoters,

control persons, and others by enlarging the classes of legal proceedings that

are subject to disclosure and by extending the period during which such disclosure

is required from the current five to ten years.t'" The proposals also would make

uniform all such requirements found in various forms, schedules, and reports.

Conferences

SEC Government-Business Forum on Small Business Capital Formation

The fourteenth annual SECGovernment-Business Forum on Small Business

Capital Formation was held in Providence, Rhode Island on September 13-14,

1995. Approxima tely 150small business represen tatives, accoun tan ts, attorneys,

and government officials attended the forum. Numerous recommendations were

formulated with a view to elimina ting unnecessary governmental impedimen ts

59
to small businesses' ability to raise capital. A final report will be provided

to interested persons, including Congress and regulatory agencies, setting forth

a list of recommenda tions for legisla tive and regula tory changes approved by

the forum participants.

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

The twelfth annual federal/state uniformity conference was held in

Washington, D.C. on March 27, 1995. Approximately 60 SEC officials met

with approximately 60 representatives of the North American Securities

Administrators Associa tion to discuss methods of effectmg grea ter uniformi ty

in federal and state securities matters. After the conference, a final report

summanzing the discussions was prepared and distributed to interested persons

and participants.

Committees and Task Forces

Adtnsoru Committee on Capital Formation

In 1995,the Commission established an Ad visory Commi ttee on the Capital

Formation and Regulatory Processes, reflecting the Commission's continuing

efforts to minimize regulatory burdens while maximizing investor protection.

The Committee is considering fundamental issues relating to the regulatory

framework governing the capital formation process, such as whether Commission

rules should provide for registration of companies rather than securities.

Task Force on Disclosure Simplijication

An internal Task Force on Disclosure Simplification initiated a "top to

bottom" review of all forms and disclosure requirements relating to securities

offerings and disclosure obligations of public companies. The purpose of the

review is to streamline and simplify regulations, including the elimination of

any requirements that have outlived their usefulness.

60
Accounting and Auditing Matters

The Chief Accountant is the principal adviser to the Commission on

accounting and auditing matters arising from the administration of the

various securities laws. The primary Commission activities designed to

achieve compliance with the accounting and financial disclosure requirements

of the federal securities laws include:

rulemaking and interpretation that supplements private-sector accounting

standards, implements financial disclosure requirements, and establishes

independence criteria for accountants;

review and comment process for agency fzlings directed to improving

disclosures in filings, identifYIng emergIng accounting issues (tohich may

result in rulemaking or priuate 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 American Institute of Certiiied Public

Accountants (AICPA), which establish. accounting and auditing standards

designed to Improve financial accounting and reporitng and the qualIty

of audit practice.

Key 1995 Results

The Commission continued its involvement in initiatives directed

toward reducing the disparities that currently exist between different

countries' accounting and auditing standards. During 1995, the International

Accounting Standards Committee (IASC) developed a work plan that, upon

successful completion, would result in a comprehensive core set of

international accounting standards. Target date for completion of the work

plan is June 1999; however, efforts are underway to accelerate that timetable,

possibly by as much as a year.

Accounting-Related Rules and Interpretations

The agency's accounting-related rules and interpretations supplement

private-sector accounting standards, implement financial disclosur e

requirements, and establish independence criteria for accountants. The

agency's principal accounting requirements are embodied in Regulation

S-X, which governs the form and content of financial statements filed with

the SEC.

Debt Extinguishment. The staff issued interpretive guidance regarding

the period in which a gain or loss should be recognized on the early

extinguishment of debt."" The guidance was issued in response to divergent

61

•

•

•

•
reporting practices by public companies by which certain companies were

recognizing such a gain or loss in a period earlier than the period in which

the debt is considered extinguished.

Oversight of Private-Sector Standard-Setting

The SEC monitors the structure, activity, and decisions of the privatesector standard-setting organizations, which include the FASB. The

Commission and Its staff worked closely with the FASB in an ongoing effort

to improve the standard-setting process, including the need to respond to

varIOUS regulatory, legislative, and business changes in a timely and

appropriate manner. A description of FASBactivities in which the staff was

involved is provided below.

During 1995, the FASB completed work on an exposure draft of a

proposed standard that would specify when entities should be included in

consolidated frnancial statements. 168 The proposed standard would require a

controlling enti ty to consolidate all enti ties deemed to be under its control unless

such control is temporary. For purposes of this requirement, control of an entity

ISdefined as representing the power to use or direct the use of the individual

assets of another entity in essentially the same ways as the controlling entity

can use its own assets. Ifadopted as proposed, the new standard would represent

a significant change from existing practice in which consolidation policy generally

is based on the existence of majority voting interests.

In another consolidations-related project, the FASB continued its joint

undertakmg wi th the Accounting Standards Board of the Canadian Insti tu te

of Chartered Accountants (CICA) to consider the current reporting

requirements under Statement of Ftnanctal Accounting Standards No. 14,

"Financial Reporting for Segments of a Business Enterprise." An exposure

draft thatwould establish common standards on disaggregated disclosures was

issued after year-end.

In 1995, the FASBadopted a new standard on accounting for impairment

of long-lived asse ts.J'" Under the new standard, long-lived assets and certain

identifiable mtangibles to be held and used by an entity are reviewed for

Impairment whenever events or changes in circumstances indicate that the

carrying amount of an asset may not be recoverable. The approach set forth

in the new standard is referred as a "two-step" method because the test

for recognition of Impairment is different than the measurement of the

Impairment loss. Recognition of impairment occurs if the sum of the future

cash flows expected to result from the use of the asset and its eventual

disposition (an undiscounted measure) is less than the asset's carrying

amount. However, the impairment loss would be measured by the amount

by which the asset's carrying amount exceeds its fair value. The standard

represents the culmination of a long range project that is expected to narrow

the range of divergent financial reporting practices in this area.

The FASBalso issued a finalstandard on accoun ting forstock compensa tion. 170

Statement 123,Accouniing jor Stock-Based Compensation, encourages companies

toadopta new accounting method that recognizes the costofstockoptionawards

based on estimated fair value at grant date. Alternatively, companies may elect

to continue to follow the existing accounting requirements set forth in Accounting

62
Principles Board Opinion No. 25, which generally do not result in an expense

charge for most options. Companies electing to continue to apply Opinion 25

would be required to provide footnote disclosure of the effect on net income

had the company recognized expense based on estima ted fair val ue at gran t da te.

The statement becomes effective for calendar year 1996.

The FASB made progress during 1995 on Its major long-term project to

address financial instruments and off-balance sheet financing issues. The FASB

is pursuing an approach to accounting for denvative instruments and hedging

that it believes would improve the current accounting for those instruments.

Under the FASB's approach, entities would select among two options, both of

which would rely on fair value measurements. The determination of fair value

would be based on the valuation guidance provided in FASB Statement 107,

Disclosures about Fair Value of Financial Instruments, adopted in an earlier phase

of this project. In a related action, the FASBissued an exposure draft to provide

for more consistent reporting of securitizations and other financial transactions

in which financial assets are transferred in exchange for cash or other assets."!

The proposed standard addresses determining when financial assets should be

considered sold and derecognized from the balance sheet and when related

revenues and expenses should be recognized.

During 1995,Congress considered litigation reform issues that impact the

accounting profession. These issues include, among others, class action reforms,

the shifting from one party to another ofIingation costs and expenses, proportiona te

liability, substantive standards for accountants' liability, and safe harbors for

disclosures of forward-looking information. The Senate bill and the House of

Representatives bill took different approaches to these issues."? Both bills,

however, included provisions that would (1) codify the Commission's au thon ty

to set auditing standards related to illegal acts, related party transactions, and

the evaluation of an entity as a gomg concern and (2) require auditors to report

certain uncorrected illegal acts of registrants to the Commission. The Private

Securities Litigation Reform Act of 1995 which included these provisions was

enacted after year- end.

In addition, the Commission has responded to Congressional mterest in

streamlining disclosure requirementsv" by, among other things, irutiating a

project to reexamine Regulation S-Xfor possible outdated accounting provisions

or provisions that may not be necessary because they du plicate generally accepted

accoun ting princi pies.

Finally, Congressional in terest in the accoun ting for deri va tive instrumen ts

continued in 1995. Commission testimony stressed the need for sound financial

statements of issuers of derivative instrurnents.!"

The FASB's Emerging Issues Task Force (EITF),in which the Commission's

Chief Accountant participates, continued to identify and resolve accountmg

issues. During 1995, the EITF reached consensus on a number of issues,

including questions relating to accounting for financial instruments, revenue

recognition, and business combinations, thereby narrowing divergent reporting

practices of public companies. Also during 1995, the EITF formed an Agenda

Committee in response to recommendations made by an FASB Committee to

Review the EITF.

63
Oversight of the Accounting Profession's Initiatives

The Commission and its staff continued to be active in overseemg the

auditing standard-setting process and other activities of the accounting

profession. A discussion of the activities in which the SEC staff was involved

follows.

AICPA. The SEC oversaw various activities of the accounting profession

conducted primarily through the AICPA. These included (1) the Auditing

Standards Board (ASB), which establishes generally accepted auditing

standards; (2) the Accounting Standards Executive Committee (AcSEC),

which provides guidance through its issuance of statements of position and

practice bullenns and prepares issue papers on accounting topics for

consideration by the FASB; and (3) the SEC Practice Section (SECPS), which

seeks to improve the quality of audit practice by member accounting firms

that audit the financial statements of public companies through various

requirements, including peer review.

ASS. The staff continued to work closely with the ASB to enhance the

effectiveness of the audit process. The ASB issued a series of annual Audit

Risk Alerts to provide auditors with an overview of recent economic,

professional, and regulatory developments that may affect 1995 year-end

audits.

SECPS. Two programs administered by the SECPS are designed to

ensure that the financial statements of SEC registrants are audited by

accounting firms with adequate quality control systems. A peer review of

member firms by other accountants is required every three years and the

Quality Control Inquiry Committee (QCIC) reviews on a timely basis the

quality control implications of litigation against member firms that involves

public clients. The staff coordinates closely with the Public Oversight Board

(POB) in performing ItS oversight of the two programs. The POB, which

is independent of the AICPA (except for funding), also engages in other

activi ties directed towards im provemen ts In the financial reporting process.l"

The Commission exercises oversight of the SECPS through frequent

contacts with the POB and members of the executive, peer review, and

QCICs of the SECPS. The staff each year selects a random sample of peer

reviews and evaluates selected working papers of the peer reviewers and

the related POB files. This oversight has shown that the peer review process

contributes significantly to improving the quality control systems of member

firms and, therefore, enhances the consis tency and quali ty of practice before

the Commission.

Closed case summaries prepared by the QCIC and related POB oversight

files are also reviewed by SEC staff. This review and discussions with the

POB and QCIC staff provide SEC staff with enough information to conclude

that the QCIC process provides added assurances, as a supplement to the

peer review process, that major quality control deficiencies, if any, are identified

and addressed on a timely basis. Therefore, the Commission believes that the

QCIC process benefits the public interest.

AcSEC. The AcSEC issued a statement of position calling for enhanced

footnote disclosures about risks and uncertainties.':" Also during 1995, the

AcSEC issued an exposure draft of a proposed accounting guide on

environmental liabilities."?

64
Special Committee. In addition, the AICPA's Special Committee on

Financial Reporting issued a comprehensive report which focuses on the

financial information needs of users. 178The report of the Special Committee,

also referred to as the "Jenkins" Committee in recogrution of its chairman,

Edmund Jenkins, makes certain recommendations to enhance the utility of

business reportmg. However, since the Special Cornrruttee is not a standardsetting body, its recommendations will be considered by accounting standard

setters, predominately the FASB and by regulators, such as the SEC. The

FASB plans to issue an Invitation to Comment on the recommendations of

the Special Committee, as well as those made by the Association for

Investment Management and Research (AIMR) in its White Paper entitled

"Financial Reporting in the 1990s and Beyond."

International Accounting and Auditing Standards

Significant differences in accounting and auditing standards currently

exist between countries. These differences are an Impediment to

multinational offerings of securities. The SEC, in cooperation with other

members of the International Organization of Securities Commissions

(IOSCO), actively participated m initiatives by international bodies of

professional accountants to establish appropriate international standards

that might be considered for use in multinational offerings. In 1995, the

IASCissued a standard on disclosure and presentation of financial instruments. J79

Work also continued on major projects addressing recognition and measurement

issues related to fmancial instrurnents.l'" earnings per share, 181intangible assets.!"

reporting financial information by business segrnents.!'" income taxes.!"

presentation of financial statements, J85 and accounting for retirement and other

employee benefit costs.!"

In August 1993, the Working Party informed the IASC of the necessary

core accounting standards that would comprise a comprehensive body of

principles for enterprises (not in a specialized industry) undertaking crossborder offerings and listings. In June 1994, the Working Party provided

the IASC with its evaluation of the acceptability of existing and recently

improved IASCstandards and iden tified the projects that would be necessary

to complete the development of a core set of standards. In July 1995, the

IASC and IOSCO's Technical Committee announced that the Board of the

IASC has developed a work plan that the Technical Committee agrees will

result, upon successful completion, in International Accounting Standards

(lAS) comprising a comprehensive core of standards. Completion of

comprehensive core standards that are acceptable to the Technical Committee

will allow the Technical Committee to recommend endorsement of lAS for

cross-border capital raising and listing purposes in all global markets. Completion

of the work plan is estimated to be june 1999. Efforts are underway to accelerate

that work plan, possibly by as much as a year.

In addition to the existing projects in process, the work plan includes

planned projects on accounting in interim periods, discontinued operations,

provisioning and contingencies, leases, research and development,

impairment, investments, and goodwill.

65
In December 1994, the Commission eliminated the need to reconcile the

differences that would result from the application of SFAS No. 52, Forezgn

Currency Translation, if the issuer accounts for its operations in hyperinflationary

economies using the historical cost/constant currency method in accordance with

lAS 21, The Effects of Changes In Foreign Exchange Rates.187 This followed

a 1994 action in which the Commission revised financial sta tement requiremen ts

so that foreign private issuers may now submit, without reconciliation, a cash

flow statement prepared in accordance with lAS 7, Cash Flow Statements. Also,

the Commission proposed to eliminate the requirements to reconcile certain

differences attributable to the method of accounting for a business combination

(pooling of interests or purchase) and the amortization period of goodwill and

negative goodwill, provided that the financial statements comply with lAS 22,

Buszness Combinations P"

In the auditing arena, the staff closely monitored the efforts of the

International Auditing Practices Committee (JAPC) of the International

Federation of Accountants to codify the In terna tional Standards on Audi ting

(ISAs). As a result of its oversight, the staff became concerned with the

introduction of black lettering, which resulted in portions of the standards

that were deemed by the IAPC to represent "basic principles and essential

procedures" being presented in bold type. As a result, uncertainty was

introduced into the standards regarding the amount of work to be performed

by an auditor in order to represent that his or her audit complied with the

ISAs. The staff's concerns were communicated to IOSCO and, through

IOSCO, to the IAPe. The IAPC did not address IOSCO's concerns in its

final standards. As a result, IOSCO was unable to reach a consensus to

endorse the codified ISAs. The staff has advised the IAPC that additional

changes to the final codified standards are necessary before the staff would

recommend that the Commission support an IOSCO endorsement of the

ISAs.

66
Other Litigation and Legal Activities

The General Counsel represents the Commission in all litigation in the

United States' Supreme Court and the courts of appeals. The General

Counsel defends the SEC and its employees when sued in district courts,

prosecutes administrative disciplinary proceedings against attorneys, appears

amicus curiae in significant private litigation involving the federal securities

laws, and oversees the regional offices' participation in corporate

reorganization cases. The General Counsel analyzes legislation that would

amend the federal securities laws or other laws affecting the work of the

agency, drafts congressional testimony, prepares legislative comments, and

advises the Commission on issues arising from the agency's regulaiorv and

enforcement activities including all public releases and rule proposals. In

addition, the General Counsel advises the Commission in administrative

proceedings under various statutes, and advises the Commission and

prepares both opinions with respect to appeals from administrative law

judges' decisions and self-regulatory organizations'(SRO) disciplinary

actions, and orders resolving related motions.

Key 1995 Results

Issues of major importance were litigated in 1995 in cases in which

the Commission participated, either as a party or as amicus curiae. In

Mastrobuono v. Shearson Lehman Hutton, Inc.,189 the United States Supreme

Court held that inclusion of a New York choice of law provision in a brokerdealer's arbitration agreement with its customers does not bar arbitrators

from awarding punitive damages that would otherwise have been available

in a court. In Gustafson v. Alloyd CO.,190 the United States Supreme Court held

that Section 12(2) of the Securities Act of 1933 (Securities Act) applies only

to public offerings of securities by the issuer or controlling persons of the Issuer.

In Plaut v. Spendthrift Farm, Inc.,191 the Supreme Court held that the part of

Section 27A of the Securities Exchange Act of 1934 (Exchange Act) that allowed

the reinstatement of certain private actions after dismissal on statuteofhmitations

grounds was an uncons titu tional viola tion of the separation of powers doctnne.

The Commission participated as amicus curiae in the foregoing cases. In Blount

v SEC,192 the Uni ted States Court of Appeals for the Distnct of Columbia Circui t

upheld, against constitutional challenge, the Commission's approval of Municipal

Securities Rulemaking Board Rule G-37, which imposes limitations on the

activities of certain municipal securities dealers who contribute to issuer officials

or who solicit or coordinate contributions on behalf of those officials.

The SEC continued to handle a large number and a wide variety of

legislative matters in 1995. The SEC testified, and the staff provided technical

and other assistance, with respect to bills addressing such subjects as revision

67
of the private securities litigation system, Glass-Steagall repeal, regulatory

reform, repeal of the Public Utility Holding Company Act of 1935 (Holding

Company Act), the regulation of municipal securities, and a proposed merger

of the SEC and the Commodity Futures Trading Commission (CFTC).

A record 74 new appeals were filed with the Commission in 1995. The

adjudicatory staff kept pace with its 1994 output by submitting to the

Commission a total of 82 draft opinions and orders resolving substantive

motions.

Significant Litigation Developments

Arbitration

In Mastrobuono v. Shearson Lehman Hutton, Inc.,193 the United States

Supreme Court, as urged by the SEC as amicus CUriae, held that inclusion

of a New York choice of law provision in a broker-dealer's arbitration

agreemen t wi th its cus tomers does not bar arbi trators from awarding puni tive

damages that would otherwise have been available in a court, even though

New York decisional law does not permit punitive damages to be awarded

by an arbi tra tor.

Scope of Section 12(2) of the Securities Act

In Gustafson v. Alloyd Co.,194the United States Supreme Court held that

Section 12(2) of the Securities Act applies only to public offerings of securities

by the issuer or controlling persons of the issuer. The SEC, as amicus curiae,

had contended that Section 12(2) applies to all types of sales. Section 12(2)

gives buyers a right of recission against sellers who make false or misleading

representations.

Statutes of Limitation

In Plaut v. Spendthrift Farm, Inc.,195 the Supreme Court held, contrary

to the position urged by the SEC as amicus curiae, that part of Section 27A

of the Exchange Act was unconstitutional on the ground that it violated

the separation of powers doctrine. Section 27A, which had two parts, had

been enacted to prevent retroactive application of the one-year/three-year

statute of limitations the Court had adopted in Lamp], Pleva, Lipkind, Prupis

and Petigrow v. Gilbertson J" The part of Section 27A that the Court invalidated

allowed private actions under Section 10(b) of the Exchange Act to be

reinstated even though they had been finally dismissed prior to enactment

of Section 27A.

Regulation of Municipal Securities

In Blount v. SEC,197 the United States Court of Appeals for the District

of Colurnbra Circuit upheld the validity of Municipal Securities Rulemaking

Board Rule G-37, which imposes limitations on the activities of certain

municipal securities dealers who contribute to issuer officials or who solicit

or coordinate contributions on behalf of those officials. The court found that

the Rule did not violate the First Amendment, was not impermissibly vague,

and did not violate the Tenth Amendment.

68
In United States v. Rudi,198 the United States District Court for the

Southern District of New York, as urged by the SEC as amicus curiae, refused

to dismiss an indictment charging the independent financial adviser to a

New Jersey county with securities fraud. The court held that Rudi s failure

to disclose kickbacks he allegedly received from the underwriter of the

county's bonds was "in connection with" the sale of the bonds for purposes

of Section 10(b) of the Exchange Act. The court also rejected Rudi's assertion

that Section 10(b) does not apply to a transaction between an issuer and

its underwnter.

Proxy Rules-Shareholder Proposals

In NYCERS v. SEC,199 the United States Court of Appeals for the Second

Circuit reversed a district court order regarding a SEC no-action letter

interpreting the" ordinary business" exception contained in the Commission's

shareholder proxy proposal rule, holding, as urged by the Commission, that

a no-action letter does not have the binding force of law and therefore is

not a legislative rule requiring notice and comment under the Administrative

Procedure Act. The court also dismissed plaintiffs' claim against the

Commission that the position taken in the no-action letter was arbitrary

and capricious, holding that shareholders who disagree with that

interpretation have the adequate judicial remedy of suing a company that

refuses to include a shareholder proposal.

Violation of Anti-Fraud Prouisions

In SEC v. Maio,2°o the United States Court of Appeals for the Seventh

Circuit affirmed a district court decision finding that the defendants had

engaged in fraudulent insider trading. In so doing, the Court joined the

United States Courts of Appeals for the Second and Tenth circuits in holding

that the SEC had validly exercised its rulemaking authority in adoptmg

Exchange Act Rule 14e-3,2°1which prohibits insider trading in connection

with a tender offer.

In SEC v. Lauer,2°2 the Court of Appeals for the Seventh Circuit held

that a program falsely represented as involving the use of commingled

investor funds for trading "prime bank" instruments constituted a security

and was properly enjoined as involving fraud in the sale of those secunties.

Requests for Access to Commtssion Records

The Commission received approximately 100subpoenas for documents and

testimony in 1995. In some of these cases, the Commission declined to produce

the requested documents or testimony because the information sought was

privileged. The Commission's assertions of privilege were upheld in every

instance when the party issuing the subpoena challenged the assertion in court.

The Commission received 2,389requests under the Freedom ofInformation

Act (FOIA) for access to agency records. There were 64 appeals to the SEC's

General Counsel from initial denials by the FOIA Officer. Three actions were

brought in federal court challenging Commission decisions under the FOIA. One

case was withdrawn by the plaintiff; the second is pending. In the third case,

the requester sought review of the FOIA Officer's initial denial of a request

69
without first appealing to the Commission. The court granted the

Commission's motion for summary judgment and the requester has appealed

to the United States Court of Appeals for the D.C. Circuit.i'"

Motzons to Vacate Permanent Injunctions

In SEC v. Worthen, John Worthen moved to vacate a permanent

injunction entered against him in 1974. Worthen, a twice-convicted securities

law violator, argued that his injunction should be vacated primarily because

it was entered upon his default. The Commission opposed Worthen's

motion, arguIng that Worthen's injunction was valid and noted that Worthen

pled guilty to criminal contempt of the injunction in 1989. Worthen's

motion was denied without opinion. Worthen's appeal is pending.?"

In SEC v. Calvo, William Calvo moved to vacate a permanent injunction

entered against him in 1988.205 The injunction arose out of Calvo's

participation, as underwriter's counsel, in a public offering. The court

vacated the permanent injunction on the grounds that, in light of the effects

of the injunction, its continuance constituted fundamental unfairness.

Motions for Attorneys' Fees Under the Equal Access to Justice Act

Applications for attorneys' fees aggregatmg approximately $2 million

were filed by defendants in four Commission enforcement actions in which

the Commission did not obtain all or certain of the relief It sought against

a particular defendant. Three of those applications were denied, as the court

found that the Commission was substantially justified in bringing the action

or that the defendant did not otherwise qualify for an award of fees.206 In

one of those cases, SEC v. Littler, the court denied Equal Access to Justice

Act fees because even though the court declined to issue an injunction

against him, Littler was found to have violated the federal securities laws

and thus was not a prevailing party entitled to fees. The fourth is pending.

Actions Agamst the Commisszon and the Staff'

Numerous court actions, seeking millions of dollars in the aggregate,

were brought against the Commission and its staff alleging constitutional,

statutory, and common law tort violations in connection with the conduct

of various enforcement investigations. All of these actions were dismissed

except one, in which a summary judgment motion on behalf of the staff

member is pending.?"

Actions Under the Right to Financial Privacy Act

In FY1995,30 actions were filed against the Commission in federal district

court pursuant to the Right to Financial Privacy Act (RFPA). The movants

in these cases sought to quash Commission subpoenas to financial institutions

for the movants' bank account records. In each of the cases decided, the court

denied the motion to quash and ordered the subpoena enforced, finding a

demonstrable reason to believe that the subpoenaed records were relevant to

a legitimate law enforcement inquiry and that the staff had complied with the

procedural requirements of the RFPA. The remainder of the cases are pending

or were wi thdrawn.

70
Asset Freezes

In Colello v. SEC, the court held that the SWIss-United States Treaty

on Mutual Assistance in Criminal Matters-which enables U.S. law

enforcement agenCIes to freeze an individual's Swiss assets-violates the

Fourth and Fifth Amendments to the United States Constitution.?" In so

doing, the court rejected the government's argument that the Swiss appeals

process established pursuant to the Treaty provides an individual whose

Swiss assets have been frozen with an adequate opporturuty to challenge

the basis for a freeze for purposes of the Due Process Clause. The court

also rejected the government's argument that the "reasonable suspicion"

standard-pursuant to which Swiss asset freezes may be executed under

the Treaty-is reasonable for purposes of the Fourth Amendment.

Challenges to Commission Rules

In U.S Securities Corporation v SEC, the court dismissed a pennon

for a writ of mandamus requiring the Commission to exempt petitioners

from membership in the National Association of Securities Dealers (NASD)

and from certain broker-dealer reporting and net capital requirements

because petitioner was a small business. The court also dismissed the request

for a declaratory judgment that Section 15(b)(8) of the Exchange Act, which

requires all broker-dealers to be members of a national securities association,

is unconstitutional.

In Britton ti. Chalsty, the Magistrate Judge Issued a Report and

Recommendation that a declaratory judgment action against the Commission

be dismissed. The Magistrate Judge found, as urged by the Commission,

that the district court lacked jurisdiction to consider whether Commission

Rule 17a-3, which directs broker-dealers to seek arrest information from

persons applying to become associated persons, violates Title VII of the Civil

Rights Act of 1964. The Magistrate Judge concluded that Section 25(b)(1)

of the Exchange Act provides that United States courts of appeals have

exclusive jurisdiction over challenges to Commission rules or orders.

Significant Adjudication Developments

The staff submitted to the Commission 82 draft opinions and orders

resolving subs tantive motions, consistent with 1994's record 81 draft opinions

and orders. The staff resolved by delegated authority another 72 motions.

The Commission issued 57 opinions and 34 related orders.

Seventy-fournew appeals were filed with the Commission in 1995,exceeding

the record 71 received in 1993. A higher percentage of the Commission's

adjudication docket than in prior years now is represented by appeals from

decisions of administrative law judges, including decisions in Commission Rule

2(e) proceedings agains t accoun tan ts.

Joint Arrangement under the Investment Company Act of 1940

For the first time in recent years, the Commission addressed in an adjudicatory

decision the reach of Section 17(d) of the Investment Company Act of 1940

(Investment Company Act) and Rule 17d-1 thereunder. These provisions require

prior Commission approval of any joint arrangement involving an inves tment

71
company and an affiliated person. In Sequoia Partners, L.P., the Commission

declined to approve a joint arrangement between Counselors Tandem Securities

Fund, Inc. (the Fund), and Sequoia Partners, L.P. (Sequoia), a partnership that

had acquired over 25 percent of the Fund's common stock.?" The Fund and

Sequoia had executed a settlement agreement that required the Fund both to

make a tender offer for its common shares at 95 percen t of net asset value (NAV),

and to reimburse Sequoia for $240,000 of expenses that Sequoia incurred in

a proxy contest with the Fund. The Commission rejected the application to

approve the reimbursement as untimely, as the Fund already had placed the

$240,000 a t issue In escrow. The Commission further concl uded tha t Sequoia's

effort to obtain reimbursement constitu ted overreaching by an affiliate, which

is inconsistent with the Act's objective to prevent such self-dealing. Lastly,

the Commission found that the proposed arrangement violated the "best price"

requirement (Exchange Act Rule 13e-4(f)(8)(ii)) of the Commission's tender offer

rules, because Sequoia thereby was to be paid almost 100 percent of NA Von

tender of its shares while other shareholders were to be paid 95 percent of NA V

on their tenders.

Acquisition Approved under the Holdzng Company Act

In its only Holding Company Act decision this year, the Commission

granted two applications under that Act filed by Gaz Metropolitain, Inc.

(GMLI) and Gaz Metropolitain and Company, Limited Partnership (GMLP),

Canadian public companies.?" Applicants sought, among other things,

permission for GMLP to complete its acquisition of the stock of Northern

New England Gas Corporation (NNEG), a Vermont exempt holding company

that owns all the stock of Vermont Gas Systems, Inc. (VGS), a Vermont

corporation that provides gas service in that state. In approving the

acquisition under Section 10(c)(2) of the Holding Company Act, the

Commission concluded that nothing in the Holding Company Act prevents

a foreign company that does not own or control public utility or holding

company securities from acquiring the securities of a domestic public utility

company.

Sales Practice Abueesiirejictent Supertiiston

Again this year the Commission reviewed a number of cases finding

sales practices abuses and deficient supervision. In Dan A. Druz/II for

example, the Commission found a branch manager of Shearson Lehman

Brothers, Inc. to have failed reasonably to supervise and control the activities

of a salesman who executed over 100 unauthorized trades in the accounts

of three different customers.

In Patricia A. ]ohnson,212 the Commission found that a former branch

manager of Paine Webber, Inc. failed to provide effective and reasonable

supervision of a registered representative with a view towards preventing

that person's violations of the antifraud provisions. Johnson disregarded

firm procedures and ignored numerous "red flags," including several customers'

complaints abou t the handling of their accounts, which included charges of misuse

of cus tomer funds. The Commission found that the limi ted action Johnson took

against the representative-placing him on probation-was insufficient. Johnson

72
also had contended on appeal that this administrative proceeding was

brought in violation of the federal statute of limitations contained in 28

u.s.c. 92462. The Commission concluded that Section 2462 does not apply

to proceedings brought under Section 15(b) of the Exchange Act that seek

only remedial sanctions.

In another appeal of a law judge's decision, Martin Herer Engelman,

Peter Paul Kim, and Lawrence David lsen."? the Commission found that a

Stuart-James, Inc. branch manager and his two assistants engaged in

pervasive fraud Intheir dealings with customers. Their misconduct included

inducing customers to buy speculative secunties with promises that these

investments were safe and would result in tremendous gains within short

periods of time, and withholding from customers information that investors

in the recommended securities stood to lose their entire investment. The

Commission barred all three respondents from association with any broker

or dealer and entered cease and desist orders in this matter.

Unfair Commtssione/Exceseiue and Fraudulent Markups

In Atlanta-One, lnc., et al.,214 the Commission agreed with the NASD

that commissions representing between 14 and 89 percent of customers'

investments in foreign currency options traded by the firm were unfair. The

Commission found that general proscriptions against gouging customers

placed the respondents on notice that charging commissions at these rates

was conduct inconsistent with just and equitable principles of trade. The

Commission accordingly sustained the censures, 3D-day suspensions, fines,

and requalification requirements the NASD had imposed for this misconduct.

Finally, in one of a number of disciplinary actions concerning retail

markups on securities reviewed this year, HIbbard, Brown & Co. et al.,215 the

Commission found that an NASD member firm and its president and head

trader charged customers excessive and fraudulent markups in thousands

of sales of a common stock, generating over $8.7 million in excessive profits

in only eight trading days. The Commission concluded that these respondents

violated a dealer's fundamental duty to treat its customers fairly when they

arranged to acquire the stock at less than half the price that they were selling

it to their retail customers. Concluding too that the inter-dealer market

for the stock was the result of a "stage-managed performance" which

produced wholly Illusory prices, the Commission rejected the respondents'

contention that the best evidence of the fairness of their retail prices was

the numerous inter-dealer transactions in the stock. The Commission instead

found that, because the firm was not a market-maker in the stock, the firm's

contemporaneous cost of acquiring the stock provided the best evidence

of prevailing market price. The Commission sustained the NASD's censures

and fines of the three respondents and its determination to expel the firm

from NASD membership and bar both the president and head trader from

association with any member.

73
Significant Legislative Developments

Congress actively considered, but did not enact, a number of bills that

would affect the work of the SEC. Most notably, (1) the House and Senate

passed separate litigation reform measures; (2) a House bill was introduced

to revise the federal securities laws and" deregulate" the United States capital

markets; (3) a House bill was introduced to amend or supplement provisions

of the Investment Company Act;(4)following extensive hearings, both the House

Banking and the House Commerce Committees approved legislation to repeal

the Glass-Steagall Act; (5) the House held hearings on proposals to repeal the

Public Utility HoldingCompany Act; (6) a Senate bill was introduced to delegate

to the states the regulation of smaller investment advisers; (7) a bill was

Introduced and hearings held In the House regarding the merger of the SEC

and the CFTC; (8) bills were introduced in the House and Senate regarding

the exemption from the securities laws of charitable organizations that issue

charitable gift annuities; and (9)three bills were introduced in the House and

one in the Senate addressing the regulation of participants in the derivatives

markets, and oversight hearings were held to explore the issue of Orange County,

California's derivatives-related losses. Legislative activity in most or all of

these areas IS expected to continue in 1996.

Securities Litigation Reform

House and Senate bills providing for the reform of the private securities

litrgation system were introduced in the opening days of the 104th Congress.

Both H.R. 1058 (passed by the House in March 1995) and S. 240 (passed by

the Senate in June 1995) contain provisions that would, among other things:

eliminate certain abuses associated with class action lawsuits; eliminate civil

racketeer influenced and corrupt organizations liability for securities law

violations; replace joint and several liability with proportionate liability for

defendants who act recklessly; and provide for an express right of

contribution among co-defendants. Differences between the two bills exist

WIth respect to such highly controversial issues as: the creation of statutory

safe harbors for forward-looking statements; the codification of a definition

of "recklessness;" pleading standards for fraud actions; and the availability

of the fraud-on-the-market theory of liability. As of September 30, 1995,

conferees had yet to be named to resolve the differences between the House

and Senate bills.

In testimony earlier In the year before House and Senate committees on

the respective bills, the SEC expressed support for efforts to make private

securities htigation more effective and to deter meritless lawsuits. At the

same time, the SEC opposed provisions that would (among other things)

eliminate recklessness as a basis for liability, establish a broadly applied

scheme of proportionate liability, and create an overly broad safe harbor

for forward-looking statements.

Glass-Steagall Repeal

Two major Glass-Steagall reform proposals were introduced early in the

104th Congress. The House Banking and Commerce Committees both held

hearings on and reported legislation (H.R. 1062)that would have, among other

74
things, (1) permitted banks to affiliate with securities firms through a

holding company structure, and (2) taken some steps to bring certain bank

securities activities within the federal securities regulatory scheme, but (3)

nonetheless allowed banks to conduct a range of broker-dealer activities

directly or through "separately identifiable departments or divisions" of the

bank. The SECtestified before both Committees, reaffirming its long tradition

of support for financial services modernization in the context of functional

regulation.

As of September 3D, 1995, H.R. 1062 had apparently been linked with

another bill (H.R. 1858) that contained a variety of regulatory relief provisions

and highly controversial provisions relating to bank insurance powers. It

was unclear whether disagreements over the issue of bank insurance powers

would prevent Glass-Steagall legislation from movmg forward in fiscal 1996.

For its part, the Senate did not actively take up the issue of Glass-Steagall

reform in 1995, though early in the year Senator D' Amato introduced a bill

to significantly broaden the scope of commercial as well as securities activities

permitted for companies that own banks.

Securities Deregulation

H.R. 2131, the "Capital Markets Deregulation and Liberalization Act

of 1995," was introduced in the House in July 1995. The bill, which seeks

to reduce regulatory overlap and lower the costs of raising capital, would,

among other things: preempt most state securities regulation; redefine the

suitability obligations of broker-dealers with respect to "institutional

investors;" repeal much of the Williams Act (the statute regulating tender

offers); relax prospectus delivery requirements under the Securities Act;

grant the SEC general and specific exemptive authority under the Securities

Act; repeal the Trust Indenture Act of 1939; and reduce the number of SEC

Commissioners from five to three. No action had been taken on H.R. 2131

as of September 30,1995; however, hearings on the measure were scheduled

for November 1995.

Investment Adviser Regulation

The opening days of the 104th Congress saw the introduction of S. 148,

the "Investment Advisers Integnty Act," in the Senate. S. 148 would target

specific amounts from the SEC's budget that would have to be devoted to

enforcemen t of the Advisers Act. The bill also would realloca te res ponsibili ty

for regulation of investment advisers between the federal and state securities

regulators; it would essentially exempt from registration with the SEC (and

make the states responsible for regulating) investment advisers that manage

less than $5 million in assets. Under the bill, the SEC would retain authority

to investigate allegations of fraud involving any investment adviser, whether

registered with the SEC or with a state regulator. The SEC also would have

discretionary rulemaking authority to require SECregis tra tion of inves tmen t

advisers that manage between $1 million and $5 million in assets. The Senate,

however, took no action on 5.148 in 1995, and no comparable legislation was

introduced in the House.

75
Investment Company Act Amendments

H.R. 1495, the "Investment Company Act Amendments of 1995," was

introduced in Apn11995. Incorporating a number ofrecommendations from

a 1992 SEC staff report, the bill seeks to modernize aspects of mvestment

company operation and regulation. H.R. 1495 would, among other things:

except from regulation under the Investment Company Act investment

pools that include only highly sophisticated purchasers, and streamline the

existing exception for "private" investment companies; require a majority

of fund directors to be independent; reduce the number of shares necessary

for approving certain important matters, such as advisory contracts and

changes in a fund's investment objective; give funds greater advertising

flexibility; authorize the creation of a mutual fund WIth a single unified

fee covenng all fund services and most expenses; and lift restrictions on

mutual funds making investments in other mutual funds in the same fund

complex. No counterpart to H.R. 1495 was introduced in the Senate in 1995,

and the House took no action on the bill prior to September 30, 1995;

however, hearings were held in the House early in fiscal 1996.

Regulation of Public Utzlzty Holdzng Companies

In June 1995, the SEC issued a staff report discussing the results of

a one-year study of the Holding Company Act. The report con tamed three

alternative legislative recommendations: (1) repeal of the Holding Company

Act, accompanied by addrtional authority at the state and federal level for

the continued protection of consumers; (2) outright repeal of the Act; or

(3) full exemptive authority under the Act for the SEC. In testimony before

subcornrruttees of the House Commerce Comrruttee, the SEC expressed its

preference for the first alternative-conditional repeal. Legislation embodying

this recommendation was subsequently introduced in October 1995.

Separately, the Senate in 1995considered and passed a telecommunications

bill (S. 652), one small part of which would broaden the ability of registered

public utility holding companies to diversify into telecommunications and

information services, notwithstandmg the prohibitions on diversification imposed

by the Holding Company Act. House-passed telecommunications legislation

(H.R. 1555),however, would not affect the ability of registered holding companies

to engage m telecommunications or information services under the Holding

Company Act.

SEC-CFTC Merger

H.R. 718, the "Markets and Trading Reorganization and Reform Act,"

was introduced in January 1995 and was referred primarily to the House

Banking Committee. The bill proposes to replace the SEC and the CFTC

with a new, merged Markets and Trading Commission. The SEC testified

before a subcommittee of the House Banking Committee regarding H.R. 718

in March 1995. The SEC testified that, while a merger of the two agencies

might make sense in a number of ways, the benefits of such a merger do

not at this point justify the time and political capital that would be needed

to accomplish it. In addition, the SEC expressed concern about specific

76
provisions of the bill, which could make the transition to unified regulation

very cumbersome. As of September 30,1995, H.R. 718 had not been reported

out of the Banking Committee.

Regulatory Reform

The 104th Congress considered numerous regulatory reform bills in

1995. In general, the bills considered would alter the way that all federal

agencies, including the SEC, write and review rules. In a number of instances,

the SECtestified and/or provided written statements describing the likely impact

of specific bills on the agency's independence and its enforcement program.

In March 1995, the House passed H.R. 9 that would, among other things:

compensate private property owners for certain regulatory restrictions that limit

the use of their property; give the Office ofManagement and Budget an enhanced

role in analyzing agency rulemakings under the Regulatory Flexibili ty Act; and

require agencies to analyze benefits and costs in connection with their riskassessmen t activi ties. (Paperwork red uction provisions, originally part of H.R.

9,were passed as a separate measure by both the House and Senate and signed

into law as Pub. L. No. 104-13 in May 1995).

SEC 1996 Funding

The solu tion to the offsetting fee problem of the SEC's 1995appropriation

was understood to be a one-time, stopgap measure. Work on the SEC's 1996

appropriation, therefore, required agreement on a long-term approach to

funding the agency. In June 1995, House Commerce Committee Chairman

BIiley announced an agreement in principle with the chairmen of the

Appropriations and Ways and Means Committees on a long-term funding

mechanism for the SEC. Under the agreement, securities registration fees

would be gradually reduced, while funding from the United States Treasury

general appropriation account for the agency would increase.

The House in July 1995 passed an appropriations bill (H.R. 2076) that

generally reflected this agreement: it would provide the SEC with funding

for 1996 at the $297 million level that was in place for 1995 (and a securities

registration fee rate of 1/29th of one percent in Section 6(b) of the Securities

Act). The Senate Appropriations Committee, by contrast, in September 1995

approved a bill that would have cut the SEC's funding for 1996 by 20 percent

from the 1995 level. The Senate subsequently passed legislation that would

cut the SEC's appropriation by 10 percent. At the end of fiscal 1995, the

SEC's funding still was uncertain, as was the funding for virtually all other

federal agencies.

Other Legislation and Hearings

Bills also were introduced in the House and Senate in 1995 addressing,

among other things, the regulation of participants in the derivatives markets

and the disclosure obligations of issuers of municipal securities.

77
Corporate Reorganizations

The Commission, as a statutory adviser in reorganization cases under

Chapter 11 of the Bankruptcy Code, seeks to assure that the interests of

public investors are adequately protected. During 1995, there were 120

active Chapter 11 cases involving public companies. The Commission

entered a formal appearance in 13 cases with significant public investor

interest. The Commission also was actively involved during 1995 as a

statutory party in the Orange Countu-" bankruptcy, the largest municipal

bankruptcy ever filed under Chapter 9 of the Bankruptcy Code, in order

to protect the holders of the County's public debt securities and the municipal

bond market generally. The Commission sought in addition to prevent any

disruption of trading in the wake of the bankruptcy filing.

Commzttees

Official committees negotiate with debtors on the formulation of

reorganization plans and participate generally in all aspects of the case. The

Bankruptcy Code provides for the appointment of an official committee for

stockholders where necessary to assure adequate representation of their

interests.

During 1995, the Commission sought to assure that committees were

not hindered in their efforts to represent public investors, successfully

objecting to attempts to dissolve the committee in In re Amerzca West Airlines.i"

and to limit the scope of the committee's activities in In re UDC Homes F"

The Commission also reiterated its position that insider trading prohibitions

apply to members of official committees, who frequently receive confidential

information on a company's operations and prospects. In In re County of

Orange,219 In re House of Fabrics, Inc.,220 and In re Baldwin Buitders r" the

Commission supported the adoption of court orders permitting trading in

the debtor's securities only by committee members that engage in securities

trading in the regular course of their business and that implement procedures

designed to prevent the misuse of inside information.

Disclosure Statements/Reorganization Plans

Adisclosure statemen t is a combina tion proxy and offering statemen t used

to solicit acceptances for a reorganization plan. Such plans often provide for

the issuance of large quantities of new unregistered securities pursuant to an

exemption from Securities Act registration contained in the Bankruptcy Code.

During 1995,the staffreviewed 92plans and disclosure statements and commented

on 75. Recurring problems with disclosure statements included inadequate

financial information, lack of disclosure on the issuance of unregistered securi ties

and insider transactions, and plan provisions that contravene the Bankru ptcy

Code. Most of the staff's comments were adopted by the debtors without the

need for formal Commission intervention.

In In re Trans World Airlmes P? In re Diversified, Inc.,223 and In re PharMor, Inc.224 the Commission objected to plan provisions that would have

discharged third parties, such as officers and directors, from liabilities. This

issue is of significance to investors because in many cases debtors seek to

78
use the Chapter 11 process to protect officers and directors from personal

liability for various kinds of claims, including liability under the federal

securities laws.

Enforcement Matters

Bankruptcy issues frequen tly arise in Commission enforcement actions.

In In re Bilzerian P" a case with significant implications for the enforcement

program, the district court overruled a bankruptcy court order that had

barred the Commission from bnnging an action to have its $33 million

securities fraud disgorgement judgment excepted from discharge in

Bilzerian's bankruptcy proceeding. In In re Steven Wezl,226 the Commission

blocked an attempt by a debtor to use the automatic stay of the Bankruptcy

Code to prevent enforcement of a disgorgement order entered in a

Commission law enforcement action.

Ethical Conduct Program

In 1995, the Ethics Office staff continued to respond to a demand for

counseling services at the rate of approximately 20 new matters per week.

These inquiries reflected unique or novel Issues, while routine or repetitive

inquiries were handled by ethics liaison officers and depu ties loca ted wi thin

each division and office.

79
Municipal Securities Initiatives

The Office of Municipal Securities (OMS) was established in 1995 as

part of the Commission's overall effort to provide a core of expertise and

coordination on urgent and ongoing municipal securities issues. OMS

provides expertise to the Commission and staff members, assists on

municipal securities enforcement cases, coordinates disclosure rules and

other ongoing municipal regulatory initiatives, and addresses new issues

that arise in the municipal securities area. In addition, OMS provides

assistance in legislative matters and works directly with issuers, investors,

brokers, dealers, municipal securities dealers, and other professionals on

issues relating to municipal securities.

Key 1995 Results

The staff, together with the Office of the General Counsel, coordinated

the SEC's participation in the Orange County, California municipal

bankruptcy and related issues. The staff also worked with the Division of

Enforcement, both in Washington and in the regional and district offices,

providing technical assistance in the many municipal securities investigations

and enforcement proceedmgs undertaken since the beginning of 1995. In

addition, along with the Divisions of Market Regulation and Corporation

Finance, the staff provided guidance to the municipal markets including

issuer, broker, dealer, and municipal securities dealer organizations, in

conjunction with the implementation of amendments to Rule 15c2-12 of the

Securities Exchange Act of 1934, as amended (Rule 15c2-12) concerning

secondary market disclosure.

The staff appeared on behalf of the SEC before the House Subcommittee

on Capital Markets, Securities and Government Sponsored Enterprises of

the House Banking Committee and testified on the municipal securities

markets in the aftermath of the Orange County, California bankruptcy.

Municipal Securities Disclosure

The staff planned and organized the Commission's participation in a

teleconference on municipal securities disclosure sponsored by the

Government Finance Officers Association (GFOA), the National Association

of Counties, and the Public Securities Association (PSA). Chairman Arthur

Levitt and SEC staff participated in the teleconference and provided general

information and direction on municipal securities disclosure and the prudent

management of public funds. Specific information also was provided on

Rule 15c2-12. The teleconference provided information and responses to

queries from municipal secunties professionals, including issuers.

Approximately 1,200 individuals participated in the live broadcast of the

teleconference.

80
The staff worked to educate municipal market participants in the

implementation of, and compliance with, amendments to Rule 15c2-12,

which require secondary market disclosure. The staff also provided guidance

to market participants regardmg recent SEC enforcement decisions that

apply the antifraud provisions of the federal securities laws to the municrpal

securities markets and professionals. In furtherance of this effort, the staff

metwith numerous organizations involved in the municipal finance industry.

Technical Assistance

In 1995, the staff provided support to Chairman Levitt's and Secretary

of the Treasury Rubin's joint efforts to increase the awareness of local

government financial officers of the need for the prudent management of

public funds in today's markets. The staff, working through the Office of

Legislative Affairs, also provided technical assistance to Congress on issues

involving municipal secunties, such as providing information on the

investment of public funds, suitability requirements, and the municipal

bankruptcy in Orange County, California.

The staff worked with the Division of Market Regulation on matters

relating to the Municipal Securities Rulemaking Board (MSRB), including

the implementation of MSRB rule G-37, which prohibits brokers, dealers,

and municipal securities dealers from engaging In municipal securities

business with issuers if certain political contributions have been made to

officials of such issuers. In addition, the staff worked with the Divisions

of Market Regulation and Corporation Finance on various issues surrounding

the implementation of amendments to Rule 15c2-12.

The staff worked with the Office of the General Counsel on the municipal

bankruptcy in Orange County, California, and other municipal securities

matters; assisted the Office of Compliance Inspections and Examinations

in oversight concerning municipal securi ties regula tions; provided technical

assistance to the Division of Investment Management on proposed

rulemaking; and assisted the Office of Investor Education and Assistance

on issues pertaining to individual investors and municipal securities price

transparency.

OMS staff provided technical assistance to the Division of Enforcement

on several municipal securities enforcement actions, including: SEC v.

Stifel, NIcolaus and Company, Inc., Litigation Release No. 14587 (August 3,

1995),59 SEC Docket 2964; SEC v. Goodman and Harold Tzinberg, Litigation

Release No. 14471 (April 18, 1995), 59 SEC Docket 0457; SEC v. Terry D.

Busbee and Preston C. Bynum, Litigation Release No. 14387 (January 23,1995),

58 SEC Docket 1949; and SEC v. Nicholas A. Rudi, Joseph C. Salema, PublIC

Capital Advisors, Inc. formerly known as Consolidated Financial Management,

Inc, George L. Tuttle, Jr. and Alexander S. Williams, Litigation Release No.

14421 (February 23, 1995), 58 Docket 2495.

81
Economic Research and Analysis

The Office of Economic Analysis (OEA) provides the Commission and

the operating divisions with the technical and analytical support necessary

to understand and evaluate the economic effects of Commission regulatory

policy. OEA plays a major role in the Commission's enforcement effort by

applying economic and statistical tools to issues such as materiality and

disgorgement.

Key 1995 Results

In 1995, the staff focused its efforts on a number of areas, including

enforcement cases, mutual fund disclosure, and market structure issues. The

staff provided technical assistance to the Division of Enforcement, designed a

survey to evaluate investors' understanding of financial products, and analyzed

various risk measures in connection with the Commission's release on mutual

fund risk disclosure.

Economic Analysis and Technical Assistance

The staff assisted the Division of Enforcement in approximately 40 cases

ofinsider trading, market manipulation, fraudulent financial reporting, and other

violations of securities laws. This work generally involved the application of

financial economics and statistical techniques to determine whether the elements

offraud are present and to estimate, where appropriate, the amountofdisgorgement

to be sough t. In particular, the staft assisted in the developmen t of da ta presen ted

at trial in the action against First Jersey Securities, assisted in the taking of

testimony in cases involving complex fmancial instruments, and assisted in

evaluating reports of consultants and the testimony of experts hired by opposing

parties. The staff also assisted the Division of Enforcement in several largescale investigations.

The staff developed a survey, in cooperation With the Division ofInvestment

Management (1M),aimed at learning what individual investors understand about

financial products. Responses to a nationwide telephone survey of mu tual fund

owners were used to examine why investors choose particular mutual funds.

The statistical analysis focused on relations between the type of fund and venue,

purchase information, investment knowledge possessed by investors, and various

demographic variables. This survey led to a Profile Prospectus focus-group

program, which is currently being conducted by 1Mand several mutual fund

families. The staff also provided an extensive statistical analysis of risk measures

In support of 1M's concept release on mutual fund risk disclosure.

The staff provided extensive statistical analysis for the Commission's

Advisory Committee on Capital Formation and Regulatory Processes, which is

considering company registration versus the registration of individual securities

82
offerings. This analysis addressed the costs of new issues and the volume of

offerings, the effects of various possible thresholds for issuer participation in

company registration, and the impact of SEC review of prospectuses.

The staff provided advice and a variety of statistical analyses, rela ted to

market structure issues, to the Commission and operating divisions. These

included analyses of the impact ofsmall order execu tion system trading activity

on the NASDAQ market, New York Stock Exchange specialists' profitability

and market participation, the effects of preferenced order flow and related pilot

programs, execu tion quali ty, market fragmen tation, and paymen tfor order flow.

The staff continued to monitor the securities industry and developments

In the domestic and international securities markets. In addition, the staff

analyzed 90 rule proposals to assess their potential effects on small entities

as required in the Regulatory Flexibility Act of 1980.

During the year, OEA initiated a variety of projects designed to expand

the Commission's understanding of the capital markets. These projects are longterm in nature and focus on the use and economics of soft dollar commissions,

price stabilization in the initial public offering aftermarket, the demand for

proprietary trading systerns, and the trading of Amencan Deposi tory Receipts

and foreign securities in the over-the-counter market.

83
Policy Management and Administrative Support

Policy management and administrative support provide the Commission

and operating divisions with the necessary services to accomplish the

agency's mission. PoliC1Jmanagement is provided by the executive staff,

including the Office of Legislative Affairs; the Office of the Secretary; the

Office of Public Affairs, Policy Evaluation and Research; the Office of the

Executive Director; and the Office of Equal Employment Opportunity. The

responsibilities and activities of policy management include developing and

executing management policies, formulating and communicating program

policy, overseeing the allocation and expenditure of agency funds, maintaining

liaison with the Congress, disseminating information to the press, and

facilitating Commission meetings.

Administrative support includes services such as accounting, financial

management, fee collection, information technology management, data

processing, space and facilities management, and human resources

management. Under the direction of the Office of the Executive Director,

these support services are provided by the Offices of the Comptroller,

Information Technology, Administrative and Personnel Management, and

Filings and Information Services.

Key 1995 Results

In 1995, the Commission held 55 meetings and considered 240 matters.

Major activities of the Commission included amendments to streamline

financial disclosure requirements for foreign and domestic issuers, public

hearings on the safe harbors from liability for disclosure of "forward looking"

information, rules to streamline prospectus delivery requirements to

accommodate timing concerns raised by implementation of the trade date

plus three days settlement standard (known as T+3), the establishment of

a program of joint and coordinated examinations of broker-dealers and

investment company activities, and rules to implement the EDGAR system.

The agency collected fees for the United States Treasury in excess of

its appropriation for the thirteenth consecutive year. The SEC's total fee

collections in 1995 were $559 million and the net gain to the Treasury was

$292 million.

Policy Management

Commission Activities. During 55 Commission meetings held in 1995,

the Commission considered 240 matters, including the proposal and adoption

of Commission rules, enforcement actions, and other items that affect the

84
stability of the nation's capital markets and the economy. The Commission

also acted on 1,027 staff recommendations by seriatim vote. Significant

regulatory actions taken by the Commission included:

proposing amendments to the National Market System rules on

execution of customer orders by brokerage firms:

adopting comprehensive revisions to its rules of practice for

administrative proceedings;

conducting hearings in Washington, D.C. and San Francisco,

California on possibly amending current rules on safe harbors for

corporate disclosure;

proposing amendments to rules on codes of ethics for investment

company personnel; and

issuing a concept release on improving disclosure of risks by mu tual

funds and other Investment companies.

Congressional interest in the agency's activities and initiatives remained

high. The Commission and staff members testified at 16 congressional

hearings during the year. In addition, the Congress actively considered

a number of important issues under the Commission's jurisdiction. These

were most notably:

securities litigation reform;

concerns relative to the municipal bond and government securities

markets;

proposals for regulatory reform;

Glass-Steagall reform and financial services modernization;

proposals to merge the SEC and the Commodity Futures Trading

Commission;

the regulation of public utility holding companies; and

the SEC's appropriation.

Public Affairs. The Office of Public Affairs, Policy Evaluation and

Research (OPAPER) communicated information on Commission activities

to those interested in or affected by Commission actions, including the

press, regulated entities, the general public, and SEC employees through

ongoing programs and special projects. The office published the SEC News

Digest daily, which provided information on rule changes, enforcement

actions against individuals or corporate entities, administrative actions,

litigation releases, acquisition reports, decisions on requests for exemptions,

upcoming Commission meetings, and other events of interest. OPAPER

published a regular newsletter, The SEC Employee News, and prepared a daily

summary of news clips for agency employees. Special projects, such as

support for activities related to the Chairman's investor education initiatives,

the creation of the SEC's Internet Web site, and the agency's International

Institute for Securities Markets Development were undertaken.

Many of the agency's actions are of national and international Interest.

When appropriate, these actions are brought to the attention of regional,

national, and international press. The office issued 262 press releases on

upcoming events, SEC programs, enforcement actions, and special projects.

85

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In addition, the office responded to approximately 50,000 requests for

specific mformation on the SEC or its activities. The office also coordinated

visi ts of domestic and foreign officials to the SEC. In total, programs for

776 foreign visitors and 103 United States visitors were coordinated during

the year.

Management Activities. The Office of the Executive Director continued

to promote management controls and financial integrity and to manage

audit follow-up requirements. The office continued to analyze the efficiency

and effectiveness of opera ting di visions and su pport offices and to coordina te

and Implement the agency's compliance with and response to actions under

the National Performance Review (NPR) and the Government Performance

and Results Act of 1993, including development of the agency's strategic

plan. Working closely WIth other senior officials, the staff formulated the

agency's budget submissions to the Office of Management and Budget and

the Congress.

Equal Employment Opportunity. The Office of Equal Employment

Opportunity (EEO) provided the agency with support for compliance with

Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination

in Employment Act of 1967; the Rehabilitation Act of 1973; and the Equal

Pay Act of 1963. This support was provided through the office's compliance

and affirmative employment activities.

The primary services provided by the compliance branch included

counseling and dispute resolution, administrative fact-finding investigations,

and fmal agency decisions on formal complaints of employment

discrimination. In connection with the affirmative employment activity,

the office participated in orientation programs for new employees and

administered the Federal Women's Program, the Hispanic Employment

Program, and the Black Employment Program and sponsored, along with

the Office of Administrative and Personnel Management (OAPM), the SEC's

Disability Issues Advisory Committee.

Freedom of lnjormatton Act and Privacy Act. The Office of Freedom of

Information Act (FOIA) and Privacy Act Operations responded to requests

for access to information pursuant to FOIA, the Privacy Act, and the

Government in the Sunshine Act, and processed requests under the agency's

confidential treatment rules. Confidential treatment requests were generally

made in connection with proprietary corporate information and evaluated

in conjunction with access requests to prevent the unwarranted disclosure

of information exempt under the FOIA.

The agency received 2,430 FOIA requests and appeals, 12 Privacy Act

requests and appeals, 42 Government in the Sunshine Act requests, 11

government referrals, and 8,300 requests and appeals for confidential

treatment. All responses to FOIA, Privacy Act, and Government in the

Sunshine Act requests were made within the statutory time-frame.

86
Administrative Support

Financial Management and Operations. In 1995, the SEC collected fees

in excess of its appropriation. The SEC's total fee collections in 1995 were

$559 million, 188 percent of the agency's appropriated spending authority

of $297 million (WhICh consisted of $75 million in appropriated funds, an

appropriation of $192 million subject to reduction as offsetting fees were

received, and $30 million from a carry-over of prior year offsetting fee

collections). The $559 million in total fee collections, rrunus the SEC's

current year spending authority of $267 million ($297 million less the $30

million from prior year offsetting fee collections), resulted in a net gain of

$292 million to the United States Treasury.

The SEC's total fee revenue in 1995 was collected from four basic

sources: registrations of securities under Section 6(b) of the Securities Act

of 1933 (comprising 71 percent of total fee collections), transactions of

covered exchange listed securities (19 percent), tender offer and merger

filings (7 percent), and miscellaneous filings (3 percent). Offsetting fee

collections were generated from an increase in the fee rate under Section

6 (b) of the Securities Act from one-fiftieth of one percent to one-twentyninth of one percent.

During the year, the staff updated the agency's Five-Year Financial

Management Plan. This plan responds to current financial system issues,

recognizes new legislative and NPR requirements, and is consistent with

the agency's information technology plan.

In other financial areas, the staff implemented a new Electronic Time

and Attendance System, completed the testing of an off-the-shelf travel

management software package, and replaced an imprest fund based travel

advance program with an automated teller machine based system that uses

the government credit card for travel advances.

Information Resources Management. The Office of Inforrnation Technology

(OIT) continued to develop and enhance SEC information resources. Notably,

full implementatIon of the Electronic Data Gathering, Analysis, and Retrieval

(EDGAR) project continued to proceed smoothly. As of September 3D,1995,

nearly 75 percent of all SEC registrants were filmg all of their required

material electronically. The last two groups of filers will enter the system

in November 1995 and May 1996.

A conference was held on August 14, 1995 to solicit public input on

how to improve and update the EDGAR system. In a further effort to solicit

input from the public and the securities industry, the SEC published a

Request for Information (RFI) in the Commerce Business Daily during the

week of October 9, 1995. Questions included in this RFI were drawn from

comments received at the August 14 conference.

The OIT continued implementing the agency's strategic automation

moderniza tion ini tia tive. Several infrastructure im prove men ts were

implemented, including the upgrade of staff workstations and the

enhancement of the local area network/wide area network. Upgraded

personnel, payroll, and financial management systems were among the new

systems implemented to enhance administrative functions.

87
Modifications to the agency's disaster recovery plans were initiated

to provide the agency with fully integrated backup capabilities for its local

area network and its mainframe computing resources, in the event of a

disaster at either of its computer facilities-the main Operations Center in

Alexandria, Virginia or the Headquarters building In Washington, D.C.

Work also continued on the development of a backup capability for the

EDGAR system.

On September28, 1995, the Comrnissrorr's new World Wide Web (WWW)

site was inaugurated. The WWW server was configured to provide basic

access to the EDGAR database of electronic filings on a 24-hour delayed

basis and to provide a forum for litigation releases, news digests, press

releases, Commission rulemaking activities, and a wide range of other

information of interest to the investing public. Key financial information

that previously was not easily accessible is now available worldwide to

students, public interest groups, individual investors, and any other

mterested party with access to a computer and Internet interface.

Admznistrative and Personnel Management. The OAPM provided a wide

range of personnel and office support functions to the agency's divisions

and offices. Personnel programs included recruitment and staffing, position

management and classification, employee compensation and benefits,

training, performance management, employee recognition, employee

relations, counseling, disciplinary actions, personnel security and suitability,

personnel action processing, and maintenance of official employee records.

Support programs included procurement and contracting, space acquisition,

lease administration, facilities management, property management, desktop

publishing, printing, publications, mail services, and telecommunications

management.

Efforts to streamline and reinvent personnel programs continued as

a result of the NPR. Based on focus group recommendations, new policies

on alternate work schedules and flexiplace were implemented in January

1995 to assist employees in balancing work and family demands. The

streamlining of internal operations continued with the implementation of

the first phase of the new automated Personnel Resource System and the

establishment of a centralized photocopy center.

The SEC joined a consortium of federal agencies in sponsoring and

participating in an in-depth study by the National Academy of Public

Administration (NAPA). The purpose of the NAPA study is to discover and

evaluate organizations with innovative personnel programs and to generate

models for implementing change in human resources management that can

be shared with government agencies.

The SEC obtained authority from the Office of Personnel Management

to offer early retirements and implemented a Voluntary Early Retirement

program for members of the Senior Executive Service and employees in

grade 15 positions. As part of this effort, several special retirement planning

seminars were provided to eligible staff.

88
During 1995, overall training activities increased with mandatory HIV/

AIDS training for all employees, customer service training for all support

office employees, and conflict resolution techniques for managers and

supervisors. A total of 2,597 employees attended 5,390 traming events.

The agency awarded contracts, purchase orders, and credit card

purchases totalling approximately $31,293,747 during 1995. As part of its

effort to encourage the use of the government-wide credit card for purchases

of commercially available goods and services under $2,500, OAPM issued

25 credit cards to purchasing agents and contracting officers throughout

the agency. The SEC administered 15 leases for an approximate total of

794,797 square feet of office and related space.

Public Reference The SEC maintains public reference rooms in its

Washington, D.C., New York, and Chicago offices. In a continuing interest

to better serve the public, the procedures in the headquarters public reference

room were enhanced to expedite identification, location, and retrieval of

documents and microfiche. The public reference rooms made all company

filmgs and Commission rules, orders, studies, reports, and speeches available

to the public.

During 1995, the staff provided assistance to 28,070 visitors to the

headquarters public reference room, responded to 7,070 requests for

documents, processed 590 requests for certifications of filings and records,

and responded to 81,350 telephone inquiries. The public reference staff

received and filed 390,450 paper documents and 488,180 microfiche records

to the existing library of publicly available information.

89
Endnotes

ISEC v. Block, Exchange Act Release No. 14598 (Aug. 10, 1995), 59 SEC Docket

3112.

25EC v. Odulo, Exchange Act Release No. 14591 (Aug. 7, 1995), 59 SEC Docket

3105.

3SEC v. Pleasure Time Inc., Litigation Release No. 14440 (Mar. 15, 1995),58 SEC

Docket 2909.

4SEC v. Gallard, Litigation Release No. 14485 (May 2,1995),59 SEC Docket 69l.

55EC v. Norton, Litigation Release No. 14529 (June 14, 1995), 59SEC Docket 1747.

6SEC v. United Communications, Ltd., Litigation Release No. 14424(Feb. 27, 1995),

58 SEC Docket 2595.

7SEC v. Future Vision Direct Marketing, Inc., Litigation Release No. 14287 (Oct. 4,

1994),57 SEC Docket 2278.

BSEC v. Telecom Marketing, Inc., Litigation Release No. 14494 (Mar. 29,1995),58

SEC Docket 3106.

9SEC v. Qualified Pensions, Inc., Litigation Release No. 14636 (Sept. 13,1995),60

SEC Docket 708.

JOSECv. Bloch, Litigation Release No. 14511 (May 25,1995),59 SEC Docket 127l.

IJSECv. Bennett, Litigation Release No. 14503(May 18,1995),59SECDocket1147.

uSEC v. International Breeders, Inc., Litigation Release No. 14607 (Aug. 17, 1995),

59 SEC Docket 3228.

135ECv. Naiman, Litigation Release No. 14463 (Apr. 10, 1995),59 SEC 260.

14SECv. First Capital Holdings Corp., Inc., Litigation Release No. 14444 (Mar. 17,

1995),58 SEC Docket 3002.

15SEC v. Sojtpomt, Inc., Litigation Release No. 14480 (Apr. 27, 1995), 59 SEC

Docket 547.

16SECv. Digitran Systems, Incorporated, Litigation Release No. 14375(Jan. 4, 1995),

58 SEC Docket 159l.

17SEC v. Bradstreet, Litigation Release No. 14571 (July 26, 1995),59 SEC Docket

2819.

"Inthe Matter of The Cooper Companies, Inc., Exchange Act Release No. 35082 (Dec.

12,1994),58 SEC Docket 681.

19In the Matter ofMarvin E. Basson, CPA, Exchange Act Release No. 35840 (June 13,

1995),59 SEC Docket 1650.

WIn the Matter of C. Steven Bolen, Exchange Act Release No. 34974 (Nov. 15,1994),

58 SEC Docket 8.

21In the Matter of BT Securities Corporation, Exchange Act Release No. 35136 (Dec.

22, 1994),58 SEC Docket 1182.

22Inthe Matter of Gibson Greetings, Inc., Exchange Act Release No. 36357 (Oct. 11,

1995),60 SEC Docket HOI.

23SECv Schulte, Litigation Release No.14372 (Dec. 29, 1994),58 SECDocket1476.

24In the Matter of Van Kampen American Capital Asset Management, Inc., Investment

Advisers Act Release No. 1525 (Sept. 29, 1995),60 SEC Docket 1284.

25In the Matter of Thomas M. Rogge, Investment Advisers Act Release No. 1472

(Feb. 22, 1995),58 SEC Docket 2474.

90
2h In the Matter ofAskin Capital Management, L.P., Inves tment Advisers Act Release

No. 1492 (May 23, 1995), 59 SEC Docket 1233.

27SECv. Busbee, Litigation Release No. 14387 (jan. 23, 1995), 58 SEC Docket 1949.

2BIn the Matter of Preston C. Bynum, Exchange Act Release No. 35870 (june 20,

1995),59 SEC Docket 1801.

29Inthe M~tterofDerryl W Peden, Exchange Act Release No. 35045 (Dec. 2, 1994),

58 SEC Docket 505.

30SEC v. Stifel, Nicolaus and Company, lnc., Litigation Release No. 14587 (Aug. 3,

1995),59 SEC Docket 2964.

31SEC v. Cochran, Litigation Release No. 14644 (Sept. 20, 1995),60 SEC Docket 833.

32SECv. Sutliffe, Litigation Release No. 14658 (Sept. 28, 1995),60 SEC Docke tl 006.

33SEC v. Goodman, Litigation Release No. 14471 (Apr. 18, 1995).

34SEC v. Rudi, Litigation Release No. 14421 (Feb. 23, 1995), 58 SEC Docket 2495.

35SEC v Brumfield, Litigation Release No. 14408 (Feb. 9, 1995),58 SEC Docket

2225, refiled after resolution of criminal proceedings, Litigation Release No. 14706 (Oct.

31,1995),60 SEC Docket 1888.

36SECv. Croce, Litigation Release No. 14655 (Sept. 28, 1995),60 SEC Docket 1004.

37SECv. Wagner, Litigation Release No. 14479 (Apr. 26, 1995),59 SEC Docket 546.

38SEC v. Schwartzberg, Litigation Release No. 14454 (Mar. 31, 1995), 59 SEC

Docket 152.

39SECv. Seibald, Litigation Release No. 14449 (Mar. 28, 1995),58 SEC Docket3103.

4°SEC v. Woodward, Litigation Release No. 14548 (june 28,1995),59 SEC Docket

2122.

41In the Matter of Gabelli & Company, lnc.,Exchange Act Release No. 35057 (Dec.

8,1994),58 SEC Docket 520.

42SEC v. Stratton Oakmont, lnc., Litigation Release No. 14355 (Dec. 15, 1994), 58

SEC Docket 806.

43In the Matter of F.N. Wolf & Co., Inc., Exchange Act Release No. 34892 (Oct. 25,

1994),57 SEC Docket 2576.

44In the Matter of Stephen T. Strabala, Exchange Act Release No. 36305 (Sept. 29,

1995),60 SEC Docket 1087.

45SEC v. Strabala, Litigation Release No. 14667 (Sept. 29, 1995),60 SEC Docket

1329.

46In the Matter of H.D. Vest Investment Securities, lnc., Exchange Act Release No.

35946 (July 10, 1995),59 SEC Docket 2330.

47SEC v. Saxena, Litigation Release No. 14348 (Dec. 8, 1994),58 SEC Docket 607.

48In the Matter of Account Management Corporation, Exchange Act Release No.

36314 (Sept. 29, 1995),60 SEC Docket 1157.

49In the Matter of Roger W. Honour, Investment Advisers Act Release No. 1527

(Sept. 29, 1995), 60 SEC Docket 1300.

50SECv. Katoeske, Litigation Release No. 14399 (Feb. 6, 1995), 58 SEC Docket 2215.

51In the Matter of John Logan Wallace, Investment Advisers Release No. 1470 (Feb.

21,1995),58 SEC Docket 2470.

52SEC v. Galleon Capital Management, Litigation Release No. 14315 (Nov. 1,1994),

57 SEC Docket 2939.

53Inthe Matter of Anthony J. Benincasa, Exchange Act Release No. 36273 (Sept. 25,

1995),60 SEC Docket 0852.

91
54Exchange Act Release Nos. 36165 (Aug. 29, 1995), 60 FR 46653 (Sept. 7, 1995);

36166 (Aug. 29, 1995), 60 FR 46660 (Sept. 7, 1995); 36167 (Aug. 29, 1995),60 FR 46667

(Sept. 7, 1995);36168 (Aug. 29, 1995),60FR46637 (Sept. 7, 1995);36169 (Aug. 29, 1995),

60 FR 46644 (Sept. 7, 1995)(five options exchanges); and 36296 (Sept. 28,1995),60 FR

52234 (Oct. 5, 1995) (NASD).

55ExchangeAct Release No. 34908 (Oct. 27, 1994),59 FR 54812 (Nov. 2, 1994).

56ExchangeAct Release No. 36213 (Sept. 11,1995),60 FR 48078 (Sept. 18, 1995).

570rder Instituting Proceedings Pursuant to Section 8A of the Securities Act of

1933and Sections 15(b) and 21C of the Securities Exchange Act of 1934, and Findings

and Order Imposing Remedial Sanctions in the Matter ofBT Securities Corporation.

Exchange Act Release No. 35136 (Dec. 22, 1994), 58 SEC Docket 1182.

58ExchangeAct Release No. 35135 (Dec. 22,1994),59 FR 67358 (Dec. 29,1994),58

SEC Docket 1264.

59ExchangeAct Release No. 36270 (Sept. 22,1995),60 FR 50223 (Sept. 28, 1995).

60ExchangeAct Release No. 36310 (Sept. 29, 1995), 60 FR 52792 (Oct. 10, 1995).

61ExchangeAct Release No. 35124 (Dec. 20, 1994),59 FR 66702 (Dec. 28, 1994).

62ExchangeAct Release Nos. 27445 and 29185 (Nov. 16, 1989 and May 9,1991),54

FR 48703 (Nov. 24, 1989) and 56 FR 22490 (May 15, 1991).

63Letter regarding Application of Rules lOb-6 and 10b-13 to New York Stock

Exchange Specialists, Exchange Act Release No. 36044 (july 31, 1995), 60 FR 40212

(Aug. 7, 1995).

64Letterregarding Dividend Reinvestment and Stock Purchase Plans, Exchange

Act Release No. 35041 (Dec. 1, 1994),59 FR 63393 (Dec. 8, 1994), as modified by Letter

regarding Dividend Reinvestment and Stock Purchase Plans (May 12, 1995); and

Letter regarding Bank-Sponsored Investor Services Programs (Sept. 14,1995) and

Letter regarding First Chicago Trust Company of New York (Dec. 1, 1994).

65Letterregarding Legg Mason Wood Walker (Aug. 24, 1995); Letter regarding

Bear Steams Securities Corporation (june 14, 1995); Letter regarding U.S. Clearing

Corporation (Apr. 11, 1995).

66Letter regarding CS Holding (Mar. 31, 1995), [1995] Fed. Sec. L. Rep. (CCH)

1177018.

67ExchangeAct Release No. 33137 (Nov. 3, 1993), 58 FR 60324 (Nov. 15, 1993).

68Letter regarding Distributions of Certain United Kingdom Securities and of

Certain Securities Traded on SEAQ International, Exchange Act Release No. 35234

Gan. 10,1995),60 FR 4644 (Ian. 24, 1995).

69Letterregarding Distributions of Certain Dutch Securities, Exchange Act Release No. 36412 (Oct. 19, 1995),60 FR 55391 (Oct. 25, 1995).

"Exchange Act Release No. 33741 (Mar. 9, 1994),59 FR 12748 (Mar. 17, 1994).

71Exchange Act Release No. 34961 (Nov. 10, 1994),59 FR 59590 (Nov. 17, 1994).

72Letterfrom Robert L.D. Colby, Depu ty Director, Division of Market Regulation,

SEC, to John S. Overdorff, Chair, and Gerald J. Laporte, Vice-Chair, Securities Law

and Disclosure Committee, National Association of Bond Lawyers (june 23, 1995);

Letter from Catherine McGuire, Chief Counsel, DIvision of Market Regulation, SEC,

to John S. Overdorff, Chair, Securities Law and Disclosure Committee, National

Association of Bond Lawyers (Sept. 19, 1995).

73Lettersdated June 22,1995 from Brandon Becker, Director, Division of Market

Regulation, SEC,to: Michael R.Bloomberg, Pres., Bloomberg, L.P.;Daniel Heimowitz,

Exec. V.P., Moody's Investor Services; Robert C. BuIik, Exec. V.P., Disclosure, Inc.;

92
Joel Mandelbaum, Pres., Thomson Municipal Services Group; and Aaron V. Klapow,

V.P., Kenny S&P Information Services. Also, Letter from Robert Colby, Deputy

Director, Division of Market Regulation, SEC, to Joel Brenner, Storch & Brenner (Oct.

27,1995).

74Exchange Act Release No. 34961 (Nov. 10, 1994),59 FR 59590 at 59603-59604

(Adopting Release) (Nov. 17, 1994).

751994Adopting Release, td , 59 FR at 59604. There is no requirement that a SID

be an instrumentality of the state. A SID may be a private organization that has been

designated by the state to function as its SID.

76Letter regardmg Ontala Forest Products, Inc. (Dec. 14,1994).

77Letter regarding Browning-Ferris Industries, Inc. (Iune 20,1995).

"Letter regarding First of America Brokerage Service, Inc. (Sept. 28, 1995).

79ExchangeActRelease No. 34962 (Nov. 10, 1994),59 FR59612 (Nov. 17,1994),57

SEC Docket 3014.

80Letter regarding Investment Company Institute (Aug. I, 1995).

81Letter regarding Public Securities Association (Sept. 29,1995).

82Exchange Act Release No. 35224 Gan. 12, 1995),60 FR 4040 Gan.19, 1995),58 SEC

Docket 1662.

83Exchange Act Release No. 35990 (Iuly 19, 1995),60 FR 38384 Guly 26,1995).

84Exchange Act Release No. 36145 (Aug. 23, 1995),60 FR 45200 (Aug. 30, 1995).

85Exchange Act Release No. 35314 (Feb. 1,1995),60 FR 7241 (Feb. 7, 1995).

86Exchange Act Release No. 36088 (Aug. 10,1995),60 FR 42930 (Aug. 17,1995).

87Exchange Act Release No. 35637 (Apr. 21, 1995), 60 FR 20891 (Apr. 28, 1995).

88Exchange Act Release No. 36102 (Aug. 14,1995),60 FR 43626 (Aug. 22,1995).

B9Exchange Act Release No. 35038 (Dec. 1,1994),59 FR 63652 (Dec. 8, 1994).

90Exchange Act Release No. 35039 (Dec. I, 1994), 59 FR 63656 (Dec. 8, 1994).

"Exchange Act Release No. 35040 (Dec. 1,1994),59 FR 63662 (Dec. 8,1994).

9217CFR 240.17f-1 (1994).

93Exchange Act Release No. 35341 (Feb. 8, 1995),60 FR 8426 (Feb. 14, 1995).

'l4Exchange Act Release No. 36324 (Sept. 29, 1995),60 FR 52436 (Oct. 6, 1995).

95Exchange Act Release No. 36323 (Sept. 29,1995),60 FR 52440 (Oct. 6, 1995).

%Exchange Act Release No. 35121 (Dec. 19, 1994),59 FR 66570 (Dec. 27, 1994).

97Exchange Act Release No. 35751 (May 22, 1995),60 FR 27997 (May 26, 1995). 98

Exchange Act Release No. 35059 (Dec. 7, 1994),59 FR 64455 (Dec. 14, 1994).

99Exchange Act Release No. 36076 (Aug. 9, 1995), 60 FR 42200 (Aug. 15, 1995).

looExchange Act Release No. 36211 (Sept. 8, 1995),60 FR 48182 (Sept. 18, 1995).

lOlExchange Act Release No. 36403 (Oct. 20, 1995),60 FR 54898 (Oct. 26, 1995).

102Exchange Act Release No. 35990 Guly 19, 1995),60 FR 38384 Guly 26,1995).

l03Exchange Act Release No. 35428 (Feb. 28, 1994),60 FR 12583 (Mar. 7, 1995).

I04Exchange Act Release No. 35953 Guly 11, 1995),60 FR 36843 Guly 18, 1995).

105Exchange Act Release No. 35482 (Mar. 13 1995),60 FR 14806 (Mar. 20, 1995).

l06Exchange Act Release No. 35132 (Dec. 21, 1994),59 FR 67743 (Ian. 25, 1995).

107Exchange Act Release No. 35198 (Ian, 6, 1995),60 FR 3286 Gan. 13, 1995).

l08Exchange Act Release No. 35787 (May 31,1995),60 FR 30324 (Iune 8,1995).

I09Exchange Act Release No. 35557 (Mar. 31, 1995),60 FR 17598 (Apr. 6,1995).

llOExchange Act Release No. 36091 (Aug. 10,1995),60 FR 42931 (Aug. 17, 1995).

lllExchange Act Release No. 36162 (Aug. 29, 1995),60 FR 46138 (Sept. 5, 1995).

93
lI2Investment Company Act Release No. 20915 (Feb. 23, 1995),58 SEC Docket

2389.

1I3Investment Company Act Release No. 20916 (Feb. 23, 1995), 58 SEC Docket

2487.

114Investment Company Act Release No. 20917 (Feb. 23, 1995), 58 SEC Docket

24Ol.

115Investment Company Act Release No. 21259 (july 27, 1995), 59 SEC Docket

2793.

116Investment Company Act Release No. 21341 (Sept. 8, 1995), 60 SEC Docket

524.

117Investment Company Act Release Nos. 20874 (Feb. 1,1995),58 SEC Docket

1970 and 21332 (Sept. 1,1995),60 SEC Docket 0413.

118Investment Company Act Release No. 21217 Ouly 19, 1995), 59 SEC Docket

2513.

119InvestmentCompany Act Release No. 21260 (July 27, 1995),60 FR 39574 (Aug.

2,1995).

12°FrankRussell Investment Company, Investment Company Act Release Nos.

21108 (June 2, 1995),59 SEC Docket 1503 (Notice), and 21169 (lune 28,1995),59 SEC

Docket 2105 (Order); The Managers Funds and The Managers Funds, L.P., Investment

Company Act Release Nos. 21354 (Sept. 13, 1995),60 SEC Docket 692 (Notice), and

21412 (Oct. II, 1995),60 SEC Docket 1439 (Order); Consulting Group Capital Markets

Funds and Smith Barney Mutual Funds Management Inc., Investment Company Act

Release Nos. 21318 (Aug. 23, 1995),60 SEC Docket 109 (Notice), and 21366 (Sept. 19,

1995), 60 SEC Docket 823 (Order); Tiff Investment Program, Inc. and Foundation

Advisers Inc., Investment Company Act Release Nos. 21268 (Aug. 3, 1995), 59 SEC

Docket 2952 (Notice), and 21328 (Aug. 30, 1995),60 SEC Docket 316 (Order).

121Vanguard STAR Fund, Investment Company Act Release Nos. 21372 (Sept. 22,

1995),60 SEC Docket 983 (Notice), and 21426 (Oct. 18, 1995),60 SEC Docket 1630

(Order); T. Rowe Price Spectrum Fund, Inc., Investment Company Act Release Nos.

21371 (Sept. 22, 1995),60 SEC Docket 681 (Notice), and 21425 (Oct. 18,1995),60 SEC

Docket 1628 (Order).

I22Vanguard Special Tax-Advantaged Retirement Fund, Inc., Investment Company

Act Release Nos. 14153 (Sept. 12, 1984),31 SEC Docket 437 (Notice), and 14361 (Feb.

7,1985),32 SEC Docket 549 (Order); T. Rowe Price Spectrum Fund, Inc., Investment

Company Act Release Nos. 17198 (Oct. 31, 1989),44 SEC Docket 515 (Notice), and

17242 (Nov. 29, 1989), 44 SEC Docket 1751 (Order), as amended by Investment

Company Act Release Nos. 18816 (june 29,1992),51 SEC Docket 1380 (Notice), and

18865 (july 25,1992),51 SEC Docket 2419 (Order).

I23H.R. 1495, 104th Cong., 1st Sess. (1995).

124PaineWebberIncorporated, Investment Company Act Release Nos. 20755 (Dec.

6,1994),58 SEC Docket 589 (Notice), and 20819 Oan. 4,1995),58 SEC Docket 1586

(Order); Prudential Securities Incorporated, Investment Company Act Release Nos.

20922 (Feb. 27, 1995),58 SEC Docket 2564 (Notice), and 20975 (Mar. 29, 1995), 58 SEC

Docket 3097 (Order); Dean Witter Reynolds, Inc., Investment Company Act Release

Nos. 20931 (Mar. I, 1995),58 SECDocket 2581 (Notice), and 20976 (Mar. 29,1995),58

SEC Docket 3098 (Order); Van Kampen American Distributors, Inc., Investment

Company Act Release Nos. 21014 (Apr. 17, 1995),59 SEC Docket 0438 (Notice), and

21073 (May 16, 1995), 59 SEC Docket 1125 (Order).

94
125SMCCapital, Inc. (pub. avail. Sept. 5, 1995).

126RobertsonStephens Investment Trust (pub. avail. Aug. 24, 1995).

127TheT. Rowe Price Funds (pub. avail. July 31,1995).

128TempletonRussia Fund, Inc. (pub. avail. Apr. 18, 1995).

129CiticorpSecurities, Inc. (pub. avail. Aug. 4, 1995).

130SalomonBrothers Inc. (pub. avail. May 26, 1995).

131MassMutualInstitutional Funds (pub. avail. Sept. 28, 1995).

132T.Rowe Price Investment Services (pub. avail. Sept. 8, 1995).

133AmericanCouncil of Life Ins. (pub. avail. June 20,1995).

134Investment Company Act Release No. 21221 (july 21, 1995),59 SEC Docket

2608.

135Investment Company Act Release No. 21216 (Iuly 19, 1995),59 SEC Docket

2459.

136InvestmentAdvisersActReleaseNo.1469(Feb.14, 1995),58 SEC Docket 2279.

137Thompson Advisory Group, L.P. (pub. avail. Sept. 26,1995).

138FirstCall Corporation (pub. avail. Sept. 6, 1995).

139TheRegulation of Public Utility Holding Companzes, Report of the Division of

InvestmentManagement, United States Securities and Exchange Commission (June

1995).

140Exemption ofIssuance and Sale of Certain Securities by Public UtIlity and Nonutility

Subsidtarv Companies of Registered Holding Companzes, Holding Co. Act Release No.

26311 (june 28, 1995). The Council ofthe City of New Orleans, which has jurisdiction

over the retail rates oftwo public-utility subsidiary companies ofEntergy Corporation,

a registered holding company, has filed a petition for judicial review with the Court

ofAppeals for the District of Columbia Circuit. Case No. 95-1434 (filed Aug. 24, 1995).

141Exemption of Issuance and Sale of Certain Securities by Public Utzlity and Nonutility

Subsidiary Companies of Registered Holding Companies, Holding Co. Act Release No.

26312 (june 28,1995).

142ExemptionofAcquisition by Registered Public-UtIlity Holding Companies of Securities

of Nonutilttu Companies Engaged in Certain Energy-Related and Gas-Related Businesses,

Holding Co. Act Release No. 26313 (Iune 28,1995).

143CINergy Corporation, Holding Company Act Release No. 26146 (Oct. 21, 1994).

144Southern Company, Holding Company Act Release No. 26211 (Dec. 30, 1994).

145EUACogenex, Inc., Holding Company Act Release No. 26232 (Feb. 15, 1995).

146Centraland South West Corporation, Holding Company Act Release No. 26293

(May 18, 1995).

147TheColumbia Gas System, Inc., Holding Company Act Release No. 26361 (Aug.

25,1995).

148SecuritiesAct Release No. 33-7141 (Feb. 21, 1995), 58 SEC Docket 2371 and

Securities Act Release No. 33-7168 (May 11, 1995), 59 SEC Docket 0727.

149SecuritiesAct Release No. 33-7233 (Oct. 6, 1995),60 SEC Docket 1348.

150SecuritiesAct Release No. 33-7234 (Oct. 6, 1995), 60 SEC Docket 1358.

15lSecurities Act Release No. 33-7183 (june 27, 1995),59 SEC Docket 1939.

152SecuritiesAct Release No. 33-7184 (June 27,1995),59 SEC Docket 1968.

153SecuritiesAct Release No. 33-7185 (June 27,1995),59 SEC Docket 1973.

154SecuritiesAct Release No. 33-7185 (June 27,1995),59 SEC Docket 1973.

155SecuritiesAct Release No. 33-7188 (June 27,1995),59 SEC Docket 1983.

156SecuritiesAct Release No. 33-7186 (June 27,1995),59 SEC Docket 1977.

95
157SecuritiesAct Release No. 33-7187 (June 27, 1995), 59 SEC Docket 1980.

158SecuntiesAct Release No. 7189 (June 27,1995),59 SEC Docket 1991.

159SecuritiesAct Release No. 7189 (June 27,1995),59 SEC Docket 1991.

I60SecuritiesAct Release No. 7190 (June 27,1995),59 SEC Docket 1998.

161ExchangeAct Release No. 34-36356 (Oct. 11,1995),60 SEC Docket 1393.

162ExchangeAct Release No. 34-34514 (Aug. 10,1994),57 SEC Docket 0932.

163ExchangeAct Release No. 34-34681 (Sept. 16,1994),57 SEC Docket 1780.

I64SecuritiesAct Release No. 33-7122 (Dec. 19, 1994), 58 SEC Docket 0865.

165SecuritiesAct Release No. 33-7101 (Oct. 13, 1994), 57 SEC Docket 2292.

I66SecuritiesAct Release No. 33-7106 (Nov. 1, 1994), 57 SEC Docket 2748.

167StaffAccounting Bulletin No. 94 (Apr. 18, 1995),59 SEC Docket 463.

I68Proposed Statement of Financial Accounting Standards, "Consolidated

Financial Statements: Policy and Procedures" (Oct. 16, 1995).

169Statement of Financial Accounting Standards No. 121, "Accounting for the

Impairment of Long-Lived Assets to be Disposed Of" (Mar. 1995).

170Statement of Financial Accounting Standards, "Accounting for Stock-Based

Compensation" (Oct. 1995).

l7IProposed Statement of Financial Accounting Standards, "Accounting for

Transfers and Servicing of Financial Assets and Extinguishments of Liabili ties" (Oct.

24,1995).

I72Compare S. 240, 104th Cong., 1st. Sess. (1995)with H.R.1058, 104th Cong., 1st

Sess. (1995).

I73See generally, H.R. 2131, 104th Con g., 1st Sess. (1995).

174Testimonyof Arthur Levitt, Chairman, SEC,Concerning Municipal Bond and

Government Securi ties Markets, Before the Senate Commi ttee on Banking, Housing,

and Urban Affairs (Jan. 5, 1995).

175SeeDirectors, Mana~ement, and Auditors: Allies in Protectin~ Shareholder

Interests, issued in 1995 by Public Oversight Board.

1765tatement of Position 94-6, "Disclosure of Certain Significant Risks and

Uncertainties (Dec. 30, 1994).

177 Proposed Statement of Position, "Environmental Remediation Liabilities"

(June 30,1995).

178Reportofthe Special Committee on Financial Reporting, "Improving Business

Reporting-A Customer Focus."

179International Accounting Standard 32, "Financial Instruments: Disclosure

and Presentation" (June 1995).

I80ExposureDraft E48, Financial Instruments (Jan. 1994).

181DraftStatement of Principles, Earnings Per Share (Oct. 1993).

182ExposureDraft E50, Intangible Assets (June 1995).

183DraftStatement of Principles, Reporting Financial Information by Segment

(Sept. 1994).

184ExposureDraft E49, Income Taxes (Oct. 1994)

185DraftStatement of Principles, Presentation of Financial Statements (Mar.

1995).

186Issues Paper, Retirement Benefit and Other Employee Benefit Costs (Aug.

1995).

187ReleaseNo. 33-7119 (Dec. 13,1994).

I88ReleaseNo. 33-7117 (Dec. 13,1994).

96
189115S. Ct. 1212 (1995).

190115S. Ct. 1061 (1995).

191115 S. Ct. 1447 (1995).

19~1 F.3d 938 (D.C Cir. 1995).

193115S. Ct. 1212 (1995).

194115S. Ct. 1061 (1995).

195115S. Ct. 1447 (1995).

196501U.S. 350 (1991).

19761F.3d 938 (D.C Cir. 1995).

198No.95 Cr. 166 (S.D.N.Y. Oct. 24, 1995), 1995 WL 628312.

19945F.3d 7 (2d Cir. 1995).

20051 F.3d 623 (7th Cir. 1995).

20117CF.R. 240.14(e)-3.

20252F.3d 667 (7th Cir. 1995).

203Swan v. SEC, No. 95-1218 (D.D.C), appeal pending, No. 95-5376 (D.C Cir.).

204SECv. Worthen, 74-202-N (S.D. Cal.).

205SECv. The Electronic Warehouse, 689 F. Supp. 53 (D. Conn. 1988), aff'd per

curiam, 891 F.2d 457 (1989), cert. denied, 496 U.S. 942 (1990).

206SECv. Price Waterhouse, 41 F.3d 305 (2d Cir. 1994); SEC v. Littler, 874 F. Supp.

345 (D. Utah 1994); SEC v. Grosby, No. 1P921411 (S.D. Ind.); SEC v Adler, CV 94-PT2018-S (N.D. Ala.).

207Hunterv. SEC, 879 F. Supp.494 (E.D. PA.1995) Dalyv. SEC, 95-5-285 (D. Colo.);

Kinlaw v. SEC, No. 3-93-CV-2010-T (N.D. Tex.).

208Coiellov. SEC, No. CV-94-6022-RAP (CD. Ca.)

209SequoiaPartners, L.P., Investment Company Act Release No. 20644 (Oct. 20,

1994),57 SEC Docket 2547.

2lOGazMetropolitain, Inc. et al., Holding Company Act Release No. 26170 (Nov. 23,

1994),53 SEC Docket 246.

211DanA. Druz, Exchange Act Release No. 35202 (Jan. 9, 1995),58 SEC Docket

1621.

212PatriciaA. Johnson, Exchange Act Release No. 35698 (May 10, 1995), 59 SEC

Docket 863, appeal filed, No. 95-1340 (D.C Cir.).

213Martin Herer Engelman, Peter Paul Kim, and Lawrence David Isen, Exchange Act

Release No. 35729 (May 18,1995),59 SEC Docket 1038, appeal fzled, No. 95-70564 (9th

Cir.).

214Atlanta-One, Inc., et al., Exchange Act Release No. 35455 (March 8, 1995),58 SEC

Docket 2670, appeal filed, No. 95-70360 (9th Cir.).

215Hibbard,Brown & Co. et al., Exchange Act Release No. 35476 (March 9,1995),58

SEC Docket 2769, appeals filed, Nos. 95-1556 (D.C Cir.) and 95-3270 (3d Cir.).

216InCounty of Orange, No. 94-22272-JR (Bankr. CD. CA).

217Inre America West Airlines, Inc., No. 91-07505-PHX-RGM (Bankr. D. AZ).

218In re UDC Homes.lnc., No. 95-558 HSB (Bankr. D. DE).

219Inre County of Orange, No. 94-22272-JR (Bankr. CD. CA).

220Inre House of Fabrics, Inc., No. SV 94-50060-KL, (Bankr. CD. Cal).

221In re Baldwin Builders, Nos. ND 95-13057 RR and ND 95-13058 RR (Bankr. CD.

CA).

222Inre Trans World Airlmes.lnc., No. 95-43478-399 (Bankr. E.D. MO).

223Inre Diversified, Inc., No. 93-41173-293 (Bankr. N.D. OH).

97
98

224Inre Phar-Mor, Inc., No. 92-41599 through No. 92-41614 (Bankr. N.D. OH).

225Inre Bilzerian, Nos. 93-486-CIV-T-24A and 94-635-CIV-T-24 E (M.D. FL).

226Inre Steven Weil, No. 95-21570-BKC-RBR (Bankr. S.D. Fl).
99

I
Table 1

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL YEAR 1995 IN VARIOUS PROGRAM AREAS

(Each case initiated has been included In only one category listed below, even though

many cases Involve multiple allegations and may fall under more than one category

The number of defendants and respondents is noted parenthetically)

Program Area In Which a %01

CIvil Action or Administrative CIvil Administrative Total

Proceeding Was Initiated Actions jj Proceedings Total Cases

Securities Offenng Cases

(a) Non-regulated Entity 48 (182) 14 ( 32) 62 ( 214)

(b) Regulated Entity 17 ( 82) 56 ( 83) 73 ( 165)

Total securmes Offenng Cases 65 (264) 70 (115) 135 ( 379) 28%

Broker-dealer Cases

(a) Fraud Against Customer 18 ( 29) 49 ( 81) 67 ( 110)

(b) Failureto Supervise o ( 0) 9 ( 9) 9 ( 9)

(c) Govemment secunnes 2 ( 4) o ( 0) 2 ( 4)

(d) Books & Records o ( 0) 4 ( 6) 4 ( 6)

(e) Other 2 ( 2) 12 ( 16) 14 ( 18)

Total Broker-dealer Cases 22 ( 35) 74 (112) 96 ( 147) 20%

Issuer Financial Statement

and Reporting Cases

(a) Issuer Financial

Disclosure 28 ( 91) 54 ( 84) 82 ( 175)

(b) Issuer Reporting Other o ( 0) 2 ( 2) 2 ( 2)

Total Issuer Financial Statement

and Reporting Cases 28 ( 91) 56 ( 86) 84 ( 177) 17%

Other Regulated Entity Cases

(a) Investment Advisers 13 ( 26) 37 ( 63) 50 ( 89)

(b) Investment Companies 2 ( 8) 10 ( 23) 12 ( 31)

(c) Transfer Agent O( 0) 1 ( 1) 1 ( 1)

Total Other Regulated Entity Cases 15 ( 34) 48 ( 87) 63 ( 121) 13%

lnsider Trading Cases 29 ( 90) 6 ( 6) 35 ( 96) 7%

Contempt Proceedings 23 ( 55) o ( 0) 23 ( 55) 5%

Market Manipulation Cases 4 ( 7) 17 ( 35) 21 ( 42) 4%

Delinquent Filings

(a) Issuer Reporting 1 ( 1) 1 ( 1) 2 ( 2)

(b) Forms 3/4/5 1 ( 1) 7 ( 10) 8 ( 11)

Total Delinquent Filings Cases 2 ( 2) 8 ( 11) 10 ( 13) 2%

Fraud Against Regulated Entities 3 ( 7) 5 ( 6) 8 ( 13) 2%

Corporate Control Cases 2 ( 11) 3 ( 8) 5 ( 19) 1%

Miscellaneous Disclosure/

Reporting 1 ( 1) 5 ( 9) 6 ( 10) 1%

GRANDTOTAL 194 (597) 292 (475) 486 (1,072) 100%

v Trus category Includes injunctive actions and CIViland cnrrnnal contempt proceedings

1nn
Table 2

FISCAL 1995 ENFORCEMENT CASES

LISTED BY PROGRAM AREA

Name of Case Release Date Filed

Broker-dealer: Books & Records

In the Matter of RIchard Allerton, Jr, et al. 34-34990 11/21/94

In the Matter of George L. Tuttle, Jr., et al 34-35605 04/14/95

In the Matter of Lehman Brothers Inc 34-36104 08/15/95

In the Matter of Warren C. Trepp 34-36288 09/28/95

Broker-dealer: Failure to Supervise

In the Matter of Daniel R. Wolfgram 34-34887 10/25/94

In the Matter of Dennis W Reedy 34-35216 01/11/95

In the Matter of E. Ronald Lara 34-35594 04/12/95

In the Matter of Michael J. Spagnola 34-35664 05/02/95

In the Matter of Irving Stitsky 34-35790 06/01/95

In the Matter of H.D. Vest Investment

Securities Inc. 34-35946 07/10/95

In the Matter of Walnut Street Securities, Inc. 34-35975 07/17/95

In the Matter of Thomas Risher 34-36071 08/09/95

In the Matter of John R. Moysey 34-36247 09/19/95

Broker-dealer: Fraud Against Customer

In the Matter of Terence Patrick Mulrooney 34-34833 10/13/94

In the Matter of Laurie J. Candy 34-34888 10/25/94

In the Matter of Laurence M. Brown 34-34905 10/27/94

In the Matter of DE Wine Investments Inc. 34-34942 11/04/94

In the Matter of Philip L. Black 34-34975 11/15/94

SEC v. Michael B. Curran LR-14535 11/29/94

In the Matter of John Albert DeCastro Day 34-35069 12/08/94

In the Matter of Joseph Kemprowski, et al. 34-35058 12/08/94

In the Matter of John T Moran 34-35064 12/08/94

In the Matter of Joseph J. Barbato, et al. 34-35105 12/16/94

In the Matter of Kenneth Puckett 34-35115 12/19/94

SEC v. Stephen A. Gonsalves LR-14367 12/21/94

In the Matter of BT Securities Corp. 34-35273 12/22/94

SEC v. Kenneth Schulte LR-14372 12/27/94

In the Matter of Elizabeth Bamberg 34-35163 12/28/94

In the Matter of Craig Medoff, et al. 34-35196 01/06/95

In the Matter of Mathews, Holmquist &

Associates, et al. 34-35236 01/19/95

In the Matter of Paul B. Holmquist 34-35237 01/19/95

In the Matter of Laurence S. ZImmerman 34-35312 02/01/95

101
Name of Case

In the Matter of Bede F. Howard

SEC v Daniel L. Osborn

In the Matter of Southern California Securities Inc.

In the Matter of James W Bullard, Jr.

In the Matter of Rita Barbato

In the Matter of Stephen B. Phillips

In the Matter of Thomas F. Bandyk

SEC v. William Hampton

In the Matter of Roberl Parker Adams

SEC v James McCurry, et al.

In the Matter of William J. Hampton

In the Matter of Thomas P. Gimettin Jr., et al.

In the Matter of Mark J. Hamel, et al.

In the Matter of Robert J. Raffa

In the Matter of Stephan A. Gonsalves

In the Matter of First Jersey Securities lnc., et al.

In the Matter of Timothy A. Hills

In the Matter of First Lauderdale Securities

lnc., et al.

In the Matter of Victor H. Strevel

In the Matter of Preston C. Bynum

SEC v Samuel L. Williams

In the Matter of Biltmore Securities

SEC v. Daniel C. Baxley

In the Matter of Samuel L Williams

In the Matter of M. Rimson & Co., tnc., et al.

In the Matter of Thomas V. Ackerly

In the Matter of Stuarl, Coleman & Co., lnc., et al

In the Matter of Roberl Matthew McGee

SEC v. Victor Strevel

In the Matter of Michael Herberl Novick, et al.

In the Matter of Daniel C. Baxley

SEC v. John L. Fauls, 11/

SEC v. Qualified Pensions, tnc., et al.

In the Matter of Richard G. Wiwi, et al.

SEC v. Robert M. Cochran, et al

In the Matter of Mark Nicholas Savoca

SEC v. Charles Zanford

SEC v. Wendell Jeffrey Lee

In the Matter of Calvin L Word

SEC v. Calvin L. Word, et al.

In the Matter of Richard A. Anders

In the Matter of Daniel L. Zessinger

SEC v Stephen T Strabala

SEC v. Roberl Simpson

SEC v. Benjamin Rex Moses

In the Matter of Thomas J. Word, et al.

In the Matter of Grant C. Ross

In the Matter of Stephen T. Strabala

102

Release No.

34-35336

LR-14407

34-35353

34-35379

34-35383

34-35384

34-35415

NONE

34-35504

LR-14450

34-35570

34-35973

34-35643

34-35644

34-35718

34-35741

34-35791

34-35813

34-35858

34-35870

LR-14554

34-35900

LR-14665

34-35974

34-36054

34-36073

34-36099

34-36116

LR-14664

34-36144

34-36152

LR-14719

LR-14636

34-36249

LR-14644

34-36261

LR-14652

LR-14659

34-36286

LR-14662

34-36287

34-36291

LR-14667

NONE

LR-14682

34-36304

34-36307

34-36305

Date Filed

02/07/95

02/07/95

02/10195

02/15/95

02/16/95

02/16/95

02/24/95

03/15/95

03/17/95

03/24/95

04/05/95

04/19/95

04/25/95

04/25/95

05/15/95

05/19/95

06101/95

06106/95

06/19/95

06/20195

06/23/95

06/27/95

07/10195

07/17/95

08103/95

08/09/95

08/14/95

08/18/95

08/22/95

08/23/95

08/25/95

09/12/95

09/13/95

09/19/95

09/20/95

09/21/95

09/22/95

09/27/95

09/28195

09/28/95

09/28/95

09/28/95

09/28195

09/29195

09/29195

09/29195

09/29195

09/29195
I Name of Case Release No. Date Filed

I Broker-dealer: Government Securities

SEC v. Steinhardt Management Co., tnc., et al. LR-14358 12/16/94

SEC v. Terry D. Busbee, et al. LR-14387 01/23/95

Broker-dealer: Other

In the Matter of J. Edmund & Co., et al. 34-34927 11/02/94

SEC v. Stratton Oakmont LR-14355 12/14/94

In the Matter of Robin Rushing, et al. 34-35232 01/18/95

In the Matter of Peter T Frankel 34-35458 03/08/95

/n the Matter of James P. Cahill 34-35461 03/08/95

In the Matter of Frank J. Romeo, Jr., et al. 34-35460 03/08/95

In the Matter of Ronald F. Milardo 34-35456 03/08/95

In the Matter of John D. O'Brien 34-35457 03/08/95

In the Matter of Alan E. Rosenthal 34-35489 03/15/95

In the Matter of Lai Sum Pang 34-35521 03/22/95

In the Matter of James Capel Inc. 34-35648 04/26/95

In the Matter of James E. Matuszewski 34-35902 06/28/95

SEC v. Stifel, Nicolaus & co., Inc. LR-14587 08/03/95

In the Matter of Joel J. Matcovsky 34-36065 08/07/95

Contempt-Civil

SEC v. Dennis Santiago, et a/. NONE 11/16/94

SEC v Steven G. Weil NONE 12/16/94

SEC v. Teri Cooper, et a/. NONE 12/27/94

SEC v. Frank Custable, Jr., et al. NONE 01/17/95

SEC v. Michael Mcintyre LR-14497 01/19/95

SEC v Basic Energy & Affiliated Resources Inc. NONE 01/20/95

SEC v. Sarah Delaney, et al. NONE 01/20/95

SEC v John Gallard LR-14485 02/28/95

SEC v. John C. Trimpin NONE 03/15/95

SEC v. Bankers Alliance Corp., et al. NONE 03/17/95

SEC v. William B. Clark LR-14474 03/20/95

SEC v Fortune Plus Management NONE 03/27/95

SEC v. Robert Vecchioni NONE 04/13/95

SEC v. Frank Custable, et al. NONE 04/24/95

SEC v. Frank Custable, Jr., et a/. NONE OS/26/95

SEC v. Oscar William Olson LR-14736 06/05/95

SEC v. Karl L. Dahlstrom NONE 06/21/95

SEC v. Oscar William Olson LR-14736 08/04/95

SEC v. Danny Sterk, et al. LR-14663 08/04/95

SEC v. Prime One Partners Corp., et al NONE 08/15/95

SEC v. Howard Addison NONE 09/07/95

SEC v. Northport ASSOCIatestnc., et a/. NONE 09/12/95

SEC v. Jed: Group Ltd., et at. NONE 09/29/95

103
Name of Case Release No. Date Filed

Corporate Control

SEC v. Concord Assets Group Inc. LR-14398 02/02/95

In the Matter of Arthur E. FIllmore 34-36259 09/21/95

SEC v. The Ventana Corp., et al. LR-14646 09/21/95

-ln the Matter of Tnstar Corp. 34-36315 09/29/95

In the Matter of Starion International Ltd., et al 34-36318 09/29/95

Delinquent Filings: Forms 314/5

In the Matter of Porter C. McKinnon 34-34874 10/20/94

In the Matter of Devta L. Chandler 34-34904 10/27/94

In the Matter of Charles E. Fausel 34-34964 11/10/94

In the Matter of Allan J. McCorkle, et al. 34-35075 12/09/94

In the Matter of Floyd D. Wilkenson 34-35665 05/02/95

In the Matter of John D. Kuhns 34-35794 06/01/95

In the Matter of Janice A. Jones 34-35856 06/19/95

SEC v. David GEiler LR-14628 09/06/95

Delinquent Filings: Issuer Reporting

In the Matter of Norsul Oil & Mining Ltd. 34-34989 11/21/94

SEC v Eutro Group Holding Inc. LR-14359 12/16/94

Fraud Against Regulated Entities

In the Matter of Manufacturers & Traders Trust Co. 34-34896 10/26/94

In the Matter of Donna Tumminia, et al. 34-35241 01/19/95

SEC v. Michael J. Morse, et al. LR-14423 02/27/95

In the Matter of Demitrios JulIUS Shiva 34-36202 09/07/95

In the Matter of Edward L. Scherer 34-36290 09/28/95

SEC v. LoUIS Bethune, et al. LR-14675 09/29/95

SEC v. William P. Hoidas LR-14677 09/29/95

In the Matter of Barc/ays Bank PLC 34-35382 12/15/94

Insider Trading

SEC v Edward A. Cantor, et al LR-14329 11/08/94

In the Matter of Ann E Hiles 34-34994 11/22/94

In the Matter of Thomas L. Greulich Sf. 34-34995 11/22/94

In the Matter of Robert T. McMahon 34-34996 11/22/94

SEC v. Jeffrey C. Morris, et al. LR-14381 12/06/94

SEC v. Thomas J. Farrell, et al. LR-14319 12/08/94

SEC v. William K. Fisher LR-14362 12/20/94

SEC v. Lawrence M. Mathe LR-14369 12/21/94

SEC v. Angelo A. Corona to, et al. LR-14391 01/24/95

SEC v. Charles Brumfield, et al. LR-14408 02/09/95

SEC v. Michael Borlinghaus, et al. LR-14429 03/06/95

104
Name of Case Release No Date Filed

SEC v. Richard A Galanti LR-14445 03/22/95

SEC v. Sheri I. Kleinbaum, et al. LR-14447 03/23/95

SEC v. Jack Seibald, et al. LR-14449 03/28/95

SEC v. Gilbert N Schwartzberg, et al. LR-14454 03/30/95

SEC v. Lawrence Ronald Freedman LR-14458 04/03/95

SEC v. Stephen H. Wagner LR-14479 04/26/95

SEC v. Herbert D. Conant LR-14525 05/19/95

SEC v. Thomas F. Lanier, et al. LR-14507 05/23/95

SEC v. Rathna Papa Rachuri, et al. LR-14510 05/24/95

In the Matter of Vincent A. Mayer 34-35783 05/31/95

In the Matter of Eugene R. Ehmann 34-35826 06/08/95

SEC v. Frederick Augustus Moran, et al. LR-14532 06/15/95

SEC v. Stefan HISlop, et al. LR-14533 06/19/95

SEC v. Richard W Woodward, et al. LR-14548 06/28/95

SEC v. Stephen C. Leung LR-14551 06/29/95

In the Matter of Danny Omar Cherif 34-35935 07105/95

SEC v. Thomas H. Potts LR-14561 07/17/95

SEC v. Jozef A. C. VanStratum LR-14599 08/09/95

SEC v. Robert B. Frame, et al. LR-14614 08/24/95

SEC v. Giovanni Malavasi LR-14626 09/06/95

SEC v. Martyn I. Gefsky, et al. LR-14648 09/21/95

SEC v. Richard J. Smith LR-14689 09/27/95

SEC v. Nicholas Croce, et al LR-14655 09/28/95

SEC v. Robert J. Young, et et. LR-14661 09/29/95

Investment Adviser

In the Matter of Chancellor Capital

Management Inc., et al. IA-1447 10/18/94

In the Matter of Gerald B. Unterman IA-1448 10/20/94

In the Matter of Midwest Advisory Services

Inc., et al. IA-1449 10/21/94

SEC v. Galleon Capital Management, et al. LR-14315 10/31/94

In the Matter of Credit Suisse Asset

Management Inc. IA-1452 11/16/94

In the Matter of Center for Financial Planning Inc. IA-1456 12/06/94

SEC v. Sanjay Saxena, et al. LR-14348 12/08/94

In the Matter of Gabelli & Company Inc. IA-1457 12/08/94

In the Matter of Sheer Asset Management

Inc., et al. IA-1459 01/03/95

In the Matter of Louis Elwin Sharp IA-1463 01/11/95

In the Matter of David Lee Ullom IA-1461 01/13/95

In the Matter of Stock and Option Services

Inc., et al. IA-1466 02/02/95

SEC v. Financial Concepts Group International LR-14524 02107/95

In the Matter of H. David Grace, et al. IA-1467 02/07/95

In the Matter of Thomas J. Bowes IA-1468 02/10/95

SEC v. Jay DeForest Moore LR-14420 02/13/95

105
Name of Case Release No Date Filed

In the Matter of Kenneth Von Kohom, et al. IA-1471 02/22/95

SEC v. Nicholas A. Rudl, et al LR-14421 02/23/95

In the Matter of Mountain Capital

Management Inc, et a/. IA-1473 02/27/95

In the Matter of Louis A Acevedo IA-1479 03/14/95

In the Matter of Meridian Investment Co., et al. IA-1484 04/18/95

In the Matter of K Lawrence Neill IA-1485 04/18/95

In the Matter of LUISConuo IA-1490 05/11/95

In the Matter of Chubb Securities Corp. IA-1491 05/11/95

In the Matter of Askm Capital Management, L.P.,

et a/. IA-1492 OS/23/95

SEC v John T Nakoski LR-14515 05/30/95

SEC v. Joseph Edwm Gtewettowsk), et a/. LR-14520 05/30/95

In the Matter of Coles Fmancial Services,

lnc., et al IA-1493 06/05/95

In the Matter of Clarke Lanzen Skalla

Investment Firm lnc., et al IA-1501 06/16/95

SEC v. Mark G. Daly, et al. LR-14534 06/19/95

In the Matter of Herbert I. Glass IA-1503 06/22/95

In the Matter of John T. Nakoski IA-1505 07/10/95

In the Matter of Clariden Asset

Management (NY) Inc, et al. IA-1509 07/10/95

SEC v. Robert Burstem NONE 07/13/95

In the Matter of Money Growth Institute tnc., et al. IA-1506 07/14/95

In the Matter of Gary A Smith IA-1508 07/17/95

In the Matter of Robert J. Kuss IA-1509 07/26/95

In the Matter of Robert Burstein IA-1511 07/28/95

In the Matter of Carmen W Ella, et a/. IA-1513 07/31/95

In the Matter of Harold M Covert &

Associates tnc., et al. IA-1515 08/17/95

SEC v. James A. Pearce, et a/. LR-14629 09/05/95

In the Matter of WillIam Roderick McCarty, Jr. IA-1519 09/13/95

SEC v. Homer W Forster LR-14313 09/22/95

In the Matter of Stanley P. Kerry IA-1523 09/25/95

In the Matter of Wayne B. Conwell, et al. IA-1524 09/26/95

SEC v Robert Pierce, et al. LR-14653 09/26/95

In the Matter of Valicenti Advisory Services

Inc., et al IA-1528 09/29/95

In the Matter of Account Management Corp., et al. IA-1529 09/29/95

In the Matter of Van Kampen American Capital

Asset Mgmt, lnc., et a/. IA-1525 09/29/95

SEC v. Keypoint Financial Corp. LR-14669 09/29/95

Investment Company

In the Matter of Concourse Capital Asset

Management tnc , et a/. IC-20698 11/15/94

In the Matter of The Commercial Bank, et al. IC-20757 12/06/94

106
Nan It:: UI l"dSl::l Release No Date Filed

In the Matter of SmIth Hayes

Financial Services Corp., et al. IC-20876 02102/95

SEC v. John J. Kaweske LR-14399 02/06/95

In the Matter of John Logan Wallace IC-20904 02/21/95

In the Matter of Thomas M. Rogge IC-20908 02/22/95

In the Matter of Kemper Financial Services,

Inc., et al. IC-20936 03/02/95

In the Matter of Leeb Investment Advisers, et al. IC-21671 05/02/95

In the Matter of Thomas H. Richards IC-21114 06/06/95

In the Matter of Cardinal Management Corp. IC-21384 09/29/95

In the Matter of Roger W Honour IC-21385 09/29/95

SEC v Michael Carnicle, et al. LR-14669 09/29/95

Issuer Financial Disclosure

In the Matter of Philip A Fitzpatrick, et al. MER 617 10/20/94

In the Matter of RIta C. Villa MER 618 10/20/94

In the Matter of Pantheon Industries tnc., et al. MER 621 10/27/94

SEC v. Joseph B. Hebb MER 623 11/03/94

In the Matter of Collins Industries tnc., et al. MER 624 11/03/94

In the Matter of C. Steven Bolen, CPA MER 626 11/15/94

SEC v. Abraham Gold, et al. MER 631 11/29/94

SEC v. Ernst Hiestand, et al. LR-14347 12/08/94

In the Matter of Bernard Wemer, CPA, et al. MER 633 12/19/94

SEC v. First Capital Holdings MER 634 12/19/94

SEC v. Digitran Systems, tnc., et al. MER 637 12/29/94

In the Matter of Larry Uyeda MER 638 01/09/95

In the Matter of Ronald G. Sherry, CPA MER 639 01/11/95

In the Matter of Douglas P. Rosile, CPA MER 641 01/19/95

In the Matter of Harry Weinblatt MER 642 01/30/95

SEC v. Ross Freitas, et al. MER 643 02/08/95

In the Matter of L. Karl Denton, CPA MER 644 02/15/95

In the Matter of Thomas Milo Somers MER 646 02/16/95

SEC v. Sequoia Systems Inc., et al. MER 647 02/16/95

In the Matter of James Edward Palmer, et al. MER 645 02/16/95

In the Matter of Harry C. Berridge MER 650 03/06/95

SEC v. Network Equipment Technologies Inc. NONE 03/07/95

SEC v. Victor G. Incendy, et al. MER 656 03/10/95

In the Matter of Douglas C. Hansen, CPA MER 653 03/13/95

SEC v. Martin Greenstein MER 660 03/24/95

In the Matter of Martin Greenstem, CPA MER 659 04/03/95

In the Matter of Ronald Effren, et al MER 661 04/07/95

In the Matter of Arden Franklin, CPA MER 662 04/12/95

SEC v. Softpomt lnc., et al. MER 666 04/27/95

SEC v. Michael Monus, et al. MER 667 05/02195

In the Matter of John G. Rangos, Sr. MER 672 05/09/95

In the Matter of William R. Nelson MER 669 05/09/95

107
Name of Case

In the Matter of John J Cushma, CPA

In the Matter of Dale 0. Nolder, Jr

SEC v. Chambers Development Co., Inc

In the Matter of James A Merriam

SEC v. Raynard M. Fenster, et al.

In the Matter of Kemper Corp., et al.

In the Matter of Marvm E. Basson, CPA

In the Matter of Emest T. Szeker, Jr., et al.

In the Matter of Duane V Midgley, CPA

In the Matter of Michael A. Pinto, CPA

In the Matter of Gordon N Oakes, Jr., et al.

In the Matter of American Mobile Systems, Inc

In the Matter of Warren L. Rawls, CPA

SEC v. Curtis A. Younts, Jr., et al.

SEC v. First National Entertainment Corp., et al.

SEC v. Barry R. Benjamin, et al.

SEC v. William J. Young

SEC v. The Keith Group of Companies Inc., et al.

In the Matter of Kurzwell Applied Intelligence Inc.

In the Matter of Tracy Spadaro Maynard, et al.

SEC v Bemard F. Bradstreet, et al.

SEC v. ANVY, Inc., et al.

In the Matter of Wendell L. Gunn

In the Matter of Edwm F. Schaeffer, et al.

SEC v. Malcolm Cheek, et al.

In the Matter of John J French, CPA, et al.

In the Matter of Sound Aavice lnc., et al.

In the Matter of TCF Financial Corp.

In the Matter of John McMillan

In the Matter of Bion Environmental

Technologies Inc.

In the Matter of Robert W Zak, Jr., CPA

SEC v. John S. Nadolski, et al

In the Matter of Valley Systems, Inc.

SEC v. Nicholas J. Pace, et al.

In the Matter of Kerkhoff Industries, Inc., et al.

In the Matter of Roger D. Gnowles

In the Matter of Lawrence R. Reich, CPA, et al.

SEC v. Gary L. Holman

SEC v. Ernest W Greruit, et al

In the Matter of P. Andrew Baker

SEC v. Excal Enterprises, inc., et al.

In the Matter of Richard 0. Russell

In the Matter of Terry R. Kuntz, et al.

SEC v. Met Capital Corp., et al

In the Matter of Marvin Mears, et al.

In the Matter of Donald A. Vandenberg, CPA

In the Matter of Joseph E. Grendi, CPA, et al.

108

Release No.

AAER 670

AAER 671

AAER 673

AAER 674

AAER 676

AAER 677

AAER 678

AAER 679

AAER 680

AAER 681

AAER 682

AAER 683

AAER 684

AAER 685

LR-14546

AAER 686

AAER 687

LR-14576

AAER 689

AAER 690

LR-14571

AAER 691

AAER 692

AAER 693

AAER 694

AAER 695

AAER 696

AAER 697

AAER 699

AAER 700

AAER 701

AAER 702

AAER 707

AAER 708

34-36232

AAER 711

AAER 712

AAER 713

AAER 715

AAER 716

AAER 718

AAER 719

AAER 720

LR-14674

IC-21383

AAER 723

AAER 724

Date Filed

05/09/95

05/09/95

05/09/95

05/11/95

05/30/95

06/06/95

06/13/95

06/13/95

06/19/95

06/22/95

06/22/95

06/26/95

06/27/95

06/27/95

06/27/95

07/11/95

07/20/95

07/24/95

07/25/95

07/25/95

07/26/95

07/27/95

08/03/95

08/03/95

08/03/95

08/03/95

08/09/95

08/10/95

08/14/95

08/16/95

08/15/95

08/18/95

09/14/95

09/14/95

09/14/95

09/18/95

09/18/95

09/20/95

09/21/95

09/21/95

09/26/95

09/26/95

09/26/95

09/27/95

09/29/95

09/29/95

09/29/95
Name of Case Release No Date Filed

In the Matter of John M. Waters MER 726 09/29/95

In the Matter of Roger Michael Rosenberg, et al MER 727 09/29/95

In the Matter of Goody's Family Clothmg Inc., et al MER 729 09/29/95

Issuer R~porting: Other

In the Matter of The Cooper Companies 34-35082 12/12/94

In the Matter of Service Corporation International 34-36237 09/15/95

Market Manipulation

In the Matter of Cynthia Keefover 34-34804 10/07/94

In the Matter of F N. Wolf & Co., Inc., et al. 34-34892 10/25/94

In the Matter of Robert Peckerman 34-35152 12/27/94

In the Matter of Leonard M. Tucker, et al. 34-35262 01/23/95

In the Matter of Steven R. Cloyes 34-35290 01/30/95

SEC v. Jeffrey C Hays, et al LR-14412 02/08/95

In the Matter of Edward J. Barter 34-35346 02/08/95

In the Matter of Leo M. Eisenberg 34-35545 03/02/95

In the Matter of Paul Russo, et al 34-35586 04/10/95

In the Matter of Stanley Berk 34-35254 04/20/95

In the Matter of Patnck A Collins 34-35645 04/25/95

In the Matter of Victor M. Wexler 34-35670 05/04/95

In the Matter of Elliott B Rosenberg, et al 34-35768 OS/25/95

In the Matter of Scott Bedford 34-35887 06/23/95

SEC v. Timothy Essaye LR-14572 07/26/95

In the Matter of Paul Giles, et al. 34-36118 08/18/95

SEC v. Michael J. Markowski, et al. LR-14615 08/24/95

In the Matter of Robert Frencts CatoggJO,et al 34-36262 09/21/95

SEC v. Robert 0 Glau, Jr. NONE 09/21/95

In the Matter of Vmcent Militano, et al. 34-36312 09/29/95

In the Matter of Harold W Ross, et al. 34-36322 09/29/95

Miscellaneous Disclosure/Reporting

In the Matter of Charles E. Campbell, et al 34-34973 11/15/94

In the Matter of Ferdinand Russo, et al 34-35081 12/12/94

SEC v. Mal Yerasi LR-14514 05/30/95

In the Matter of Thomas J Blair, CPA 34-36136 08/23/95

Offering Violations (By Non-Regulated Entities)

SEC v. Paul J. Myers LR-14295 10/13/94

SEC v. Frank S Butler LR-14322 10/14/94

SEC v. Fulcrum Holding Company Inc., et al. LR-14316 10/31/94

SEC v. Basic Energy & Affiliated Resources Inc.,

et al. LR-14326 11/02/94

109
Name of Case

SEC v. John W Walsh Jr., et al.

In the Matter of Frederick Entman, et al.

SEC v. Saul Foos

SEC v. The Trust Group, Ltd., et al.

SEC v. Broadcast Associates-I, et al.

SEC v. Melbourne Capital Corp, et al.

SEC v Edward V Ellis, Sr.

SEC v. Jonathan N. Googel, et al.

SEC v Bankers Alliance Corp., et al.

SEC v Telecom Marketing tnc., et al.

SEC v. Gary F. Neunen

SEC v. Northwest Starscan, LP, et al.

SEC v. Michael Goodman, et al.

In the Matter of Command Credit Corp., et al.

SEC v. Robert F. Harmon

SEC v. C'est Lestlal Waters, tnc., et al.

SEC v. John Gallard, et al.

SEC v. Comcoa Ltd., et al.

SEC v Panwortd Mmerals tntemstions! Inc.

SEC v. Lee F Pioske, et al.

SEC v. John G. Bennett, Jr., et al.

SEC v. Irwin Harry Bloch

SEC v. Personal Wealth Systems lnc., et al.

SEC v. Brian Walsh, et al.

SEC v. Untted Benefits Group, tnc., et al.

SEC v. Jeffrey Norton, et al.

SEC v. Harry G. Terezakis, et al.

In the Matter of Albert T Devaul

In the Matter of Global Lmk

Capital Markets Inc, et al.

SEC v. D'Acquisto Fmancial Group, lnc., et al

SEC v. Ellis L Deyon, et al.

SEC v. Sybans Clubs International tnc., et al.

SEC v. Edward M Beagan, et al.

In the Matter of Joseph Legrotte

In the Matter of Sidney Gould

SEC v. Daniel Odulo, et al.

SEC v. Ronald M. Zook, et al.

In the Matter of Brigit (Gitte) Mechlenburg

SEC v. lntemettonel Consultmg &

Management Ltd., et al

SEC v. Jerome E. Pinckney, et al.

SEC v. RIchard M. Lambert

In the Matter of Donald J Stoecklein

SEC v. The Better Life Club of America, inc., et al.

In the Matter of William E. Cooper

In the Matter of The CapItal Fund, et al.

SEC v. James P. McLaughlm

110

Release No.

LR-14353

34-35164

LR-14376

LR-14382

LR-14388

LR-14396

LR-14414

LR-14432

LR-14427

LR-14451

LR-14463

LR-14465

LR-14471

33-7162

LR-14476

LR-14484

LR-14485

LR-14080

LR-14606

LR-14504

LR-14503

LR-14511

LR-14688

LR-14523

LR-14589

LR-14529

LR-14542

34-35936

33-7194

LR-14562

LR-14586

LR-14577

LR-14575

34-36036

34-36037

LR-14591

LR-14594

34-36067

LR-14601

LR-14660

LR-14621

34-36177

LR-14624

34-36214

33-7214

LR-14685

Date Filed

12/14/94

12/28/94

01/04/95

01/17/95

01/23/95

01/31/95

02115195

03/09/95

03/22/95

03/29/95

04/06/95

04/10/95

04/14/95

04/19/95

04/18/95

04/27/95

05/02/95

05/05/95

05/10/95

05/17/95

05/18/95

05/25/95

05/30/95

06/06/95

06/06/95

06/14/95

06/22/95

07/05/95

07/06/95

07/13/95

07/25/95

07/26/95

07/28/95

07/31/95

07/31/95

08/07/95

08/07/95

08/08/95

08/10/95

08/24/95

08/29/95

09/01/95

09/01/95

09/11/95

09/12/95

09/13/95
Name of Case Release No Date Filed

SEC v. Bradley S. HIli LR-14697 09/13/95

In the Matter of The Outer Space

Development Co., et al. 33-7217 09/18/95

SEC v. Jenne Charles Spangler, et al LR-14645 09/20/95

SEC v. Robert Cord Beatty, et al LR-14673 09/25/95

In the Matter of Ronald Blame 34-36277 09/26/95

SEC v. Lee F. Sutliffe LR-14658 09/27/95

In the Matter of Sidney Friedman, et al 33-7228 09/28/95

SEC v. Balance For Life lnc., et al LR-14656 09/28/95

SEC v. Rufus L. Jackson, et al. LR-14657 09/28/95

SEC v. Chnstopher M. Pederson LR-14672 09/28/95

In the Matter of Stylex Homes Inc, et al. 34-36299 09/29/95

SEC v. Envirommt Holdings Inc, et al. LR-14683 09/29/95

Offering Violations (By Regulated Entities)

SEC v. Future Vision Direct Marketing lnc., et al. LR-14287 10/03/94

In the Matter of Amencan Business

Securities Inc, et al. 34-37894 10/25/94

SEC v. Jon D. Aldrich, et al. LR-14323 10/28/94

In the Matter of Ronald Stephen Combs, et al. 34-34910 10/28/94

In the Matter of Deltec Asset Management Corp. 33-7109 11/08/94

In the Matter of Jeffrey D. Howes, et al. 33-7115 12/02/94

SEC v. Gemco Oil Development, Inc, et al LR-14385 12/27/94

In the Matter of Stephen A. Holloway, et al. 34-35238 01/19/95

SEC v. United Communications Ltd, et al. LR-14424 02/27/95

In the Matter of Sanjay Saxena, et al. IA-1475 02128/95

In the Matter of Kenneth L. Weinberg, et al. 34-35441 03/03/95

In the Matter of Diane Burnell Kaechele 34-35459 03/08/95

SEC v. Pleasure Time Inc, et al. LR-14440 03/13/95

In the Matter of Robert L. McAtee 34-35496 03/15/95

In the Matter of Charles Irvin 34-35498 03/16/95

In the Matter of William Moore 34-35500 03/16/95

In the Matter of John Martin Kealy 34-35799 03/16/95

In the Matter of Peter J. Curley 34-35539 03/28/95

In the Matter of Benjamin J Sisti 34-35540 03/28/95

In the Matter of Jonathan N. Googel 34-35541 03/28/95

In the Matter of Robert Johnston 34-35562 04/04/95

SEC v. American Interactive Group LR-14462 04/07/95

In the Matter of James W Cope 34-35588 04/10/95

SEC v. Myron Barry Michaels, et al. LR-14570 04/17/95

In the Matter of Wayne E. Wood 34-35610 04/17/95

In the Matter of Ray S. Stoddard, et al. 34-35611 04/17/95

In the Matter of George R. Duke 34-35612 04/17/95

In the Matter of Delphoi Partners, et al. 33-7165 04/26/95

SEC v. Kenton Capital Ltd., et al. LR-14490 05/03/95

In the Matter of Blythe Olin Selden IA-1489 05/04/95

In the Matter of Louis F. Vargas 34-35679 05/05/95

111
Name of Case Release No. Date Filed

SEC v Marc M Joseph, et a/. LR-14494 05/05/95

In the Matter of William Edwm Somdahl 34-35728 05/18/95

In the Matter of Joseph Michael Haddad, Jr. 34-35770 OS/25/95

In the Matter of MIchael J. Murphy 34-35825 06/08/95

In the Matter of Paul C. Keiley, et al. 34-35841 06/13/95

In the Matter of Uoyd D. Pankey, et al. 34-35851 06/16/95

In the Matter of RIchard Kevin Gerson 34-35871 06/20/95

SEC v. Wealth tntemetionet Network, et al. LR-14552 07/06/95

In the Matter of Lee F Pioske 34-35948 07/10/95

In the Matter of William J Moriarly 34-35949 07/10/95

SEC v. Amtel Communications Inc, et et. LR-14713 07/17/95

In the Matter of David C. Wiley 34-35986 07/18/95

In the Matter of Carmen J. Librandi 34-36024 07/26/95

In the Matter of Milton Puryear IA-1514 08/01/95

SEC v MIchael W Crawford, et a/. LR-14583 08/01/95

In the Matter of Kinlaw Secunties Corp, et al 34-36048 08/02/95

In the Matter of Thomas V Ackerly 34-36073 08/09/95

SEC v. Gene Block LR-14598 08/09/95

SEC v. International Breeders, Inc, et al. LR-14607 08/14/95

In the Matter of Derek Vaughn States 34-36143 08/23/95

In the Matter of Gus Zoppi, et al 34-36161 08/28/95

In the Matter of Willtam P. Cadelori 34-36170 08/30/95

In the Matter of Peter W Woodbridge 34-36184 09/05/95

SEC v. Joy L. Bouwkamp, et a/. LR-14631 09/06/95

In the Matter of Terry T. Steen, et a/. 34-36190 09/06/95

In the Matter of Roberl Lee Gunther, et al. 34-36192 09/06/95

In the Matter of Charles Joseph Bazarian 34-36191 09/06/95

In the Matter of Jesse M Townsley, Jr., et al 34-36201 09/07/95

In the Matter of Danny G. Pinkerton, et al. 34-36217 09/11/95

In the Matter of Peter F. Olsen 34-36218 09/11/95

In the Matter of Raymond Charles Gross, et al. 34-36221 09/13/95

In the Matter of Jesse J. Hunt, Jr., et al. 34-36243 09/18/95

In the Matter of Anthony A Benmcasa 34-36273 09/25/95

SEC v. Jody M Felterman LR-14654 09/26/95

In the Matter of Michael S. Goodman 34-36279 09/26/95

In the Matter of Russell G. Koch, et al 34-36282 09/26/95

In the Matter of Jerome L. Casperson 34-36289 09/28/95

In the Matter of Jody M Felterman 34-36294 09/28/95

In the Matter of Roberll. Moses 34-36297 09/29/95

In the Matter of Kenneth MItchell Wiggms, Jr 34-36298 09/29/95

tn the Matter of Thomas S. Drysdale 34-36300 09/29/95

SEC v. Harvey P. Tabb, et al. LR-14671 09/29/95

Transfer Agent

tn the Matter of The Chase Manhattan Bank, N.A. 34-38784 10/04/95

112
Table 3

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1,1994 .. . 1,424

Opened in Fiscal Year 1995 . 436

Total

Closed in Fiscal Year 1995 .

Pending as of September 3D, 1995

Formal Orders of Investigation

Issued in Fiscal Year 1995 ....

................. 1,860

... 329

................. 1,531

..... 245

Table 4

ADMINISTRATIVE PROCEEDINGS INSTITUTED

DURING FISCAL YEAR ENDING SEPTEMBER 30,1995

Broker-dealer Proceedings 149

Investment Adviser, Investment Company and Transfer Agent Proceedings 77

Stop Order Proceedings 46

Rule 2(e) Proceedings 19

Suspensions of Trading in SecuritIes in Fiscal Year 1995 5

113
114

Fiscal Year

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Table 5

INJUNCTIVE ACTIONS

Actions Initiated

163

144

125

140

186

171

156

172

197

171

Defendants Named

488

373

401

422

557

503

487

571

620

549
Right to Financial Privacy

Section 21(h) of the Securities Exchange Actof 1934 [15 U.S.c. 78u(h)(6)J

requires that the Commission" compile an annual tabula tion of the occasions

on which the Commission used each separate subparagraph or clause of [Section

21(h)(2)] or the provisions of the Right to Financial Privacy Act of 1978 [12

U.s.c. 3401-22 (the RFPA)] to obtain access to financial records of a customer

and include it in its annual report to the Congress." During the fiscal year,

the Commission made nine applications for judicial orders pursuant to Section

21(h)(2). Set forth below are the number of occasions on which the Commission

obtained customer records pursuant to the provisions of the RFPA:

Section 1104 (Customer Authorizations)

Section 1105 (Administrative Subpoenas)

Section 1107 (Judicial Subpoenas)

7

487

27

115
Table 6

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons SUbject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Violation of the federal secuntres laws.

Broker-dealer, municipal securities dealer,

government securities dealer, transfer

agent, investment adviser or associated

person

Willful violation of secuntles laws or rules;

aiding or abetting such violation; failure

reasonably to supervise others, Willful

misstatement or omission In filing with the

Commission; conviction of or injunction

against certain cnmes or conduct.

Registered securities association

Violation of or Inability to comply WIth the

Exchange Act, rules thereunder, or ItS own

rules; urnustrned failure to enforce

compliance WIth the foregoing or With rules

of the MUnicipal Securities Rulemaking

Board by a member or person associated

WIth a member.

116

Sanction

Cease-and-desist order, which may also

require a person to comply or take steps to

effect compliance with federal secunnes

laws, accounting and disqorqernent of Illegal

profits (Secuntles Act, Section 8A;

Exchange Act, Section 21 C(a), Investment

Company Act, Section 9(f}, Investment

Advisers Act, Section 203(k}}.

Censure or limitation on activities;

revocation, suspension or denial of

registration; bar or suspension from

association (Exchange Act, Sections

15(b)(4}-(6}, 15B(c}(2}-(5}, 15(C}(c}(1 }-(2),

17A(c} (3}-(4); Investment Advisers Act,

Section 203(e}-(f}}.

Civil penalty up to $100,000 for a natural

person or $500,000 for any other person;

accounting and disgorgement of Illegal

profits Penalties are subject to other

limitations depending on the nature of the

violation. (Exchange Act, Section 21 B;

Investment Company Act, Section 9;

Investment Advisers Act, Section 203).

Temporary cease-and-desist order, which

may, In appropriate cases, be issued ex

parte. (Exchange Act, Section 21C).

Suspension or revocation of reqrstration:

censure or limitation of actrvttres, functions,

or operations (Exchange Act, Section

19(h}(1 )}.
Member of registered securities

association, or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of secunties laws or rules

thereunder or rules of Municipal Securities

Bulernakmq Board; effecting transaction for

other person with reason to believe that

person was committing vrolations of

seCUritIes laws.

National securities exchange

Violation of or inability to comply with

Exchange Act, rules thereunder or Its own

rules; unjustified failure to enforce

compliance with the foregoing by a member

or person associated with a member.

Member of national securities exchange,

or associated person

Entry of Commission order against person

pursuant to Exchange Act, Section 15(b);

willful violation of securities laws or rules

thereunder, effecting transaction for other

person with reason to believe that person

was committing VIolation of securities laws.

Registered clearing agency

Vrolatron of or inability to comply with

Exchange Act, rules thereunder, or ItS own

rules; failure to enforce compliance with its

own rules by participants.

Participant in registered clearing agency

Entry of Oornrrusslon order against

participant pursuant to Exchange Act,

Section 15(b)(4); willful violanon of clearing

agency rules; effecting transaction for other

person with reason to believe that person

was committing violations of securities laws.

Securities information processor

Violation of or inability to comply with

provlsions of Exchange Act or rules

thereunder.

Suspension or expulsion from the

association; bar or suspension from

association with member of assocratron

(Exchange Act, Section 19(h)(2)-(3».

Suspension or revocation of registration;

censure or limitation of activilles, functions,

or operations (Exchange Act, Section 19(h)

(1»

Suspension or expulsion from exchange; bar

or suspension from association with member

(Exchange Act, Section 19(h)(2)-(3».

Suspensron or revocation of registration;

censure or limitation of actlvines, functions,

or operations (Exchange Act, Section

19(h)(1 ».

Suspension or expulsion from clearing

agency (Exchange Act, Section 19(h)(2».

Censure or limitation of actrvrties, suspension

or revocation of reqistration (Exchange Act,

Section 11A(b)(6)

117
Any person

Willful violation of Securities Act, Exchange

Act, Investment Company Act or rules

thereunder; aiding or abetting such violation,

willful misstatement in filing with

Commission.

Officer or director of self-regulatory

organization

Willful violation of Exchange Act, rules

thereunder or the organization's own rules;

willful abuse of authonty or unjustified failure

to enforce compliance.

Principal of broker-clealer

Officer, director, general partner, ten-percent

owner or controlling person of a brokerdealer for which a SIPC trustee has been

appointed.

Securities Act registration statement

Statement materially Inaccurate or

Incomplete.

Person subject to Sections 12, 13, 14 or

15(d) of the Exchange Act or associated

person

Failure to comply With such provisions or

having caused such failure by an act or

omission that person knew or should have

known would contnbute thereto.

Securities registered pursuant to Section

12 of the Exchange Act

Noncompliance by issuer With Exchange Act

or rules thereunder.

Public Interest requires trading suspension.

Registered investment company

Failure to file Investment Company Act

registration statement or required report;

filing materially Incomplete or misleading

statement or report

Company has not attained $100,000 net

worth 90 days after Securities Act

registration statement became effective.

118

Temporary or permanent prohibition against

serving In certain capacities with registered

Investment company (Investment Company

Act, Section 9(b)).

Removal from office or censure (Exchange

Act, Section 19(h)(4».

Bar or suspension from being or becoming

associated With a broker-dealer (SIPA,

Section 14(b)).

Stop order refusing to permit or suspending

effectiveness (Securities Act, Section 8(d».

Order directing compliance or steps

effecting compliance (Exchange Act, Section

15(c)(4)).

Denial, suspension of effective date,

suspension or revocation of registration

(Exchange Act, Section 120)).

Summary suspension of over-the-counter or

exchange trading (Exchange Act, Section

12(k)).

Suspension or revocation of registration

(Investment Company Act, Section 8(e)).

Stop order under Securities Act; suspension

or revocation of registration (Investment

Company Act, Section 14(a)).
AUorney, accountant, or other

professional or expert

Lack of reqursite 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.

Attorney suspended or disbarred by court,

expert's license revoked or suspended,

conviction of a felony or of a misdemeanor

mvolvmq moral turpitude.

Securities violation in Commission-instituted

action; finding of securities Violation by

Commission in administrative proceedings.

Member or employee of Municipal

Securities Rulemaking Board

Willful Violation of Exchange Act, rules

thereunder, or rules of the Board; abuse of

authority.

Permanent or temporary denial of pnvileqe of

appearing or practrcmq before the

Commission (17 CFR Section 201.1 02(e)(1)).

Automatic suspension from appearance or

practice before the Commission (17 CFR

Section 201.1 02(e)(2)).

Temporary suspension from practicrnq

before the Commission, censure; permanent

or temporary disqualification from practicing

before the Commission (17 CFR Section

201 102(e)(3».

Censure or removal from office (Exchange

Act, Section 15B(c)(8)).

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Engaging In or about to engage In acts or

practices violating securities laws, rules or

orders thereunder (Including rules of a

registered self-regulatory organization).

Noncompliance with provisrons of the laws,

rules, or regulations under Securities Act,

Exchange Act, or Holding Company Act,

orders Issued by Commission, rules of a

registered self-regulatory orqanizatron, or

undertaking in a registration statement.

Sanction

Injunction against acts or practices

constituting Violations (plus other equitable

relief under court's general equity powers)

(Securities Act, Section 20(b); Exchange Act,

secnon 21 (d); Holding Company Act,

Section 18(e); Investment Company Act,

Section 42(d); Investment Advisers Act,

Section 209(d); Trust Indenture Act, Section

321).

Writ of mandamus, injunction, or order

directing compliance (Securities Act, Section

20(c), Exchange Act, Section 21 (e); Holding

Company Act, Section 18(f».

119
Violating the securities laws or a cease-anddesist order (other than through Insider

trading).

Trading while In possession of material nonpublic information in a transaction on an

exchange or from or through a broker-dealer

(and transaction not part of a public

offering); aiding and abetting or directly or

Indirectly controlling the person who

engages in such trading.

Violating Securities Act Section 17(a)(1) or

Exchange Act section 10(b), when conduct

demonstrates substantial unfitness to serve

as an officer or director.

Issuer subject to Section 12 or 15(d) of

the Exchange Act; officer, director,

employee or agent of issuer; stockholder

acting on behalf of issuer

Payment to foreign official, foreign political

party or officral, or candidate for foreign

political office, for purposes of seeking the

use of Influence in order to assist Issuer in

obtaining or retaining business for or with, or

directing business to, any person.

Securities Investor Protection Corporation

Refusal to commit funds or act for the

protection of customers.

National securities exchange or registered

securities association

Failure to enforce compliance by members

or persons associated With ItS members with

the Exchange Act, rules or orders

thereunder, or rules of the exchange or

association.

Registered clearing agency

Failure to enforce compliance by ItS

participants with its own rules.

120

CiVil penalty up to $100,000 for a natural

person or $500,000 for any other person ill,

if greater, the gross gain to the defendant.

Penalties are subject to other limitations

dependent on nature of violation. (Securities

Act, Section 20(d); Exchange Act, Section

21 (d) (3); Investment Company Act, Section

42(e); Investment Advisers Act, Section

209(e».

Maximum civil penalty: three times profit

gained or loss avoided as a result of

transaction (Exchange Act, Section 21A(a)-

(b)).

Prohibition from acting as an officer or

director of any public company. (Securities

Act, Section 20(e); Exchange Act, Section

21 (d)(2)).

Maximum civil penalty' $10,000 (Exchange

Act, Section 32(c».

Order directing discharge of obligations and

other appropriate relief (SIPA, Section 11 (b)).

Writ of mandamus, injunction or order

directing such exchange or associatron to

enforce compliance (Exchange Act, Section

21 (e)).

Writ of mandamus, Injunction or order

directing clearing agency to enforce

compliance (Exchange Act, Section 21 (e».
Issuer subject to Section 15(d) of 1934

Act

Failure to file required information,

documents or reports.

Registered investment company

Name of company or of security issued by It

deceptive or misleading.

Officer, director, member of advisory

board, adviser, depositor, or underwriter

of investment company

Engage In act or practice constituting breach

of fiduciary duty involving personal

misconduct.

Forfeiture of $100 per day (Exchange Act,

Section 32(b»

lnjunctron against use of name (Investment

Company Act, Section 35(d}).

Injunction against acting In certain capacities

for Investment company and other

appropriate relief (Investment Company Act,

Section 36(a}).

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

Persons SUbject to, Acts Constituting, and

Basis for, Enforcement Action

Any person

Willful Violation of securities laws or rules

thereunder; willful misstatement in any

document required to be filed by securities

laws or rules; willful misstatement In any

document required to be filed by selfregulatory organization in connecnon With an

application for membership or association

with member.

Issuer subject to Section 12 or 15(d) of

the Exchange Act; officer or director of

issuer; stockholder acting on behalf of

issuer; employee or agent subject to the

jurisdiction of the United States

Payment to foreign official, foreign political

party or offlcial, or candidate for foreign

political office for purposes of seeking the

use of Influence In order to assist issuer in

obtaining or retaining business for or with, or

directing business to, any person.

Sanction

Maximum penaltres: $1,000,000 fine and ten

years imprisonment for individuals,

$2,500,000 fine for non-natural persons

(Exchange Act, Sections 21 (d), 32(a));

$10,000 fine and five years imprisonment (or

$200,000 If a public utility holding company

for VIolations of the Holding Company Act)

(Securities Act, Sections 20(b) , 24;

Investment Company Act, Secnons 42(e),

49; Investment Advisers Act, Sections

209(e) , 217; Trust Indenture Act, Sections

321, 325; Holding Company Act, Sections

18(t),29).

Issuer $2,000,000; officer, director,

employee, agent or stockholder $100,000

and five years imprisonment (Issuer may not

pay fine for others) (Exchange Act, Section

32(c)).

121

-

-
Foreign Restricted List

The Securi ties 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 (Securities Act). The

offer and sale of unregistered securities deprives investors of all the protections

afforded by the Securities Act, including the right to receive a prospectus

containing the information required by the Act for the purpose of enabling the

investor to determine whether the investment is suitable. While most brokerdealers refuse to effect transactions in securities issued by companies on the

Foreign Restricted List, this does notnecessanly prevent promoters 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 (CostaRica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Miningand 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 asInvestigation

Industrial Americana, S.A.(Mexico)

7. American International Mining (Bahamas)

8. American Mobile Telephone and Tape Co.,Ltd. (Canada)

9. AntelInternational Corporation, Ltd. (Canada)

10. Antoine Silver Mines, Ltd. (Canada)

11. ASCAEnterprisers Limited (Hong Kong)

12. Athol! Brose (Exports) Ltd. (England)

13. Athol! Brose Ltd. (England)

14. Atlantic and Pacific Bankand Trust Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, ChannelIslands, D.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 WestIndies)

20. Canterra Development Corporation, Ltd. (Canada)

21. Cardwell OilCorporation, Ltd. (Canada)

22. Caribbean Empire Company, Ltd. (BritishHonduras)

23. CayeChapel Club, Ltd. (British Honduras)

24. Central and Southern Industries Corp. (panama)

25. CerroAzul Coffee Plantation (Panama)

26. Cia. Rio Banano, S.A. (Costa Rica)

27. City BankA.S. (Denmark)

28. Claw Lake Molybdenum Mines, Ltd. (Canada)

29. Claravella Corpora tion (CostaRica)

30. Compressed AirCorporation, Limited (Bahamas)

122
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. DoncannonSpirits,Ltd. (Bahamas)

37. Durman, Ltd., formerly known asBankers International

InvestmentCorporation(Bahamas)

38. EmpresiaMinera Caudalosa de-Panama, S.A.(Panama)

39. Ethel Copper Mines, Ltd. (Canada)

40. Euroforeign Banking Corporation, Ltd.(panama)

41. Finansbankera/s (Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining S.A.(Canada)

44. Global Explorations, Inc. (Panama)

45. GlobalInsurance Company, Linuted (BritishWestIndies)

46. GlobusAnlage-Vermittlungsgesell-schaftMBH (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. IntercontinentalTechnologies Corp. (Canada)

53. International Communications Corporation (BntishWestIndies)

54. International Monetary Exchange (panama)

55. International Trade Development ofCosta Rica,S.A.

56. IroncoMining& Smelting Company, Ltd. (Canada)

57. James G.Allan &Sons (Scotland)

58. [ojoba 011 & Seed Industries, S.A.(Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon MiningCompany (Canada)

62. KoKaneeMoly Mines, Ltd. (Canada)

63. Land SalesCorporation (Canada)

64. Los Dos Hermanos, S.A.(Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bankand Trust&Co., Ltd. (Cayman Island)

68. MultireaIProperties,Inc. (Canada)

69. J.P.Morgan &Company, Ltd., of London, England (not

to be confused wi th J.P. Morgan & Co., Incorporated, New York)

70. NorartMineralsLimited(Canada)

71. Normandie TrustCompany,S.A. (Panama)

72. Northern Survey (Canada)

73. Northern TrustCompany,S.A. (Switzerland)

74. Northland Minerals, Ltd. (Canada)

75. ObscoCorporation, Ltd. (Canada)

76. PadficNorthwest Developments, Ltd. (Canada)

77. Pan-Alaska Resources, S.A.(Panama)

78. PanamericanBank&TrustCompany(panama)

79. Pas car Oils Ltd. (Canada)

80. PaulpicGoldMines,Ltd.(Canada)

123
81. PyrotexMiningand Exploration Co., Ltd. (Canada)

82. Radio Hill Mines Co., Ltd. (Canada)

83. Rancho San Rafael, SA (Costa Rica)

84. Rodney Gold Mines Limited (Canada)

85. Royal Greyhound and Turf Holdings Limited (South Afnca)

86. SA Valles & Co., Inc. (Philippines)

87. San Salvador Savings &Loan Co., Ltd. (Bahamas)

88. SantackMines Lnruted (Canada)

89. Security Capital Fiscal & Guaranty Corporation, SA

(panama)

90. Silver Stack Mines, Ltd. (Canada)

91. Socie teAnonyme 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. (WestIndies)

99. TrustCompanyofJamaica, Ltd. (WestIndies)

100. United Mirungand MillingCorporation (Bahamas)

101. Unitrustl.rrnitedflreland)

102. Vacationland(Canada)

103. Val ores de Inversion, S.A. (Mexico)

104. Victoria Oriente, Inc. (Panama)

105. Warden Walker Worldwide InvestmentCo. (England)

106. Wee Gee Uranium Mines, Ltd. (Canada)

107. WestemIntemational Explorations, Ltd. (Bahamas)

108. Yukon Wolverine MiningCompany (Canada)

124
Self-Regulatory Organizations: Expenses, Pre-tax Income, and Balance

Sheet Structure'

In 1994, the total revenues of all self-regulatory organizations (SROs)

with marketplace jurisdiction rose approximately $80.0 million, an increase

of approximately 7% from 1993. The New York Stock Exchange (NYSE),

the National Association of Securities Dealers (NASD), the American Stock

Exchange (AMEX), and the Chicago Board Options Exchange (CBOE)

accounted for 86% of total SRO revenues, up from 85% in 1993. Revenues

were earned primarily from listing or issuer fees, trading fees, and market

data fees. For example:

the NYSE reported total revenue of $452 million, an increase of 2%

from 1993, of which 40% consisted of listing fees, 20% consisted of

trading fees, and 15% consisted of market data fees;

the NASD reported total revenue of $372 million, an increase of 12%

from 1993, of which 21% consisted of issuer fees and 36% consisted

of trading and market data fees; and

the AMEX reported total revenue of $144 million, an increase of

10% from 1993, of which 11% consisted of listing fees.

The following SROs also reported increases in revenues:

the Boston Stock Exchange (BSE) reported a $846,000 increase (6%)

to $14.9 million;

the CBOE reported a $16.7 million increase (21%) to $97.7 million;

the Pacific Stock Exchange (PSE) reported a $3.3 million increase

(8%) to $46.8 million; and

the Philadelphia Stock Exchange (PHLX) reported a $1.8 million

increase (5%) to $40.6 million.

The Chicago Stock Exchange (CHX)Z reported a $298,000 decrease

(.42%) to $69.8 million. The Cincinnati Stock Exchange (CSE) reported total

revenues of$3.6 million for the six months ended June 30,1994, as compared

to its reported revenues of $6.1 million for the entire year ended December

31, 1993.

The CBOE experienced the largest percentage increase in total revenues,

21%, while the NASD reported the largest dollar volume mcrease in total

revenues, $39.9 million.

'After the close of its fiscal year ending December 31, 1993, the CSE

adopted a fiscal year ending June 30. The amounts included in this report

representing total revenues, total expenses, total pre-tax income, total

liabilities, total assets, and total net worth for all SROs in 1994 include

financial information based on CSE's June 3D, 1994 fiscal year-end. Thus,

comparisons between the financial analysis provided in the SEC's 1994

Annual Report and this report may be misleading.

2The CHX adopted its current name in 1993. Previously, it was known

as the Midwest Stock Exchange.

125

•

•

•

•

•

•

•
The total expenses of all marketplace SROs were $1.1 billion in 1994,

an increase of $94.6 million (10%) over 1993. The NASD incurred the largest

dollar volume increase in expenses, $65.9 million (24%). FIve additional

SROs incurred increases in expenses as follows:

the AMEX incurred a $9.4 million increase (8 % );

the BSE incurred a $824,132 increase (6%);

the NYSE incurred a $23.7 million increase (7%);

the PHLX incurred a $3.7 million increase (10%); and

the PSE incurred a $242,000 increase (1%).

Two SROs incurred decreases in expenses:

the CBOE incurred a $4.3 million decrease (5%); and

the CHX incurred a $3.0 million decrease (4%).

The remaining SRO, the CSE, reported expenses of $2.0 million for

the six months ended June 30, 1994, as compared to its reported expenses

of $4.2 million for the entire year ended December 31, 1993.

Due to an increase in aggregate expenses, aggregate pre-tax income

of the marketplace SROs fell to $154.5 million in 1994, a declme of $15

million (9%) from 1993. The CBOE experienced the largest dollar volume

and largest percentage Increase in pre-tax income, $20.9 million and 3,228%,

respectively. The PSE also showed a large percentage Increase in pre-tax

income, 181 %. The remaInIng SROs reported pre-tax income in 1994, with

the exception of the PH LX which reported a pre-tax loss of $923,000. The

CSE reported pre-tax income of $1.4 million for the six months ended June

30, 1994, as compared to its reported pre-tax income of $1.9 million for

the year ended December 31, 1993.

The total assets of all marketplace SROs amounted to approximately

$1.9 billion in 1994, an increase of $184 million (11 %) over 1993. The NYSE

showed the largest dollar volume increase in total assets, $88.8 million

(12%), while the AMEX reported the largest percentage increase in total

assets, 14% ($17.1 million). The NASD, CHX, and CBOE also reported large

increases in total assets, equalling $43.9 million (11.6%), $31.2 million

(12.0%), and $8.8 million (10.4%), respectively. The PHLX, BSE, and PSE

reported decreases of $352,000 (.45%), $3.2 million (16%), and $1.4 million

(4%), respectively. The CSE reported total assets of $5.2 million as of June

30, 1994, as compared to its reported total assets of $5.7 million as of

December 31, 1993.

In 1994, the total liabrlities of marketplace SROs increased $94.3 million

(11 %) over the 1993 level. The NYSE showed the greatest dollar volume

increase in liabili ties, $44.8 million (12 %), while the AMEX reported the

greatest percentage increase, 32% ($9.3 million). Increases in liabilities also

were reported by the CHX ($29.9 million or 13%), the PHLX ($1.4 million

or 3%), and the NASD ($22.8 million or 21 %). Of the SROs reporting

financial information for a 12-month period, the CBOE reported the largest

dollar volume decline in liabilities, $4.7 million (18%), while the BSE

reported the greatest percentage decrease, $3.7 million (27%). The PSE

reported a decline in liabilities of $4.2 million (26%). The CSE reported

liabilities of $1.3 million as of June 30, 1994, as compared to its reported

liabilities of $2.7 million as of December 31, 1993.

126

•

•

•

•

•

•

•
The aggregate net worth of the marketplace SROs rose $90.1 million

in 1994 to $922.6 million, an increase of 11% over 1993. Of the SROs

reporting financial information for a 12-month period, the CBOE incurred

the largest percentage increase in net worth, 23% ($13.5 million), while the

largest dollar volume increase in net worth was reported by the NYSE, $44.0

million (13%). The PSE also reported a substantial increase In net worth

of $2.8 million (13%). Other marketplace SROs also experienced positive

growth in net worth, with the AMEX reporting an increase of $7.8 million

(9%); the NASD reporting an increase of$21.1 million (8%); the BSEreporting

an increase of $555,000 (9%); and the CHX reporting an Increase of $1.3

million (6%). The PH LX reported a decrease in net worth of $1.7 million

(7%). The CSE reported a total net worth of $3.9 million as of June 30,

1994, as compared to its reported net worth of $3.0 million as of December

31, 1993.

Clearing agency results have been presented in two charts by their

respective types: depositories and clearing corporations. Aggrega te cleanng

agency service revenue decreased almost 2%, to $476 million, in calendar

year 1994. Interest income increased 48%, or by almost $32 million. All

clearing agencies adjust fee structure and refunds of fees to provide

participants with attractively pnced services, to meet expenses and to

provide the amount of earmngs which they desire to retain.

All service revenues at depositories totaled over $287 million, down

9% or $29 million. This included a decrease of almost $25 million by

Depository Trust Company (DTC). Only Philadelphia Depository Trust

Company recorded an increase, which was 6%, or $600,000. Total depository

pre-tax income was up only $84,000, or 1%.

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. This was made possible by the further expansion

of deposi tory-eligible issues and the desire of partici pants to avail themselves

of depository services. At year-end there were more than 1.2 rrullion

depository eligible issues. In general, eligibili ty for all types of securities

increased. For example, more than 95% of the principal amount of all

outstanding municipal bonds and notes were in the depository system. At

the end of 1994, the total value of securities in the depository system

approached $8 trillion, of which DTC alone controlled over $7.7 trillion.

Service revenue of clearing corporations increased to over $188 million,

up 13%. MBSClearing Corporation's pre-tax earnings increased $5.7 million,

up 269%. The Midwest Clearing Corporation reported a gaIn of $227,000

compared to a loss of $953,000 in 1993. The Options Clearing Corporation's

pre-tax gain was $5.2 million, up 186%. The Stock Clearing Corporation

of Philadelphia showed a loss of $173,000, compared to a gain of $632,000

the previous year. The Government Securities Cleanng Corporation was

up 131%, or $2 million, to $3.6 million. Total pre-tax income was $23 million,

up 105%, for all clearing corporations.

The aggregate shareholders' equity of all cleanng corporations and

depositories rose to $116 million in 1994, up 4%. Participant clearing fund

contributions, which provide protection to the clearing agencies in the

127
event of a participant default, Increased by $95 million, or 4%, to almost

$2.8 billion. Should a participant default and its losses exceed its deposit,

the entire participants' fund of the clearing agency may be assessed on a

pro rata basis.

128
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~~~~
Table 9

SELF-REGULATORY ORGANIZATIONS-DEPOSITORIES

1994 REVENUES and EXPENSES 11

($ In Thousands)

Midwest Philadelphia

Depository Securities Participants Depository

Trust Trust Trust Trust

Company Company Company Company

12/31/94 12/31/94 12/31/94 12/31/94 Total

Revenues

Depository Services $227.127 $30,764 $18,753 $10,613 $287.257

Interest 72.665 1.667 11.913 1.021 87.266

Other 0 365 365

Total Revenues ZI 299,792 32.431 30.666 11.998 374.887

Expenses

Employee Costs $175.116 16.589 10.412 6,490 208,607

Data Processmg and

Comrnurucations Costs 35.208 2.158 6,191 632 44.189

Occupancy Costs 42.902 3,116 6.018 411 52.447

All Other Expenses 45.682 10.068 4.045 3.920 63,715

Total Expenses $298.908 31.931 26.666 11,454 368.959

Excess of Revenues

Over Expenses 'JJ $884 $500 $4.000 $544 $5.928

Shareholders' Equny $19.385 $4,429 $19.073 $3.649 $46.536

Participant's Fund $667,196 $7,305 $273,352 $752 $948.605

1/ Although efforts have been made to make the presentanons comparable. any smgle revenue or expense category may not be

completely comparable between any two clearing agencies because of (i) the varymg classincauon methods employed by the

clearmg agencies m reportmg operatmg results and (II) the groupmg methods employed by the Commission staff due to these

varymg classincauon methods IndiVidual amounts are shown to the nearest thousand Totals are the rounded result of the

underlymg amounts and may not be the anthrnetrc sums of the parts

ZI Revenues are net of refunds which have the effect of reducmg a clearing agency's base fee rates

'JJ Itns IS the result of operations and before the effect of mcorne taxes. which may significantly Impact a clearing agency's net

mcorne

131

Investment Companies and Investment Advisers

The tables below show the number of registered investment companies

and investment advisers and the amount of assets under management. All

figures are reported for fiscal year-end.

Number of Active Registrants

% Change

1991 1992 1993 1994 1995 1991-95

Investment Companies 3,660 3,850 4,300 4,530 4,900 339%

Investment Company

Portfolios 16,000* 18,700 21,200 22,486 23,139 446%

Investment Advrsers 17,500 18,000 20,000 21,600 22,000 257%

*Estimate

Assets Under Management

($ in billions)

% Change

1991 1992 1993 1994 1991-95

Investment Companies $1,400 $1,800 $2,400 $2,500 $3,062 118 7%

Investment Advisers $5,400 $8,100 $9,600 $9,600 $10,600 96.3%

The number of registered investment companies increased more than

8% during 1995. Many investment companies combine several separate

portfolios or investment series in one investment company registration

statement. The number of portfolios generally ranges from three to ten.

However, some unit investment trusts group as many as 1,320 separate

portfolios under one Investment Company Act registration. The number

of portfolios increased almost 3% during 1995. Investment company assets

increased more than 22%.

Section 13(f)(1) Reports

Section 13(f)(l) of the Exchange Act and Rule 13f-1 reqUire "institutional

investment managers" exercising investment discretion over accounts

holding certain equity securities with a fair market value of at least $100

million to file quarterly reports on Form 13F. For the quarter ending June

30, 1995, 1,231 managers filed Form 13F reports, for total holdings of

approximately $3.08 trillion.

133

~
Exemptions

Section 12(h) Exemptions

Section 12(h) of the Exchange Act authorizes the Commission to grant.

complete or partial exemption from the registration provisions of Section 12(g

or from the disclosure or insider reporting/trading provisions of the Exchange

Actwhere such exemption is consistent with the public interest and the protectior

of investors. Four applications were pending at the beginning of 1995 and fou

applications were filed during the year. Requested relief was granted to fou

applicants.

Exemptions for Foreign Private Issuers

Rule 12g3-2 provides various exemptions from the registration provision;

of Section 12(g) of the Exchange Act for the securities of foreign private issuers

An important exemption is that contained in subparagraph (b), which provides

an exemption for certain foreign issuers that furnish to the Commission on a

current basis the material specified in the rule. Such material includes that

Information about which investors ought reasonably to be informed and which

the issuer has: (1) made or is required to make public pursuant to the law

of the country in which it is incorporated or organized; (2) filed or is required

to file with a stock exchange on which its securities are traded and which was

made public by such exchange; or (3) distributed or is required to distribute

to its securityholders. Periodically, the SEC publishes a list of those foreign

issuers that appear to be current under the exemptive provision. The mostcurrent

list contains a total of 1,221 foreign issuers.

134
Corporate Reorganizations

During 1995, the SEC entered its appearance in 13 reorganization cases

filed under Chapter 11 of the Bankruptcy Code involving companies with

aggregated stated assets of about $4.2 billion and about 100,000 public

investors. Counting these new cases, the Commission was a party in a total

of 173 Chapter 11 cases during the year. In these cases, the stated assets

totalled approximately $80 billion and involved almost one million public

investors. During 1995, 78 cases were concluded through confirmation of

a plan of reorganization, dismissal, or liquidation, leaving 95 cases in which

the Commission was a party at year-end.

Table 11

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Action Auto storesj/ EA MI 1990 1995

ADI Electronics ED NY 1987 1995

AlA lndustnes, Inc ED PA 1984 1995

Aileen, Inc SD NY 1994

AI Copeland Enterpnses, Inc WD TX 1991 1995

Alexander's Inc SO NY 1992

Allegheny lnternanonal, Inc 1/ WO PA 1988 1995

Alliant Computer Systems Corp ED MA 1992

Amdura Corporatronj/ D CO 1990 1995

Amencan Mrcrotel, Inc D NV 1995

Amencan West Arrunes, Inc 1/ D AZ 1991 1995

Anglo Energy, Inc 1/ SD NY 1988 1995

Appletree Markets, Inc 1/ SD TX 1992 1995

Baldwin BUilders CD CA 1995

Banyon Corp y SD NY 1991 1995

Barton Industnes Inc WD OK 1991

Bay Financial Corp, et al D MA 1990 1995

B-E Holdmgs, Inc ED WI 1994

Beker Industnes Corp 1/ SD NY 1986 1995

Bonneville Pacrtic Corporation D UT 1992

Branch Industnes, Inc SD NY 1985 1995

Camera Enterpnses, Inc., et al D MA 1989 1995

Cambridge Biotech Corp. DM 1994

Carter Hawley Hale Stores Inc CD CA 1991

Cascade lnternatrcnal Inc SD FL 1992

Citywide secunues Corp Y SD NY 1985 1995

Chyron Corporalion ED NY 1991 1995

Coated Sales, Inc SD NY 1988 1995

135
136

Table 11 continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

F.Y FY

Debtor Dismct Opened Closed

College Bound, Inc SO FL 1993

Columbia Gas System, Inc 0 DE 1991

Commonwealth Equity Trust1/ ED CA 1994 1995

Conston Corporation ED PA 1990 1995

Continental Information Systems1/ SO NY 1989 1995

Core Minerai, Inc 'JJ WD TX 1995 1995

County of Orange (Chapter 9) CD CA 1995

CPT Corp 0 MN 1991

Crazy Eddie, Inc, et al SO NY 1989

Crompton Co , Inc SO NY 1985 1995

Dakota Minerals, Inc 0 WY 1986

Damson 011 Co SO TX 1991

Dest Corp ND CA 1989

Drversined lndustrres, Inc 1/ ED MI 1993 1995

Drexel Burnham Lambert Group, Ltd 1/ S D NY 1990 1995

Eagle Clothes, Inc SD NY 1989 1995

Eagle-Pitcher Industries, Inc 1/ SO OH 1991

Eastern Air Lines, Inc, et al S D. NY 1989

E L FltzgeraldY NO FL 1993

Enterprise Technologies, Inc SD TX 1984

Envrropact, Inc SO FL. 1994

Everex Systems, Inc 1/ N C CA 1993 1995

F & C International, Inc 1/ S D. OH 1993 1995

F & M Distributor Inc ED MI 1995

Fed Depart fAllled Stores et al S D OH 1990 1995

Financial News Network, Inc SO NY 1991 1995

First City Bancorporanon of Texas NO TX 1994

First Republicbank Corp NO TX 1989

Future Ccmrnurucauons, Inc WD OH 1994

Gantos, Inc et al1/ WD MI 1994 1995

General Technologies Group ED NY 1990 1995

Gulf USA Corporation, et al. 0 10 1994

Hal, Inc 1/ 0 HI 1994 1995

Hannover Corporation of AmericaY MD LA 1993

Harry SchrieberY 0 CO 1993

Healthcare lnternanonat, Inc 11 WO TX 1992 1995

Helronencs, Inc CD. CA 1986

Hexcel Corporatronj,' NO CA 1994 1995

Hills Department storesj/ SO NY 1991 1995

House of Fabrics Inc CO CA 1995

-
Table 11 continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor Dismct Opened Closed

In re SportsTown, Inc NO GA 1995

Infllght Services, Inc SO NY 1987 1995

Infotechnology Inc 1J SO NY 1991 1995

Integra-A Hotel and Restaurant Co 0 CO 1993

Integrated Resources, Inc 1J SO NY 1990 1995

lnteloqrc Trace, Inc 1J WO TX 1994 1995

Inter Amencan Homes, Inc, et al 0 NJ 1990 1995

mternanonal Trading, Inc NO GA 1994

Jamesway Corporation SO NY 1993 1995

JWP, Inc SO NY 1994

Kaiser Steel Corp 0 CO 1987

King of Video, Inc 0 NV 1989

Kurzwerl Musrc Systems Inc 1 0 MA 1990 1995

Laventhol & Horwath 1J SO NY 1991 1995

Leslie Fay Companies, Inc SO NY 1993

Library Bureau Inc NO NY 1993

LlfeCo Investment 0 GA 1995

Lomas Financial Corp 1J SO NY 1990

Lone Star Industnes, Inc 1J SO NY 1991 1995

MacGregor Sparling Goods, Inc 0 NJ 1989

1995

Mallard Coach Co 1J WO IL 1993 1995

Marathon Office Supply, Inc CD CA 1988

Marcade Group Inc SO NY 1993 1995

Martech USA, Inc Y D AK 1994 1995

Maxlcare Health Plus Inc 1J CD CA 1989

McLean Industnes, Inc SO NY 1987 1995

MCorp (MCorp Financial, Inc

& MCorp Management) S D TX 1989

McCrory Parent Corp SD NY 1992

1995

Media VIsion Technology, Inc NO CA 1994

Megafoods Stores, Inc 0 AZ 1995

MEl Diversified, Inc 0 DE 1994 1995

Mendian Reserve, Inc. WO OK 1989

Merry-Go-Round Enterprises, Inc 0 MO 1994

Midland Capital Corp SO NY 1986 1995

Midwest Communications Corp ED KY 1991

Monarch Capitol Corp 0 MA 1991

National Fmanctal Realty Trust1J SO IN 1990 1995

National Gypsum Company NO TX 1991

New Valley Corp SO NY 1994

137

-
Table 11 continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor District Opened Closed

Newmark & tewis S D NY 1991 1995

Nutn Bevco, Inc y SD NY 1988 1995

NVF Company D DE 1994

D'Bnen Environmental Energy, Inc D NJ 1995

OCCIdental Development Fund lilY CD CA 1989

Occidental Development Fund IVY CD CA 1989

OCCIdental Development Fund vy CD CA 1989

Oliver's Stores ED NY 1987 1995

OLR Development Fund LP CD CA 1989

OLR Development Fund II LP CD CA 1989

Orbitron Capitol Corp WT TX 1995

PanAm Corporation SO NY 1991

Penn Pacific ED OK 1994

Phar-Mor, Inc NO OH 1994

Premier Benefit Capitol Trusty MD FL 1993

Premium Sales Corporauonj/ MD FL 1993

Public Service Co of New Hampshire 0 NH 1988

QMax Technology Group, Inc 11 SO OH 1989 1995

QT&T, Inc ED NY 1987

Oubrx Graphic Systems11 ND CA 1987 1995

Ramtek Corporatron ND CA 1989

Reserve Rent-a-Car D OH 1993

Residential Resources Mortgage

Investment Corporanon 0 AZ 1989

Revco 0 S Inc y ND OH 1988 1995

R H Macy & Co Corp 11 SD NY 1992 1995

Rose's Stores, Inc ED NC 1994 1995

Rymer Foods, Inc ND ILL 1993

Sahlen & Assocratesj/ SD NY 1989 1995

Sam S Brown Jr Y WD GA 1993

Saratoga Standardbreds, Inc N D NY 1990 1995

Schepps Food Stores, Inc S D TX 1992 1995

Seatrain Lines, Inc 11 SD NY 1981

Sharon Steel Corp 11 WD PA 1987 1995

SIS Corporation ND OH 1989

Sorg Incorporated, et al I/ SD NY 1989 1995

Southland Corporation NO TX 1991

Spectrum lntormatron

Iecnnolqres, Inc ED NY 1995

Spencer Cos, Inc D MA 1987

Spnnq Meadows Assoclatesy CD CA 1988 1995

Standard a,l and Exploratron of

Delaware, Inc WD MI 1991

138

-
Table 11 continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11

OF THE BANKRUPTCY CODE IN WHICH

THE SEC ENTERED APPEARANCE

FY FY

Debtor Drsmct Opened Closed

Statewide Bancorp 0 NJ 1991 1995

Sterling Optical Corp SO NY 1992

Swanton Corp SO NY 19B5

Systems for Health Care, Inc NO IL 19B8 1995

Telstar Satellite Corp of Amerlcay CD CA 1989

The Centennial Group, Inc CD CA 1992

The Circle K 0 Al 1990

The First Connecticut Small

Business Investments Company 0 CT 1991

The Group, Inc 0 NV 1990

The lionel Corp 11 SO NY 1991

The Regina Co 0 NJ 1989 1995

Tidwell Industries, Inc NO AL 1986

Todd Shipyards Corp 11 0 NJ 1988 1995

Towle Manufact /Rosemar Silver SO NY 1990 1995

Trans World, Inc ED MO 1995 1995

Traweek Investment Fund No 22, ltd Y CD CA 1988

Traweek Investment Fund No 21, ltd CO CA 1988

Trump Tal Mahal Funding, Inc 11 0 NJ 1991 1995

TSL Holdings, Inc SO CA 1993

UoC Homes, Inc 0 DE 1995

USA Classrc Inc SO NY 1994

Value Merchants ED WI 1994

Wedgestone Financial 0 MA 1991

Wedtech Corp SO NY 1987 1995

Westworld Community Healthcare, Inc CD CA 1987

Wheeling-Pittsburgh Steel Corp 11 WD PA 1985 1995

Zale Corporation, Inc 11 NO TX 1992 1995

lenox, Inc 11 0 NH 1993 1995

Total Cases Opened (FY 1995) 13

Total Cases Closed (FY 1995) 78

11 Plan of reorqaruzatron confirmed

2J Debtor liquidated under Chapter 7

'jJ Chapter 11 case dismissed

y Debtor's secunties not registered under Section 12(g) of the Exchange Act

139

-
The Securities Industry

Revenues, Expenses, and Selected Balance Sheet Items

Broker-dealers that are registered with the Commission earned a pretax profit of $3.5 billion in calendar year 1994. This was $9.5 billion less

than that earned the previous year. The pre-tax return on equity capital

of 6.5% was one of the worst of the last ten years.

A sharp rise in interest rates during most of 1994 was the most important

factor behind the poor profitability. The resultmg decline in bond prices

contributed to proprietary trading losses at securities firms as the values

of their bond inventories fell. Securities firms earned $20.2 billion in their

trading and investment accounts In 1994, a decline of over $5 billion from

last year.

Rising interest rates also discouraged debt offerings. Interest rates that

were high relative to the recent past made refinancings of debt particularly

unattractive. The market for new mortgage-backed securities, for example,

practically disappeared in 1994. The volume of new issues of equity also

fell sharply in 1994. The volume of IPOs and that of seasoned issues of

common and preferred stock all fell by over 30%. As a result, underwriting

revenues fell by $4.4 billion to $6.8 billion.

The agency business remained profitable in 1994. Exchange volume

set a new record, and securities commissions of $19.9 billion in 1994 were

unchanged from 1993's record level. The volume of margin debt outstanding

Increased in 1994, and combined with rising interest rates, resulted in a $1.4

billion increase in margin interest to $4.7 billion. The poor return from bond

mutual funds in 1994 discouraged investments in these instruments. As

a result, revenues from retailing mutual funds declined $1.2 billion to $6.9

billion.

"All other revenues" are comprised pnmarily of interest income from

securities purchased under agreements to resell and fees from handling

private placements, mergers, and acquisitions. These revenues grew by

over $13 billion in 1994 to $54.3 billion. Merger and acquisition activity

was exceptional In 1994, with the volume of announced deals second only

to that in 1988. The average value of reverse repurchase agreements on

the balance sheets of broker-dealers also increased in 1994, and combined

with higher interest rates, contributed to higher revenues.

Expenses rose 14% to $109.2 billion in 1994, primarily due to higher

Interest expenses. Interest expenses, the largest expense item in 1994,

increased by $13.6 billion (51%). Employee compensation fell slightly (by

4%) to $37.6 billion. Total assets rose by $12 billion to $1,252 billion. Equity

capital fell by $108 million to $53.8 billion.

140
Table 12

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER-DEALERS

1990-19941/

($ in Millions)

1990 1991 1992 1993' 1994'

Revenues

Secunlies Commissions $ 12,0322 $ 14,2097 $ 16,2489 $ 19,9048 $ 19,8896

Gains (Losses) In Trading and

Investment Accounts 15,7465 22,641 3 21,8383 25,4272 20,2166

Profits (Losses) from underwnunq

and Seiling Groups 3,7283 6,5926 8,2997 11,2487 6,8480

Margin Interest 3,1794 2,7711 2,6896 3,2352 4,6700

Revenues from Sale of Investment

Company Shares 3,2416 4,1763 5,9501 8,1153 6,8806

All Other Revenues 33,4283 34,4985 35,5574 40,9126 54,2686

Total Revenues $ 71,3562 $ 84,8895 $ 90,5840 $ 108,8437 $ 112,7734

Expenses

Registered Representatives'

Compensation (Part II Only) 2J $ 8,2672 $ 9,911 7 $ 12,1111 $ 14,6960 $ 13,7076

Other Employee Compensauon

and Benefits 12,5128 14,444 1 17,0669 20,931 3 20,5595

Cornpensanon to Partners and

Voting Stockholder Officers 2,1506 2,5605 2,8929 3,4980 3,3334

Commissions and Clearance Paid

to Other Brokers 2,9594 3,2005 3,722 1 5,3378 5,3355

Interest Expenses 28,0931 27,5118 24,5763 26,6156 40,251 7

Regulatory Fees and Expenses 5643 5771 6392 6297 6280

All Other Expenses 2J 16,0186 18,0279 20,4590 24,0967 25,430 1

Total Expenses $ 70,5661 $ 76,2336 $ 81,4674 $ 95,8051 $ 109,2459

Income and Profitability

Pre-tax Income $ 7901 $ 8,6559 $ 9,1166 $ 13,0386 $ 3,5275

Pre-tax Profit Margin 11 102 101 120 31

Pre-tax Return on EqUity 22 236 220 267 65

Assets, Liabilities and Capital

Total Assets $657,2265 $787,7163 $ 978,635 0 $ 1,240,1598 $ 1,251,782 8

Liabilities

(a) Unsubordinated Liabilities 607,8030 732,2902 916,5453 1,160,4560 1,169,1633

(b) Subordinated Liabilities 15,0908 16,3471 18,1558 25,7876 28,811 1

(c) Total Liabilities 622,8938 748,6373 934,7011 1,186,2436 1,197,9744

Ownership Equity $ 34,3327 $ 39,0791 $ 43,9339 $ 53,9162 $ 53,8084

Number of Firms 8,437 7,763 7,793 7,674 7,631

Figures may not add due to rounding

r reveed

p preliminary

1/ Calendar, rather than fiscal, year data IS reported In thiS table

2J Registered representatives' compensation for firms that neither carry nor clear IS Included In "other expenses"

as thrs expense Item IS not reported separately on Part IIA of the FOCUS Report

Source FOCUS Report

141

=

=
Table 13

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

1990 1994 11

($ In Millions)

1990 1991 1992 1993' 1994'

Revenues

Securities Commissions $11,6597 $13,7108 $15,4997 $ 19,341 1 $ 19,2558

Gains (Losses) In Trading and

Investment Accounts 14,869 5 21,371 7 20,790 7 24,0425 18,9164

Profits (Losses) from UnderWriting

and Seiling Groups 3,7280 6,591 4 8,2028 11,2486 6,844 7

Margin Interest 3,1588 2,7324 2,651 7 3,2291 4,652 7

Revenues from Sale of Investment

Company Shares 3,241 6 4,1762 5,851 9 8,1153 6,8699

All Other Revenues 32,5780 33,7468 34,745 5 40,0863 53,0960

Total Revenues $69,2356 $82,3293 $87,7422 $106,0629 $109,6356

Expenses

Registered Representatives'

Cornpensatron (Part II only) ?J $ 8,2453 $ 9,9006 $11,791 1 $ 14,671 9 $ 13,6856

Other Employee Compensation

and Benefits 12,2092 14,066 5 16,601 4 20,5149 20,0805

Cornpensatron to Partners and

Voling Stockholder Officers 1,9835 2,376 4 2,6955 3,2934 3,0972

Commissions and Clearance Paid

to Other Brokers 2,7962 3,0032 3,5000 5,0833 5,0643

Interest Expenses 27,6306 27,088 1 24,2358 26,2229 395834

Regulatory Fees and Expenses 5094 511 2 5800 5733 5348

All Other Expenses ?J 15,5804 17,4575 19,777 9 23,5482 24,831 8

Total Expenses $68,9544 $74,4034 $79,1817 $ 93,9080 $106,877 6

Income and Prontabt Iity

Pre-tax Income $ 2812 $ 7,9259 $ 8,5605 $ 12,1549 $ 2,7579

Pre-tax Profit Margin 04 96 98 11 5 25

Pre-tax Return on Equity 09 233 222 265 54

Number of Firms 5,424 5,115 5,091 5,139 5,237

Figures may not add due to rounding

r revised

p preliminary

V Calendar, rather than fiscal, year data ISreported In thrs table

?J Registered representatives' compensanon for firms that neither carry nor clear ISIncluded In "other expenses"

as thiS expense Item ISnot reported separately on Part IIA of the FOCUSReport

Source FOCUSReport

142

-

=

=
Table 14

UNCONSOLIDATED BALANCE SHEET FOR BROKER-DEALERS

DOING A PUBLIC BUSINESS

YEAR-END, 1990 1994 jj

($ In Millions)

1990 1991 1992 1993' 1994P

Assets

Cash $ 10,9681 $ 10,3512 $ 11,0244 $ 13,1281 $ 13,5019

Receivables from Other

Broker-dealers 118,4131 161,4844 216,7937 289,1680 342,0283

Receivables from Customers 37,1778 50,8611 49,3335 68,5261 66,9116

Receivables from Non-customers 1,1577 2,1261 4,3267 6,4125 7,258.2

Long Posinons in Securities

and Commodities 208,1663 245,1645 294,2945 363,8643 317,6271

Securities and Investments

not Readily Marketable 1,1902 1,8639 2,3760 4,1244 4,4865

Securities Purchased Under Agreements

to Resell (Part II only) {j 237,2356 272,2261 350,4878 439,431 4 437,8056

Exchange Membership 3323 313 4 3153 3231 3483

Other Assets {j 26,0143 23,521 2 26,5029 30,6158 33.8189

Total Assets $640,6555 $767,911 8 $955,4548 $1,215,5938 $1,223,7863

L,ab,l,lies and EqUity Capital

Bank Loans Payable $ 18,3422 $ 24,9056 $ 33,9088 $ 41,9919 $ 34,7090

Payables to Other Broker-dealers 46,0389 63,2919 68,5690 105,1152 130,7599

Payables to Non-customers 7,5105 13,7306 6,6077 10,8360 11,9215

Payables to Customers 55,5497 71,977 5 70,0897 90,9429 98,5344

Short Positrons in Securities

and Cornmocmes 104,6900 113,0009 157,2956 199,5095 196,8101

Securities Sold Under Repurchase

Agreements (Part II only) {j 320,7733 385,6551 500,7141 607,8271 591,1855

Other Non-subordinated Liabilities {j 40,9732 43,7388 59,5348 83,1244 80,8468

Subordinated Liabilities 14,7630 15,4641 17,7265 25,3706 28,4954

Total Llabllilies $608,6408 $731,7646 $914,4461 $1,164,7176 $1,173,262 7

EqUity Capital $ 32,0146 $36,1473 $ 41,0087 $ 50,8762 $ 50,5236

Number oflirms 5,424 5,115 5,091 5,139 5,237

Figures may not add due to rounding

r revised

p preliminary

1/ Calendar, rather than fiscal, year data ISreported in this table

{j Resale agreements and repurchase agreements for firms that neither carry nor clear are included in "other

assets" and "other non-subordinated liabilities," respectively, as these Items are not reported separately on

Part IIA of the FOCUS Report

Source FOCUS Report

143

-

=

=
Carrying and Clearing Firms

Data for carrying and cleanng firms that do a public business is presented

here to allow for more detail. Reporting requirements for firms that neither

carry nor clear are less detailed. Data aggregation of these two types of

firms results in loss of detail.

Carrying and cleanng firms are those firms that clear securities

transactions or maintain possession or control of customers' cash or securities.

This group produced 82 percent of the securities industry's total revenues

in calendar year 1994.

Brokerage activity accounted for about 24 cents of each revenue dollar

in 1994, abou t the same as the level in 1993. Securities commissions remained

the most important component, producing 15 cents of each dollar of revenue.

Margin interest generated about five cents of each dollar of revenue, while

revenues from mutual fund sales accounted for about four cents.

The dealer side produced 61 cents of each dollar of revenue in 1994,

down from 65 cents in 1993. Eighteen cents came from trading and

investments, a decrease from 24 cents in 1993. Seven cents came from

underwriting, down from twelve cents in 1993. Thirty-six cents came from

other securities-related revenues, an increase from twenty-nine cents in

1993. This revenue item is comprised primarily of interest income from

securities purchased under agreements to resell and fees from handling

private placements, mergers, and acquisitions.

Expenses accounted for 98 cents of each revenue dollar in 1994, resulting

in a pre-tax profit margin of two cents per revenue dollar, about nine cents

lower than that in 1993. Interest expense was the most important expense

item, accounting for 42 cents of each revenue dollar in 1994 compared to

29cents in 1993.Employee-related expenses-compensation received by registered

representatives, partners and other employees-consumed 33 cents of each

revenue dollar in 1994, compared to 37 cents in 1993.

Total assets of broker-dealers carrying and clearing customer accounts

were $1,192 billion at year-end 1994, a one percent increase from 1993.

Relative to other assets, the value of inventory on the books of brokerdealers declined during 1994, reflecting at least in part the decline in bond

prices that took place over the course of the year. Broker-dealer receivables

increased.

Total liabilities also increased by about one percent to $1,150 billion in

1994. Owners' equity fell two percent to $41.8 billion.

144
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~~~
Table 16

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER-DEALERS jJ

($ in Millions)

1993' 1994'

Percent Percent Percent

of Total of Total Change

Dollars Revenues Dollars Revenues 1992-1993

Revenues

Securities Cornrmssions $14,1780 160% $13,991 5 151% -13%

Gams (Losses) m Trading and

Investment Accounts 21,2410 239 16,8100 181 -209

Profits (Losses) from UnderWrltmg and Sellmg Groups 10,5318 119 6,2546 67 -406

Margm Interest 3,2291 36 4,6527 50 441

Revenues from Sale of Investment Company Shares 4,6305 52 4,1102 44 -11 2

Miscellaneous Fees 4,1595 47 4,771 3 51 147

Revenues from Research 245 00 325 00 327

Other Securities Related Revenues 25,7539 290 33,6025 363 305

Commodities Revenues 1,2161 14 2,0306 22 670

All other Revenues 3,7320 42 6,4069 69 717

Total Revenues $ 88,6964 1000% $ 92,662 9 1000% 45%

Expenses

Registered Representaltves'

Compensalion (Part II Only) $14,6719 165% $13,6856 148% -67%

Other Employee Compensation

and Benefits 15,8262 178 15,1726 164 -41

Cornpensanon to Partners and

Votmg Stockholder Officers 2,0199 23 1,9111 21 -54

Commissions and Clearance Paid

to Other Brokers 2,7054 31 3,1787 34 175

Cornrnurucanons 2,7205 31 3,0069 32 105

Occupancy and Equipment Costs 3,4672 39 3,5231 38 1 6

Data Processmg Costs 1,1920 13 1,3430 14 12.7

Interest Expenses 25,8531 291 38,8960 420 505

Regulatory Fees and Expenses 472 3 05 4162 04 -119

Losses m Error Accounts and

Bad Debts 3099 03 3998 04 290

All Other Expenses 9,4706 107 9,4297 102 -04

Total Expenses $ 78,7091 887% $ 90,962 8 982% 156%

Income and Profitability

Pre-tax Income $ 9,9873 113% $ 1,7001 18% -830%

Pre-tax Profit Margm 113 18

Pre-tax Return on EqUity 256 40

Number of Firms 825 786

Figures may not add due to roundmg

r revised

p prehrnmary 11 Calendar, rather than nscal, year data IS reported m nus table

Note Includes mtorrnaton for firms domg a public business that carry customer accounts or clear securmes transactions

Source FOCUS Report

146

=

=
Table 17

UNCONSOLIDATED BALANCE SHEET FOR CARRYING/CLEARING

BROKER-DEALERS 11

($ in Millions)

Year-end 1993' Year-end 1994P

Percent Percent Percent

of Total oITotal Change

Dollars Assets Dollars Assets 1993-1994

Assets

Cash $ 12,0268 10% $ 12,3919 10% 30%

Receivables from Other Broker-dealers 280,4340 237 334,6326 281 193

(a) Securities Failed to Deliver 17,6253 15 21,9791 18 247

(b) Securities Borrowed 235,6547 199 295,3987 248 254

(c) Other 27,1540 23 17,2548 14 -365

Receivables from Customers 68,5261 58 66,9116 56 -24

Receivables from Non-customers 6,0385 05 6,7697 06 121

Long Posmons In Securities and Commodities 347,1544 294 300,7849 252 -134

(a) BankersAcceptances, Certificates

of Deposu and Commercial Paper 10,5784 09 9,5083 08 -101

(b) U S and Canadian Government Obhqanons 221,1856 187 189,061 0 159 -145

(c) State and MUniCipal Government Obhqanons 17,0857 14 15,4874 13 -94

(d) Corporate ObllgallOns 67,0405 57 58,5029 49 -127

(e) Stocks and Warrants 22,2735 19 19,9256 17 -105

(f) Opnons 1,4725 01 1,9496 02 324

(g) Arbitrage 5,0257 04 4,2654 04 -15 1

(h) Other Securities 2,1361 02 1,7196 01 -195

(I) Spot Commodities 3565 00 3650 00 24

Securities and Investments Not Readily Marketable 3,8337 03 4,2049 04 97

Securities Purchased Under Agreements

to Resell (Part II Only) 439,431 4 372 437,8056 367 -04

Exchange Membership 2872 00 3075 00 71

OtherAssets 24,9283 21 28,0481 24 125

Total Assets $1,182,6604 1000% $1,191,8568 1000% 08%

Liabilities and EqUityCapital

Bank Loans Payable $ 41,8634 35% $ 34,5723 29% -174%

Payables to Other Broker-dealers 94,3379 80 122,3400 103 297

(a) Securities Failed to Receive 17,3705 15 23,3116 20 342

(b) Securities Loaned 64,4235 54 79,6341 67 236

(c) Other 12,5439 11 19,3943 16 546

Payablesto Non-customers 10,0922 09 11,6289 1.0 152

Payables to Customers 90,9429 77 98,5344 83 83

Short Posiuons In Securities

and Commodities 189,7235 160 185,8428 156 -20

Securities Sold Under Repurchase

Agreements (Part II Only) 607,8271 514 591,1855 496 -27

Other Non-subordinated

Liabilities 80,8993 68 78,6940 66 -27

Subordinated Liabilities 24,2778 21 27,2893 23 124

Total Liabilities 1,139,9641 964 1,150,0873 965 09

EqUity Capital $ 42,6963 36% $ 41,7695 35% -22%

Number of Firms 825 786

Figures may not add due to rounding

r revised

p preliminary

1/ Calendar, rather than nscal, year data is reported In nus table

Note Includes mtormanon for films dOing a public busmess that carry customer accounts or clear secunues transactions

Source FOCUSReport

147

=

=
Securities Traded on Exchanges

Market Value and Volume

The market value of equity and option transactions (trading in stocks,

options, warrants, and rights) on registered exchanges totaled $3.0 trillion

in 1994. Of this total, approximately $2.8 trillion, or 95%, represented the

market value of transactions in stocks, nghts and warrants; $139 billion,

or 5%, were options transactions (including exercises of options on listed

stocks).

The value of equity and option transactions on the New York Stock

Exchange (NYSE) was $2.5 trillion, up 9.0% from the previOus year. The

market value of such transactions on the American Stock Exchange (Amex)

decreased 0.01% to $82.6 billion and increased 6.2% to $391.0 billions on

all other exchanges. The volume of trading in stocks (excluding rights and

warrants) on all registered exchanges totaled 90.5 billion shares, a 9.3%

increase from the previous year, with 85.0% of the total accounted for by

trading on the NYSE.

The volume of options contracts traded (excluding exercised contracts)

was 281.4 million contracts in 1994,21.0% greater than in 1993. The market

value of these contracts increased 25.7% to $94.5 billion. The volume of

contracts executed on the Chicago Board Options Exchange increased 30.8%

to 183.9 million. Option trading on the Amex and Pacific Stock Exchange

rose 1.4% and 27.9% respectively while option trading on the Philadelphia

Stock Exchange decreased 0.3%.

148
NASDAQ (Share Volume and Dollar Volume)

NASDAQ share volume and dollar value information has been reported

on a daily basis since November 1, 1971. At the end of 1994, there were

5,761 issues in the NASDAQ system, as compared to 5,391 a year earlier

and 3,050 at the end of 1980.

Share volume for 1994 was 74.4 billion, as compared to 66.5 billion in

1993 and 6.7 billion in 1980. This trading volume encompasses the number

of shares bought and sold by market makers plus their net inventory changes.

The dollar volume of shares traded in the NASDAQ system was $1.45 trillion

during 1994, as compared to $1.35 trillion in 1993 and $68.7 billion in 1980.

Share and Dollar Volume by Exchange

Share volume on all registered stock exchanges totaled 90.5 billion, an

increase of 9.3% from the previous year. The New York Stock Exchange

accounted for 85% of the 1994 share volume; the American Stock Exchange,

5%; the Chicago Stock Exchange, 4%; and the Pacific Stock Exchange, 2%.

The dollar value of stocks, rights, and warrants traded was $2.8 trillion,

7.9% higher than the previous year. Trading on the New York Stock Exchange

contributed 88% of the total. The Chicago Stock Exchange and Pacific Stock

Exchange contribu ted 4% and 2%, res pectivel y. The American Stock Exchange

accounted for 2% of dollar volume.

149
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Table 20

SHARE VOLUME BY EXCHANGES 1/

(In Percentage)

Total Share

Volume

Year (InThousands) NYSE AMEX CHIC PSE PHLX BSE CSE othersZ!

1945 769,018 6587 2131 177 298 106 066 005 6.30

1950 893,320 7632 1354 216 311 097 065 009 316

1955 1,321,401 6885 1919 209 308 085 048 005 541

1960 1,441,120 6847 2227 220 311 088 038 004 265

1961 2,142,523 6499 2558 222 341 079 030 004 267

1962 1,711,945 7131 2011 234 295 087 031 004 207

1963 1,880,793 7293 1883 232 282 083 029 004 194

1964 2,118,326 7281 1942 243 265 093 029 003 144

1965 2,671,012 6990 2253 263 233 081 026 005 149

1966 3,313,899 6938 2284 256 268 086 040 005 123

1967 4,646,553 6440 2841 235 246 087 043 002 106

1968 5,407,923 6198 2974 263 264 089 078 001 133

1969 5,134,856 6316 2761 284 347 122 051 000 119

1970 4,834,887 7128 1903 316 368 163 0.51 002 069

1971 6,172,668 7134 1842 352 372 191 043 003 063

1972 6,518,132 7047 1822 371 413 221 059 003 064

1973 5,899,678 7492 1375 409 368 219 071 004 062

1974 4,950,842 7847 10 28 440 348 182 086 005 064

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 1085 330 327 164 055 028 023

1980 15,587,986 7994 1078 384 280 154 057 032 021

1981 15,969,186 8068 932 460 287 155 051 037 010

1982 22,491,935 8122 696 509 362 218 048 038 007

1983 30,316,014 8037 745 548 356 220 065 019 010

1984 30,548,014 8254 526 603 331 179 085 018 004

1985 37,187,567 8152 578 612 366 147 127 015 003

1986 48,580,524 8112 628 573 368 153 133 030 002

1987 64,082,996 8309 557 519 323 130 128 030 004

1988 52,665,654 8374 495 526 303 129 132 039 002

1989 54,416,790 8133 602 544 334 180 164 041 002

1990 53,746,087 8186 623 468 3.16 182 171 053 001

1991r 58,290,641 8201 552 466 359 160 177 086 001

1992r 65,705,037 8134 574 462 319 172 157 183 001

1993 83,056,237 8290 553 457 281 155 147 117 000

1994 90,786,603 8455 496 388 237 142 139 142 001

r=revlsed

Y Sharevolume for exchangesIncludes stocks, fights and warrants, calendar,rather than fiscal, yeardata IS reported In this table

2/ Includes all exchangesnot listed individually

Source SECForm R-31

152
Table 21

DOLLAR VOLUME BY EXCHANGES 11

(In Percentage)

Total Dollar

Volume

Year ($ In Thousands) NYSE AMEX CHIC PSE PHLX SSE CSE OthersY

1945 $ 16,284,552 8275 081 2 00 178 096 116 006 048

1950 21,808,284 8591 685 235 219 103 112 011 044

1955 38,039,107 8631 698 244 190 103 078 009 047

1960 45,309,825 8380 935 272 194 103 060 007 049

1961 64,071,623 8243 10 71 275 199 103 049 007 053

1962 54,855,293 8632 681 275 2 00 105 046 007 054

1963 64,437,900 8519 751 272 239 106 041 006 066

1964 72,461,584 8349 845 315 248 1.14 042 006 081

1965 89,549,093 81 78 991 344 243 112 042 008 082

1966 123,697,737 7977 1184 314 284 110 056 007 068

1967 162,189,211 7729 1448 3 08 279 113 066 003 054

1968 197,116,367 7355 1799 312 265 113 104 001 051

1969 176,389,759 7348 1759 339 312 143 067 001 031

1970 131,707,946 7844 1111 376 381 199 067 003 019

1971 186,375,130 79 07 998 4 00 379 229 058 005 024

1972 205,956,263 7777 10 37 429 394 256 075 005 027

1973 178,863,622 82 07 6 06 454 355 245 100 006 027

1974 118,828,270 8363 440 490 350 2 03 124 006 024

1975 157,256,676 8520 367 464 326 1 73 119 017 014

1976 195,224,812 8435 388 476 383 169 094 053 002

1977 187,393,084 8396 460 479 353 162 074 075 001

1978 251,618,179 8367 613 416 364 162 061 017 000

1979 300,475,510 8372 694 383 278 180 056 035 002

1980 476,500,688 8353 733 433 227 161 052 040 001

1981 491,017,139 8474 541 5 04 232 160 049 040 000

1982 603,094,266 8532 327 583 305 159 051 043 000

1983 958,304,168 8513 332 628 286 155 066 016 004

1984 951,318,448 8561 226 657 293 158 085 019 000

1985 1,200,127,848 8525 223 659 3 06 149 120 018 000

1986 1,707,117,112 85.02 256 6 00 3 00 157 144 041 000

1987 2,286,902,788 8679 232 532 253 135 133 035 000

1988 1,587,950,769 8681 196 546 262 133 134 049 000

1989 1,847,766,971 8549 235 546 284 177 156 054 000

1990 1,616,798,075 8615 233 458 277 1 79 163 074 000

1991 1,778,154,074 8620 231 434 305 154 1 72 083 001

1992 2,032,684,135 8647 207 428 287 1 70 152 109 000

1993 2,610,504,390 8721 208 410 238 152 135 137 000

1994 2,817,671,150 88 08 2.01 349 209 134 131 168 000

1/ Dollar volume for exchangesIncludes stocks, nghts and warrants,calendar,ralherthan fiscal, year data IS reported In this

table

Y Includes all exchangesnot listed individually

Source SECForm R-31

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Table 23

VALUE OF STOCKS LISTED ON EXCHANGES

($ In Billions)

New York Amencan Exclusively

As of Stock Stock On Other

Dec 31 Exchange Exchange Exchanges Total

1938 $ 475 $ 108 $ $ 583

1940 465 101 566

1941 419 86 505

1942 358 74 432

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 670 119 30 819

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405

1953 1173 153 28 1354

1954 1691 221 36 1948

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 4417

1964 4743 282 43 5068

1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 612 60 7595

1969 6295 477 54 6826

1970 6364 395 48 6807

1971 7418 491 47 7956

1972 8715 556 56 9327

1973 7210 387 41 7638

1974 5111 233 29 5373

1975 6851 293 43 7187

1976 8583 360 42 8985

1977 7767 376 42 8185

1978 8227 392 29 8648

1979 9606 578 39 1,0223

1980 1,2428 1035 29 1,3492

1981 1,1438 894 50 1,2382

1982 1,3054 776 68 1,3897

1983 1,5222 801 66 1,6088

1984 1,5295 520 58 1,5873

1985 1,8827 632 59 1,9518

1986 2,1285 703 65 2,2053

1987 2,1322 670 59 2,2051

1988 2,3661 841 49 2,4551

1989 2,9035 1009 46 3,0090

1990 2,6921 699 39 2,7659

1991 3,5475 903 43 3,6421

1992 3,877 9 864 59 3,9702

1993 4,3149 981 72 4,4202

1994 4,2408 865 47 4,3320

Source SEC Form 1392

155
Table 24

APPROPRIATED FUNDS vs FEES. COLLECTED

$ Millions

600

550

500

450

400

350

300

559

297.4

156

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200

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APPROPRIA TED

100

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FY1976 78 80 82 84 86 88 90 92 94

77 79 81 83 85 87 89 91 93 95

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