45th Annual Report

of the Securities and

Exchange Commission

for the fiscal year

ended September 30, 1979
For sale by the Supenntendent of Documents, U S. Government Pnntong Office Washongton, D.C 20402 Stock Number 046-000.00121.4
Chairman's Letter of Transmittal

The Honorable Walter F. Mondale

President, U.S. Senate

Washington, D.C. 20510

The Honorable Thomas P. O'Neill, Jr.

Speaker, U.S. House of Representatives

Washington, D.C. 20515

Gentlemen'

Iam pleased to transmit the Annual Report of the United States

Securities and Exchange Commission for the fiscal year ended

September 30, 1979. As I have in connection with the Cornrmssion's last

two Annual Reports, I would like to summarize in this letter some of the

significant challenges which the Commission has faced, and

achievements which it has realized, during the past year. I want also to

describe several of the areas to which the Commission will be devoting

its efforts in the coming year.

After 45 years of successful administration of the Federal securities

laws-a period during which the Cornrnission earned recoqrutron as a

hiqhly effective Federal regulatory agency-It is taking a close look at

whether its rules, procedures, and internal operations remain adequate

and appropriate to the capital markets of the 1980s. This examination

comes at a time when the Commission is already facing the challenge of

stretching limited resource levels to meet its steadily Increasing

responsibilities.

Since 1975, during a period In which the Commission actually 1051 a

significant number of staff positions, the Commission has experienced

an explosion in the number and complexity of ItS regulatory

responsibilities-in large part, for two specific reasons. First. SIgnificant

changes have occurred in the financial markets and cornrnuruty-iincluding greatly expanded market activity. increasing complexity of

financial transactions, the development of a new mix of financial

products being offered to the public, and the increasinqly hiqh financial

leverage of the broker-dealer industry. As illustrations, during the period

from 1975, the number of shares annually traded in the NASDAQ

system increased over 150 percent, the number of contracts for

exchange-traded options increased over 250 percent, the number of

registered investment advisers increased by approximately one-half,

there were approximately $100 billion worth of successful tender offers,

and in the last year alone the assets of money market funds increased
almost five-fold. Such remarkable growth is expected to continue-in

January 1980, the volume of trading in New York Stock Exchange-listed

securities on the composite tape, American Stock Exchange-listed and

over-the-counter traded securities totaled 2.165 billIon shares. Just a

year earlier, the January figure was less than one-half that amount; two

years earlier, it was only about one-third of this year's figure.

Second, during this same five-year period, Congress charged the

Commission with a wide range of new regulatory responsibihties and

legal oblIgations Some of these mandates to which it must allocate

SIgnificant resources, such as the Freedom of Information Act, are not

unique to the Cornrrussion. But other requirements are. For example, in

1975 Congress directed the Commission to facilitate the establIshment

of a national market system for securities. Further, the Commission has

been charged with implementing the Forerqn Corrupt Practices Act and

has undertaken a greater role to achieve more effective oversiqht and

self-regulation of the accounting profession. The Commission also has

devoted considerable resources to reviewinq the American Law

Institute's proposed Federal Securrtres Code, WhICh, it is anticipated, will

be introduced In the Congress. Moreover, recent Judicial developments,

which have severely hampered private rights of action, mean that in

many cases, no party other than the Commission can seek judicial

enforcement of the federal secunties laws.

Major changes In the Commission's operations have been necessary to

cope WIth this increased workload in the face of dirnlnished staff

allocation. In order to maintain the Commission's traditionally high level

of investor protection, it has had to increase efficiency, reallocate

personnel, reorganize structure, develop new management strategies,

and rely on unpaid overtime donated by its highly-motivated staff. This

drive for even more efficient utilization and allocation of our resources

will, of necessity, continue in the coming year. Nonetheless, such efforts

can accomplish only so much. The Commission is concerned that

continually growing demands on lImited resources impair its existing

programs and functions. In a number of areas, underallocation of staff,

because of needs to irnrnedrately meet other demands, already has

resulted in performance capabilities diminishing to a level which the

Commission does not consider adequate. For example, the

Cornrnissron's lnspections of many of the financral entities which It

regulates are too Infrequent to be optimally effective In protecting the

publIc

The Securities Markets

The Commission continued its efforts, during fiscal 1979, to

implement ItS Congressional mandate to facilitate the establIshment of a

national market system for securities. As part of its efforts to Identify

the objectives and framework of such a system, during fiscal 1979, the

Cornrnission proposed three siqnificant rules: Rule 11AcI-3 to provide

price protection for public limit orders; Rule 19c-3 to limit extension of

off-board trading restrictions; and Rule 11Aa2-1 to define criteria for

ii
securities to "qualify" for trading in a national market system. The

securities industry, meanwhile, stengthened the two principal

experiments In technology which may become, or help determine, a

foundation of a national market system-the Intermarket Trading System

and the Cincinnati multiple-dealer trading facility. Both of these projects

also received authority from the Commission to continue operating until

January 31, 1983. Two additional private sector Initiatives in this area

were the commitment by the participating exchanges in the Intermarket

Trading System to a joint limit order protection plan, and the agreement

by the New York and American Stock Exchanges to make generally

available their common message switch.

Trading in exchange-listed options also received a great deal of

attention from the Commission during the fiscal year. In December

1978, the Special Study of the Options Markets submitted to the

Commission the l,OOO-pagereport of its comprehensive 14-month

study. The Commission released the staff's report publicly in February

1979, and announced the conditions under which it would permit an

expansion in options trading. During the balance of the fiscal year and

into fiscal 1980, the staff worked closely with the securities industry's

self-regulators toward implementing many of the recommendations of

the Study. Although the task was complex and difficult, the cooperation

between the Commission's staff and the industry's representatives has

been excellent. I anticipate that in the coming fiscal year the

Commission will authorize an expansion of trading in this segment of

the securities market.

The Full Disclosure System

The Commission's statutory mandate to require corporations to

disclose all material information to the investing public is at the heart of

the capital forrnation process. In accordance with the 1977

recommendations of its Advisory Committee on Corporate Disclosure,

the Commission is pursuing an on-going program designed to enhance

the effectiveness of its disclosure requirements, while reducing attendant

burdens to the extent practicable. During the fiscal year, the

Cornrnissron took a number of important steps towards this goal

As part of this program, the Commission has begun a thorough review

of filings under the separate disclosure systems prescribed by its two

most fundamental disclosure statutes-the Securities Act of 1933 and

the Securities Exchange Act of 1934-to reduce reporting burdens and

paperwork by more precisely tailoring the reportmg requirements to the

characteristics of particular registrants and to the needs of their

investors. This program also has been substantially advanced by the

Commission's efforts, which culminated in proposals, published

subsequent to the close of the fiscal year, to amend Form 10-K to serve

as the cornerstone of a new "integrated" disclosure system and to

centralize the instructions for financial statements in various reporting

forms. In addition, during the last fiscal year, the Commission continued

its efforts to encourage issuers to provide investors with forward-looking

and other forms of "soft" information, such as performance projections.

iii
Other actions by the Commission during fiscal 1979 designed to make

the full disclosure system more effective include the adoption of

significant rules governing public tender offers and "going private"

transactions. In addition, important progress was made in the

Commission's comprehensive examination of shareholder participation

in the process of corporate accountability. That study, which began in

1977, has resulted in slqnifrcant amendments to the Commission's proxy

rules in both fiscal 1978 and 1979. The study's final report is expected

during 1980.

One of the Commission's major initiatives during fiscal 1979 has been

its efforts to facilitate capital formation by small businesses WIthout

materially diminishing the protections afforded public investors. The

Office of Small Business Policy, established in June 1979, serves as

liaison with the small business community and generates proposals to

eliminate unnecessary impediments to the ability of small businesses to

raise capital in the securities markets. As a result ofthat Office's

recommendations, the Commission has liberalized the rule regarding

resale of restricted securities, adopted a new "short form" registration

statement for certain smaller issuesof securities, and created a new

exemption from registration for other types of relatively small issuesof

securities. In coordination with the Department of Commerce, the

Commission also developed a monitoring program to asessthe impact of

our regulations on small businesses, and in conjunction with the Small

Business Administration, is studying the role which regional brokerdealers play in the capital formation process.

In order to make the Commission's review of corporate disclosure

documents more meaningful, the staff unit with primary responsibility in

this area, the Division of Corporation Finance, has been reorganized

with its operational branches restructured according to industry groups.

The Division's new operational plan recognizes that the staff cannot

adequately review every document filed, and relies, instead, on an "audit

mode" and quality control techniques to enable the staff to give prompt

and thorough scrutiny to key filings while devoting less resources to

reviewing more routine documents.

Investment Compances and AdVIsers

Staff task forces are conducting a comprehensive review of the

Commission's regulation of investment companies and investment

advisers. With regard to investment companies, the Commission has

adopted a number of rules to lessen the costs and burdens associated

with their regulation-which historically has been based, to a large

extent, on the Commission's prior-clearance of transactions-by

enhancing the role of directors in managing investment companies. The

goal of diminishing the Comrrussion's presence in routine investment

company business decisions also is reflected in the Cornrnisston's

withdrawal, in March, of its "Statement of Policy" on investment

company advertising and in its adoption, in August, of Rule 434d to

permit investment companies much more flexibility in mass media

iv
advertising. The effect of these actions place responsibility for fair

presentation of investment company advertising material on boards of

directors rather than on arbitrary rules and staff clearances. The

Commission also has requested public comment on a proposal to relax

the prohibition against an investment company's using its assets to

merchandise the sale of its shares. These efforts by the Commission to

de-emphasize governmental prior-clearance of investment companies'

business practices, while resulting in substantial private sector benefits,

will place even greater emphasis on its increasingly stretched inspection

capabilities to determine that such practices comply with the Federal

securities laws.

As to investment advisers, the Commission has identified anomalies

in the pattern of investor protection which It is striving to resolve with

the least possible burden to that industry. For example, in response to a

long-standing concern as to the adequacy of information provided to

clients of investment advisers, the Commission adopted a new rule to

require that certain investment advisers disclose to clients and

prospective clients their background and business practices.

Ensuring Informed Regulation

The Commission recognizes that no regulatory agency can

successfully fulfill its legislative mandate unless it understands the

industry it regulates and the economic consequences of its actions.

Accordingly, the Commission is placing increasing emphasis on

gathering and analyzing empirically-based information.

As part of its efforts to better assess the consequence of its

regulations, the Commission has strengthened its capability for

economic analysis. The revised format of the Commission's annual

report on the securities industry and the recent report on the impact of

the Commission's implementation of the Conqressronally-rnandated

separation of money-management and floor brokerage illustrate this

capability. Such analyses of economic conditions in the industry

contribute importantly to the Commission's decision-makmg processes.

To further improve its oversight of the operations of the securitres

markets dunng the fiscal year, the Commission Implemented a pilot

project phase of its Market Oversight and Surveillance System, which

will provide the Commission a much enhanced capability to surveil the

marketplace. In view of the increased volume and complexity of the

securities markets, the Commission's existing approaches are no longer

adequate. This system will supplement, not supplant, the market

surveillance performed by self-regulatory organizations, in accordance

with the Commission's strong commitment to the traditional framework

of the securities industry's self-regulation.

Inspection and Enforcement

An essential medium for assuring compliance with the securities

laws-and for assessing the impact of the Commission's regulation-is

v
Its inspection program, a responsibility which is receiving an enhanced

emphasis although remaining understaffed. The Commission's

Inspection program of regulated entities-including self-regulatory

organizations, broker-dealers, investment companies and investment

advisers-provides a vital discipline and the opportunity to examine the

practical effects of regulation on such entities and on the investing

public.

Moreover, in appropriate circumstances, the Commission in

implementing its regulatory responsibilities, will initiate enforcement

actions. The Annual Report relates some of the more significant

enforcement actions concluded during the year. The Commission

continues its longstanding commitment to such a vigorous enforcement

program, which is necessary to the credibility of the Commission's

programs to protect public investors and the integrity of the securities

markets. This commitment has become even more compelling in recent

years as court decisions have severely hampered the private rights of

action by which Investors themselves might otherwise have proceeded

against perpetrators of illegal practices.

Accountmq Mallers

In response to its 1977 undertaking to a Senate Subcommittee to

report periodically on the accounting profession's response in meeting

its challenges, as well as the Commission's own initiatives in this area,

the Commission, in July 1979, submitted its second Report on the

Accounting Profession and the Commission's Oversight Role. The

Report concluded that sufficient progress has been made to merit

continued opportunity for the profession to pursue efforts at selfregulation.

In accordance with such efforts, the Commission continued its close

liaison in support of the work of the Financial Accounting Standards

Board to address emerging accounting problems, such as the effects of

inflation on financial reporting. It strongly endorses the Board's program

to develop an overall conceptual framework in which to consider such

problems.

As part of its on-going responsibilities to oversee the accounting

profession, in June 1979, the Commission issueda releaseconcerning

certain factors which may affect the independence of accountants in

performing nonaudit services for publicly-held audit clients, and certain

factors which should be considered in determining to engage a

corporation's independent accountants to perform nonaudit services. It

also proposed during the year a rule requiring that management

statements on internal accounting controls be included in corporations'

annual reports on Form 10-K. Further, during the fiscal year, the

Commission adopted amendments to certain forms and regulations to

improve disclosure requirements relating to oil and gas reserves and

operations, and proposed actions to encourage review by auditors of

interim financia I information.

vi

• • •
This summary provides only a very brief synopsis of the significant

activities in which the Commission is engaged throughout ItS operations.

Among the many others are: the important role we play in assisting

Federal courts with regard to shareholder interests in reorganizations of

publicly-held companies; the installation of micrographic and computer

systems which have brought to the Commission's information-handling

procedures the benefits of current technology, and unprecedented

efforts to employ effective evaluation, management and development

capabilities to further enhance the quality of our most valuable

resource-our staff. All of these efforts, and others, are covered in the

pages of this Annual Report-whose format, incidentally. has been

revised durinq the past two years Into a slimmer, more readable and

more timely document.

Ibelieve that this is one of the most Important periods in the

Commission's nearly half-century of existence. The American corporate

community, the securities Industry, and the markets. themselves, are

changing rapidly to meet the challenges of the 1980s. The Commission,

working closely with the Congress which oversees our operations, WIth

those in the private sector whom we regulate, and in the interests of

Investors, is also changing to meet these challenges. I have every

confidence that the Commission will strive to perform ItS responsibilities

with the professionalism and dedication which Congress and the

Investing public have come to expect.

Sincerely,

Harold M. Williams

Chairman

Vii

Commissioners and Principal Staff Officers

(As of December 31, 1979)

Commissioners

HAROLD M. WILLIAMS of California, Chairman

PHILIP A. LOOMIS, JR., of California

JOHN R. EVANS of Utah

IRVING M. POLLACK of New York

ROBERTA S. KARMEL of New York

Secretary: George A. Fitzsimmons

Executive Assistant to the Chairman: Daniel L. Goelzer

Term expires

June 5

1982

1984

1983

1980

1981

Principal Staff Officers

Benjamin Milk, Executive Director

Edward F. Greene, Director, Dtoision of Corporation Finance

Lee B. Spencer, Deputy Director

William C. Wood, Associate Director

Mary E. T. Beach, Associate Director

Michael J. Connell, Associate Director

Stanley Sporkin, Director, Division of Enforcement

(Vacant), Deputy Director]

Irwin M. Borowski, Associate Director

Theodore Sonde, Associate Director

David P. Doherty, Associate Director

Theodore A. Levine, Associate Director

Douglas S. Scarff, Director, Division of Market Requletiotv'

Sheldon Rappaport, Deputy Director

(Vacant), Associate Director

(Vacant), Associate Director

(Vacant), Associate Director

Sydney H. Mendelsohn, Director, Division of Investment Management

Martin C. Lybecker, Associate Director

Joel Goldberg, Associate Director

Aaron Levy, Director, Division of Corporate Regulation

Grant Guthrie, Associate Director

Ralph C. Ferrara, General Counsel

Jacob H. Stillman, Associate General Counsel

Robert C. Pozen, Associate General Counsel

(Vacant), Associate General Counsel

Paul Gonson, Solicitor to the Commissions

ix
Andrew L. Rothman, Director, Office of Public Affalr$

Chiles T. A. Larson, Deputy Director

A. Clarence Sampson, Chief Accountant

Steven J. Golub, Deputy Chief Accountant

Steven E. Levy, Director of Economic and Policy Research

William Stern, Director, Office of Opinions and Review

Herbert V. Efron, Associate Director

R. Moshe Simon, Associate Director

Warren E. Blair, Chief Administrative Law Judge

Lawrence H. Haynes, Comptroller

Richard J. Kanyan, Director, Office of Admmistrative Services

James C. Foster, Director, Office of Personnel

Joseph F. Olivo, Jr., Director, Office of Reports and Information Services

John D. Adkins, Director, Office of Data Processing

Justin P. Klein, Director, Office of Consumer Affairs4

Matthew R. Schneider, Director of Legislative Affairs

1 Former Deputy Director, Wallace L Trrnrneny, left the Cornrmssion on December 7. 1979 2 Former Director. Andrew M Kletn.jeft the Commission on October 12, 1979

3 Former Solrcuor. Devrd Ferber. retired from the Commission on September 28. 1979

4 Mr Klem IS now parttcrpatmq In the President 5 Executive Exchange Program and Will return to the Commission In Oc

IObeT 1980

x
Regional and Branch Offices

Regional Offices and Administrators

Region 1. New York, New Jersey.-Stephen L. Hammerman, 26 Federal Plaza,

New York, New York 10007.

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

Maine.-Willis H. Riccio, 150 Causeway si., Boston, Massachusetts 02114.

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

Georgia, Alabama, Mississippi, Florida, part of Louisiana.-Jule B. Greene,

Suite 788, 1375 Peachtree St., N.E., Atlanta, Georgia 30309.

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Min.

nesota, Missol1ri, Ohio, Wisconsin.-William D. Goldsberry, Room 1204, Everett McKinley Dirksen Bldg., 219 S. Dearborn St., Chicago, Illinois 60604.

Region 5. Oklahoma, Arkansas, Texas, part of Louisiana, Kansas (except Kansas

City).-Michael J. Stewart, 8th Floor, 411 West Seventh St., Forth Worth,

Texas 76102.

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

ico, Utah.-Robert H. Davenport, Suite 700, 410 Seventeenth St., Denver, Col.

orado 80202.

Region 7. California, Nevada, Arizona, Hawaii, Guam.-Leonard H. Rossen, Suite

1710, 10960 Wilshire Boulevard, Los Angeles, California 90024.

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-Jack H. Bookey, 3040

Federal Building, 915 Second Ave., Seattle, Washington 98174.

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

Columbia.-Paul F. Leonard, Room 300, Ballston Center Tower No.3, 4015

Wilson Boulevard, Arlington, Virginia 22203.

Branch Offices

Detroit, Michigan 48226.-231 Lafayette St., 1044 Federal Bldg.

Houston, Texas 77002.-Room 5615, Federal Office & Courts Bldg., 515 Rusk

Ave.

Miami, Florida 33131.-Suite 1114, DuPont Plaza Center, 300 Biscayne Boule.

vardWay.

Philadelphia, Pennsylvania 19106.-Federal Bldg., Room 2204, 600 Arch St.

Salt Lake City, Utah 84111.-Suite 810, Boston Bldg., One Exchange Place.

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

xi

Biographies of Commissioners

Harold M. Williams, Chairman

Chairman Williams was born on January 5, 1928, in Philadelphia, Pennsylvania.

He received his B.A. from UCLA in 1946, graduating Phi Beta Kappa at the age of

18. Three years later he was awarded his J.D. degree from Harvard University Law

School. He joined a Los Angeles law firm in 1949 where he specialized in tax and

corporation law and remained until 1955 except for an interruption to serve as a

U.S. Army legal officer during the Korean emergency. He joined Hunt Foods and

Industries, lnc., in 1955 as Associate Tax Counsel. He subsequently became Tax

Counsel, Vice President-Finance and Executive Vice President. In 1964, he became President of Hunt-Wesson Foods, Inc. In 1968, he was elected President of

Hunt Foods and Industries, Inc., and with the formation of Norton Simon, Inc.,

later that year-resulting from consolidation of Canada Dry Corporation, Hunt

Foods and Industries, Inc., and McCall Corporation-he was named Chairman of

the new company's Finance Committee. In 1969, he assumed the additional post

of Chairman of the Board of Norton Simon, Inc. In July of 1970, Mr. Williams

became Dean and Professor of Management of the UCLA Graduate School of Management. During his administration, the School achieved national ranking, including recognition as the leading graduate business school in a public university. During the 1973 energy crisis, Mr. Williams took leave to serve as full-time Energy

Coordinator for the City of Los Angeles. While at UCLA, Mr. Williams also served

as Director of Norton Simon, lnc., Phillips Petroleum Company, ARA Services,

lnc., CNA Financial Corporation, Signal Companies, Inc., and Montgomery Street

Income Securities, and as a Trustee of the Aerospace Corporation. In his service to

the community, Mr. Williams acted as Co-Chairman for the Public Commission on

Los Angeles County Government, a subcommittee chairman of the Mayor's ad hoc

Committee on Los Angeles City Revenues, a member of the State of California

Commission for Economic Development and of the California Citizens Commission on Tort Reform, and a member of the SEC Advisory Committee on Corporate

Disclosure.

xiii
Philip A. Loomis, Jr.

Commissioner Loomis was born in Colorado Springs Colorado, on June 11,

1915. He received an A.B. degree, with highest honors, from Princeton University

in 1938 and an LL.B. degree, cum laude, from Yale Law School in 1941, where he

was a Law Journal editor. Prior to joining the staff of the Securities and Exchange

Commission, Commissioner Loomis practiced law with the firm of O'Melveny and

Myers in Los Angeles, California. Commissioner Loomis joined the Commission's

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

Director and then director of the Division of Trading and Exchanges. In 1963,

Commissioner Loomis was appointed General Counsel to the Commission and

served in that capacity until his appointment as a member of the Commission.

Commissioner Loomis is a member of the American Bar Association and the

American Law Institute. He received the Career Service Award of the National

Civil Service League in 1964, the Securities and Exchange Commission Distinguished Service Award in 1966, and the Justice Tom C. Clark Award of the Federal Bar Association in 1971. He took office as a member of the Securities and Exchange Commission on August 13, 1971, and is now serving for the term of office

expiring June 5, 1984.

John R. Evans

Commissioner Evans was born in Bisbee, Arizona, on June I, 1932. He received

his B.S. degree in Economics in 1957, and his M.S. degree in Economics in 1959

from the University of Utah. He was a Research Assistant and later a Research Analyst at the Bureau of Economics and Business Research at the University of Utah,

where he was also an instructor of Economics during 1962 and 1963. He came to

Washington in February 1963, as Economics Assistant to Senator Wallace F. Bennett of Utah. From July 1964 through June 1971 Commissioner Evans was minority staff director of the U.S. Senate Committee on Banking, Housing and Urban Affairs and served as a member of the professional staff from June 1971 to March

1973. He took office as a member of the Securities and Exchange Commission on

March 3, 1973, and is now serving for the term expiring June 5, 1983.

xiv
Irving M. Pollack

Commissioner Pollack was born in Brooklyn, New York, on April 8, 1918. He

received a B.A. degree, cum laude, from Brooklyn College in 1938 and an LL.B.

degree, magna cum laude, from Brooklyn Law School in 1942. Prior to joining

the Commission's staff he engaged in the practice of law in New York City after

serving nearly four years in the United States Army, where he gained the rank of

Captain. Mr. Pollack joined the staff of the Commission's General Counsel in October 1946. He was promoted from time to time to progressively more responsible

positions in that office and in 1956 became an Assistant General Counsel. A career

employee, Mr. Pollack became Director of the Division of Enforcement in August

1972 when the SEC's divisions were reorganized. He had been Director of the

Division of Trading and Markets since August 1965, and previously served as Associate Director since October 1961. In 1967 Mr. Pollack was awarded the SEC

Distinguished Service Award for Outstanding Career Service, and in 1968 he was

a co-recipient of the Rockefeller Public Service Award in the field of law, legislation and regulation. Mr. Pollack took the oath of office on February 13,1974 as a

member of the Securities and Exchange Commission, and is now serving for the

term expiring .June 5, 1980.

Roberta S. Karmel

Commissioner Karmel was born May 4,1937, in Chicago, Illinois. She received

a B.A. from Radcliffe College in 1959 and an LL.B. from New York University

School of Law in 1962. From 1962 to 1969, Mrs. Karmel worked in the New York

Regional Office of the Securities and Exchange Commission as an attorney, then

attorney branch chief, then assistant regional administrator. From 1969 to 1972

she was an associate with Willkie, Farr & Gallagher in New York. Mrs Karmel was

a partner in Rogers & Wells from 1972 through September 1977, and an adjunct

professor at Brooklyn Law School from 1973 through 1977. She has been a memo

ber of the American Bar Association Federal Regulation of Securities Committee

since 1973. She has also served on the Association of the Bar of the City of New

York Committee on Securities Regulation, Committee on Administrative Law, and

Committee on Professional Responsibility. She is the author of numerous articles

in legal journals. Mrs. Karmel took the oath of office as a member of the Securities

and Exchange Commission on September 30, 1977, for a term expiring on June

5, 1981.

xv

315-805 0 - 80 - 2

Table of Contents

Chairman's Transmittal Letter viii

Commission and Principal Staff Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Regional and Branch Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Biographies of Commissioners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii

Regulation of the Securities Markets .

Securities Markets, Facilities and Trading .

National Market System .

National System for Clearance and Settlement of Securities Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Options Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Market Inventory Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Trading by Exchange Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Effects of the Absence of Fixed Commission Rates. . . . . . . . . . . . . 7

Regulation of Tender and Exchange Offers by Issuers. . . . . . . . . . . 8

Resale of Restricted Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Regulation of Brokers, Dealers and Municipal Securities Dealers . . . . . 9

Regulatory Burdens on Small Brokers and Dealers. . . . . . . . . . . . . 9

Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Securities Confirmations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Uniform Dispute Resolution Procedures for Investors. . . . . . . . . . . 10

Arbitration Clauses in Broker-Dealer Customer Agreements. . . . . 10

Municipal Securities Dealers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Broker-Dealer Financial Responsibility Requirements . . . . . . . . . . 11

Securities Investor Protection Corporation ..... . . . . . . . . . . . . . . 11

Oversight of Self-Regulatory Organizations. . . . . . . . . . . . . . . . . . . . . . . 12

Securities Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

National Association of Securities Dealers. . . . . . . . . . . . . . . . . . . . 13

Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . . . . . . . 14

Clearing Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Arbitration Facilities of Self-Regulatory Organizations. . . . . . . . . . 15

Procedures for Filing Proposed Rule Changes. . . . . . . . . . . . . . . . . 15

Inspections of Self-Regulatory Organizations. . . . . . . . . . . . . . . . . . 15

Revenues and Expenses of Self-Regulatory Organizations . . . . . . . 17

The Disclosure System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

New Developments in Disclosure Policy. . . . . . . . . . . . . . . . . . . . . . . . . . 19

Projections of Future Economic Performance. . . . . . . . . . . . . . . . . 19

Disclosure Revisions 19

xvii
Corporate Accountability; Management Background and Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Monitoring of Existing Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Small Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Long Range Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Tender Offer Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Going Private and Sale of Asset Transactions. . . . . . . . . . . . . . . . . . . . . 25

Oversight of the Accounting Profession. . . . . . . . . . . . . . . . . . . . . . . . . . 25

Report on the Accounting Profession and the Commission's Oversight Role. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Management Advisory Services 26

Accounting Standards for Oil and Gas Producers 28

FASB Conceptual Framework Project .... . . . . . . . . . . . . . . . . . . . 28

Accounting for the Effects of Changing Prices. . . . . . . . . . . . . . . . . 29

Reporting on Internal Accounting Control . . . . . . . . . . . . . . . . . . . . 30

Unaudited Interim Financial Information . . . . . . . . . . . . . . . . . . . . . 31

Investment Companies and Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Investment Company Act Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Disclosure Study 34

Investment Company Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Institutional Disclosure Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Office of Investment Adviser Regulation . . . . . . . . . . . . . . . . . . . 35

Enforcement Program 37

Sanctions and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Energy Related Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Questionable Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Government and Municipal Securities 41

Industrial Development Revenue Bonds. . . . . . . . . . . . . . . . . . . . . . 43

Options, Corporate Takeovers and Tender Offers. . . . . . . . . . . . . . . . . . 43

Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Tender Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Insider Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Other Significant Enforcement Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 46

Programmatic Litigation and Legal Work. . . . . . . . . . . . . . . . . . . . . . . . 51

Significant Court Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Other Significant Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Implied Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

ALI Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Public Utility Holding Companies. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 57

Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Fuel Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Service Company Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

xviii

•
Corporate Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Administration and Management 61

General Management and Program Developments. . . . . . . . . . . . . . . . . 61

Information Systems Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Facilities Improvement 62

Major System Enhancements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Systems Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Market Oversight Surveillance System. . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Financial Management 64

Personnel Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Senior Executive Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Performance Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Other Accomplishments under the CSRA. . . . . . . . . . . . . . . . . . . . . 66

On-qoinq Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Equal Employment Opportunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Activity Under The Freedom of Information Act . . . . . . . . . . . . . . . . . . . 68

Space Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Footnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Appendix 71

The Securities Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Income, Expenses and Selected Balance Sheet Items. . . . . . . . . . . 79

Table I-Financial Information For Broker-Dealers 1975-1978. . . 80

Historical Financial Information of Broker-Dealers with Securities

Related Revenue of $500,000 or More. . . . . . . . . . . . .. 80

Table 2-Historical Consolidated Revenue and Expenses of

Broker-Dealers with Securities Related Revenue of $500,000 or

More :. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Table 3-Historical Balance Sheet for Broker-Dealers with Securities Related Revenue of $500,000 or More. . . . . . . . . . . . . . . . . . 82

Securities Industry Dollar: 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Chart-Securities Industry Dollar: 1978. . . . . . . . . . . . . .. 83

Broker-Dealers, Branch Offices, Employees. . . . . . . . . . . . . . . . . . . 84

Chart-Broker-Dealers and Branch Offices. . . . . . . . . . . . . . . . . . . 85

Table 4-Brokers and Dealers Registered Under the Securities Act

of 1934. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Table 5-Principal Business of SECO Broker-Dealers. . . . . . . . . . . 87

Table 6-Applications and Registrations of Brokers and DealersFiscal Year 1979 , 88

Table 7-Applications and Registrations of Municipal Securities

Dealers and Transfer Agents-Fiscal Year 1979 ... . . . . . . . . . . 89

Self-Regulatory Organizations-Revenues and Expenses. . . . . . . . 90

Table 8-Revenues and Expenses of Self-Regulatory Organizations: 1973-1979. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. 93

Table 9-Detailed Revenues and Expenses for each Self-Regulatory Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

xix
xx

Table 10-Sources of Self-Regulatory Organization Revenue:

1973-1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Table II-Self-Regulatory Organizations-Clearing Agencies

Revenues and Expenses-Fiscal Year 1978 98

Table 12-Revenue and Expenses of Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Section 12(h) Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Exemptions for Foreign Private Issuers 99

Other Exemptions 100

Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Stock Transactions of Selected Financial Institutions . . . . . . . . . . . 100

Table 13-Common Stock Transactions and Activity Rates of Selected Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Stockholdings of Institutional Investors and Others . . . . . . . . . . . . . . . . 102

Table 14-Market Value of Stockholdings of Institutional Investors and Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Table IS-Companies Registered Under the Investment Company

Act of 1940 as of September 30, 1979. . . . . . . . . . . . . . . . . . . . . . 103

Table 16-Companies Registered Under the Investment Company

Act of 1940 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Table 17-New Investment Company Registrations.. 104

Table 18-lnvestment Company Registrations Terminated. . . . . . 104

Private Noninsured Pension Funds: Assets. . . . . . . . . . . . . . . . . . . . 104

Table 19A-Assets of Private Noninsured Pension Funds-Book

Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Table 19B-Assets of Private Noninsured Pension Funds-Market

Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Securities on Exchanges. . . . . . . . . . . . .. 105

Exchange Volume. .. . . . . . . . . . . . .. 105

Table 20-Market Value and Volume of Sales on Registered and

Exempted Securities Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . 106

Chart-Market Value of Securities Traded On All U.S. Stock Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

NASDAQ Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

Share and Dollar Volume by Exchange. 106

Table 21A-Share Volume by Exchanges 108

Table 21B-Dollar Volume by Exchanges , . . . . . . . . 108

Special Block Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Table 22-Special Block Distributions Reported by Exchanges. . . 109

Value and Number of Securities Listed on Exchanges. . . . . . . . . . . 110

Table 23-Securities Listed on Exchanges-December 31, 1978. 110

Table 24-Value of Stocks Listed on Exchanges. . . . . . . . . . . ... 111

Securities on Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Table 25-Securities Traded on Exchanges. . . . . . . . . . . . . . . . . . . 112

Table 26-Unduplicated Count of Securities on Exchanges (September 30, 1979). . . . . . . . . . . . . .. 112

1933 Act Registrations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

Effective Registration Statements Filed. . . . . . . . . . . . . . . . . . . . . . 112
Table 27-Effective Registrations. 113

Chart-Securities Effectively Registered With S.E.C. 1935-1979. . 114

Purpose of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Table 28-Effective Registration by Purpose and Type of Security:

Fiscal Year 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Chart-Effective Registrations Cash Sale For Account of Issuers

1935-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Regulation A Offerings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Table 29-0fferingsUnder Regulation A 117

Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Table 30- Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Table 31-lnvestigations Of Possible Violations of the Acts Administered by the Commission 121

Table 32-Administrative Proceedings Instituted During Fiscal

Year Ending September 30, 1979 . . . . . . . . . . . . . . . . . . . . . . . . . 121

Injunctive Actions 1978-1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Table 33-lnjunctiveActions. 122

Criminal Proceedings. . . .. . .. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 122

Table 34-Criminal Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Trading Suspensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Foreign Restricted List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Public Utility Holding Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

System Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Table 35-Public Utility Holding Company Systems. . . . . . . . . . . . 125

Table 36-Key Financial Statistics of Registered Public Utility

Holding Company Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

Table 37-Public Financing of Holding Company Systems (Fiscal

1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Fuel Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Table 38-Regulated Fuel Expenditures of Holding Company Systems (Fiscal 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Corporate Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Table 39-Reorganization Proceedings Under Chapter X of the

Bankruptcy Act in Which the Commission Participated (Fiscal

Year 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

SEC Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

Chart-Appropriated Funds vs Fees Collected 132

Table 40-Budget Estimates and Appropriation. . . . . . . . . . . . . . . 133

xxi

Regulation of the Securities Markets

Securities Markets, Facilities

and Trading

National Market System-The past

fiscal year saw marked acceleration in

progress toward the development of a

national market system.

On October 20, 1978, the Commission published for comment two proposalsdesigned to refine the operation

of the consolidated transaction reportIng and quotation systems. The first of

these proposals, Rule 11Acl-2 under

the Securities Exchange Act of 1934

(Exchange Act), would, if adopted, impose comprehensive mirurnurn reo

quirements regulating the manner in

which securities information vendors

display transaction and quotation information.' The second proposal, the

amendment of existing Rule 17a.15,

would, if adopted, (a) redesignate Rule

17a-15as Rule 11Aa3-1 under the Act;

(b) eliminate, subject to certain conditions, the existing prohibition on retransmission of last sale data for purposes of creating a moving ticker

display; and (c) set forth procedures for

amending transactions reporting plans

filed pursuant to the rules? The

Commission received many valuable

comments from self-regulatory organizations and vendors of market information and at year end both proposals

were awaiting further action.

On March 22, 1979, the Commission

issued a Status Report which, among

other things, set forth the Commission's views as to the next steps to be

taken toward development of a national market system.! These steps included: achievement of nationwide

price protection for all public limit or.

ders; refinement of pilot market linkage facilities: improvement of the

timeliness and reliability of quotation

information; development of broker to

market center order-routing facilities;

consideration of a rulemaking proceeding to preclude the application of

remaining off-board trading restrictions to securities not previously subject to those restrictions; and initiation

of a rulemaking proceeding to con.

sider procedures by which securities

would be designated as qualified for

trading in a national market system.

In the Status Report, the Commission indicated that its first priority

would be the achievement of nation.

wide protection for public limit orders

against executions at inferior prices.

The Commission expressed its belief

that nationwide price protection,

whereby any appropriately displayed

public limit order for a qualified security would be assured of receiving an

execution prior to any execution by a

broker or dealer at an inferior price,

should be a basic characteristic of a

national market system. Furthermore,

the Commission stated that, in addition to price protection for public limit

orders, it may ultimately be desirable

to afford price protection to all displayed orders at the market, whether

public or professional, so that any dis.

played quotation would be entitled to

price protection up to the quotation

size indicated. As an initial step in this

direction, the Commission indicated

that the proponents of the Intermarket

Trading System (ITS) should be af-
forded the opportunity to experiment

with and further enhance that system

as a means of providing intermarket

price protection for public limit orders.

The Commission indicated that two

types of initiatives would be necessary

to achieve nationwide price protection

for displayed public limit orders by

means of the ITS. The first would require the self-regulatory organizations

and the securities industry to resolve

collectively the various practical and

technical problems associated with (a)

disseminating and displaying public

limit order information from each market center and (b) promptly enhancing

the ITS so that it may serve as a means

by which price protection for public

limit orders can be afforded on an intermarket basis. To this end, the Commission requested that the affected

self-regulatory organizations commit

themselves to develop in concert and

to submit to the Commission a plan by

which the mechanisms to provide price

protection for all public limit orders

would be developed and implemented,

at least on a pilot basis, not later than

the end of calendar year 1980. The second initiative would involve the proposal by the Commission of a rule requiring price protection for displayed

public limit orders.

On April 26, 1979, the Commission

proposed for comment Rule lIAc1-3

under the Exchange Act which, if

adopted, would prohibit any broker or

dealer from executing any order to buy

or sell a qualified security at a price inferior to the price of any public limit

order displayed at the time of execution unless the broker or dealer assures

that those limit orders are satisfled.s

The following month, the Commission

received a commitment from each reporting self-regulatory organization to

develop a joint plan for protection of

public limit orders. In September

1979, the ITS participants submitted a

preliminary plan for the protection of

2

public limit orders and a commitment

to submit a definitive plan before the

end of calendar year 1979. At the end

of the fiscal year, the Commission was

analyzing the preliminary plan and

comments received in response to proposed Rule lIAc1-3.

In furtherance of development of

comprehensive market linkage systems, the Commission, on September

21, 1979, issued an order extending

approval for operation of the ITS until

January 31, 1983.\ At the end of the

fiscal year, all reporting self-regulatory

organizations other than the Cincinnati

Stock Exchange (CSE) and the National Association of Securities Dealers (NASD) were participating in the

ITS. The Commission expects the CSE

and NASD will commence participation in the ITS in the near future.

During the fiscal year, the number of

securities traded in the ITS increased

from approximately 100 to 600. That

number is expected to continue to expand at the rate of approximately 40

securities per month. With expansion

in the number of securities traded in

the system, there has been a substantial increase in ITS volume. Furthermore, average response times with respect to ITS commitments to trade

received by participating market centers have been reduced, and as a result

of continuing technical enhancements

to the system, the Commission expects

that response times will be further reduced during fiscal year 1980.

On December 15, 1978, the Commission approved a rule change of the

CSE extending the operation of the

Cincinnati multiple-dealer trading facility (CSE System) for one year, and

on September 21, 1979, the Commission further extended its approval until

January 31, 1983.6 While CSE System

volume has thus far been limited, several additional broker-dealers commenced participation in the CSE System during the past fiscal year. The
three-year extension and increased

broker-dealer participation should facilitate the Commission's ability to

evaluate the effects of trading in this

type of system.

In the Status Report, the Commission indicated its belief that, both for

purposes of enhancing brokers' ability

to seek out the best execution of their

customers' orders and for purposes of

assuring fair competition among markets, some type of neutral order-routing system is a necessary element of a

national market system. To assure

progress toward this objective, the

Commission requested the New York

Stock Exchange (NYSE) and the American Stock Exchange (Amex) to make

available their jointly-owned common

message switch to other market centers; other self-regulatory organizations were asked to inform the Commission of their interest in obtaining

such a linkage.

Since the Status Report, the NYSE

hasengaged in continuing discussions

with several self-regulatory organizations with respect to use of the NYSEAmex message switch. In addition, the

NASD has proposed enhancements to

its NASDAQ inter-dealer quotation

system which would, among other

things, create an order-routing switch

in NASDAQ that could be linked to the

NYSE-Amex message switch and to

the ITS. The Commission will continue

to monitor and to encourage progress

in these areas.

On April 26, 1979, the Commission

announced commencement of a proceeding to consider proposed Rule

19c-3 under the Exchange Act, which,

if adopted, would limit extension of offboard trading restrictions to additional

securities. The rule would preclude application of such restrictions to certain

securities that were not traded on an

exchange on April 26, 1979, or that

were traded on an exchange on April

26, 1979, but failed to remain so thereafter." In its release proposing Rule

19c-3, the Commission mdicated its

concern that, as companies continue

to list their securities on exchanges

that have rules precluding their members from making over-the-counter

markets in securities listed on those

exchanges, competition between the

over-the-counter market and the exchanges will be effectively foreclosed

in an increasing number of securities.

In addition, the Commission indicated

that the rule could provide it and the

securities industry with an opportunity

to gain valuable experience as to the

dynamics of competition between exchange-oriented trading and dealeroriented trading. The Commission

stated that the rule would also allow

evaluation of whether existing and

developing national market system facilities are sufficient to ensure an appropriate integration of trading in disparate locations.

During June and July 1979, the

Commission held hearings with respect to proposed Rule 19c-3 and received extensive comments and testimony both supporting and opposing

adoption of the rule. At the end of the

fiscal year, the Commission was considering further regulatory action with

respect to the rule.

Finally, on June 15,1979, the Commission proposed for comment Rule

l1Aa2-1 under the Exchange Act

which, if adopted, would provide pro.

cedures whereby securities would be

designated for trading in a national

market system." The proposed rule

sets forth two quantitatively different

sets of standards to be employed in

determining whether any equity security should be designated a national

market system security. The proposed

rule would require that any equity security meeting certain minimum standards contained in the rule (tier 1

securities) be automatically designated

a national market system security. If an

3
equity security did not meet the standards applicable to tier 1 securities,

but substantially met certain broader

standards (tier 2 securities), it would

remain eligible for designation as a national market security pursuant to the

procedures set forth in a designation

plan required to be filed with the Commission by the various self-regulatory

organizations.

The standards applicable to tier 1

and tier 2 securities would cover both

securities traded on an exchange and

securities traded exclusively in the

over-the-counter market. However,

while the proposal provides that the

rule will become operational upon

adoption with respect to all tier 1 securities and those tier 2 securities

which are traded on an exchange, the

rule will not become applicable to tier

2 over-the-counter securities until the

Commission engages in further rulemaking.

National System for Clearance and

Settlement of Securities TransactionsDuring the fiscal year, substantial

progress was made in the Commission's effort to foster development of

a national system for clearance and

settlement of securities transactions.

On September 19, 1978, the United

States Court of Appeals for the District

of Columbia Circuit affirmed the

Commission's January 13, 1977 order

granting the appllcatron of National

Securities Clearing Corporation

(NSCC) for registration as a clearing

agency.? The Commission views the

registration of NSCC as a key step in

achieving the national clearance and

settlement system envisioned by the

Congress in Section 17A of the Exchange Act. Although the court did not

disturb NSCC's registration, it did remand two issues to the Commission

for further consideration: (a) NSCC's

selection of Securities Industry Automation Corporation as the facilities

manager of its consolidated system

4

without competitive bidding; and (b)

NSCC's use of geographic price mutualization (GPM). GPM is the practice

of charging all participants the same

fees regardless of whether the participants deal with the clearing agency at

its main facility or through a branch

office.

The Commission subsequently requested that NSCC submit reports on

the two issues remanded by the court

and that interested persons comment

on NSCC's reports and on the GPM

and competitive bidding issues generally. 10 By the end of the fiscal year, the

Commission to date had received 11

letters in response to its request for

comments, including letters from all

but three of the registered clearing

agencies. In preparation for responding to the court's remand, the Commission was reviewing those comment

letters and the testimony and statements given at the Commission's

March and April 1979 hearings into the

development of a national clearance

and settlement system.

On March 14, 1979, the Commission

removed its restriction on NSCC's

processing of transactions in securities

listed on exchanges through its branch

offlces.» The removal of that restriction permitted NSCC's participants to

processthrough NSCC'sbranch offices

for the first time both transactions in

securities listed on exchanges and

transactions in securities traded in the

over-the-counter market. The Cornmission indicated, however, that until it

had responded to the remand of the

GPM issue, NSCC could not use GPM

for services relating to the processing

of transactions in securities listed on

exchanges.

The Commission continued its review of the transaction completion

rules of the securities exchanges and

of the NASD pursuant to Section 31(b)

of the Securities Acts Amendments of

1975 (the 1975 Amendments). Some
of those rules unnecessarily restricted

competition among clearing agencies.

Others failed to comply with the Exchange Act for other reasons. As a result of this review, over 120 exchange

and NASD rules now have been

amended or deleted. This step removed many impediments to the development of a national clearance and

settlement system. The Commission is

continuing to discuss the amendment

or deletion of other transaction completion rules with the exchanges and

the NASD.

Progress toward a national system

also was evident in other areas.

The continued expansion of interfaces

among depositories has further immobilized securities certificates and

allowed depository participants to use

book entry transfers to make deliveries

throughout the country. This reduces

the need to physically move stock certificates to settle securities trensactrons among depository participants.

In addition, The Depository Trust Com.

pany included certain types of rnunicrpal securities in its book entry system,

thus bringing municipal securities into

a book entry environment for the first

time. These developments have reo

duced costs and accelerated the settlement process.

Options Trading-As previously reported,» since July 1977, there has existed, at the Commission's request, a

voluntary moratorium on expansion of

the standardized options markets,

pending (a) the completion of the Com.

mission's Special Study of the Options

Market (Options Study); (b) the evaluation of its findings; and (c) the resolution of the Commission's concerns

regarding the adequacy of the regulatory framework within which standardized options trading occurs.n

The Report of the Options Study was

released by the Commission in February 1979.'4 In general, the Study found

that, to those who understand them,

options may offer an alternative to

short-term stock trading having lower

commission costs and a smaller commitment of capital. They also may provide a means of shifting the risks of

unfavorable short-term stock price

movements from owners of stock who

do not wish to bear those risks to those

who are willing to assume such risks in

anticipation of possible rewards from

favorable price movements. IS The Options Study stated, however, that the

purchase and sale of standardized options involves a high degree of financial risk and that only investors who

understand those risks and who are

able to sustain the costs and financial

losses associated with options trading

should participate in the standardized

options markets.

The Study found that, too often,

public investors have been encouraged

to use standardized options Without regard to the suitability of options for

their investment needs.» It also found

regulatory inadequacies in the options

markets and, accordingly, recommended certam steps that the broker.

age community, the self-regulatory or.

ganizations and the Commission

should take to Improve the self-regulatory framework within which listed

options trading occurs and to increase

protection of investors.

On February 22, 1979, the Commission issued a release that set forth Its

plan for implementing the Options

Study recommendations and for terminating the options rnoratorturn.»

The Commission stated that, before it

would permit any further expansion of

the options markets, certain recommendations of the Study must be implemented by the self-r equlatory

organizations and the brokerage community. Implementation of these recommendations generally would require the adoption of self-regulatory

organization rules, and modifications

and improvements in the self-regula.

5
tory organizations' surveillance and

compliance systems and procedures,

as well as improved regulatory controls by brokerage firms. At the end of

the fiscal year, the Commission had received rule proposals from the five exchanges trading options to implement

some of the Options Study recommendatlons.«

On April 24, 1979, the Commission

approved the combination of the Midwest Stock Exchange (MSE) options

market with that of the Chicago Board

Options Exchange (CBOE), to be effective upon termination of the options

moratorium. Upon consummation of

the combination, the MSE will no

longer provide a market for listed options, and the CBOE will provide a

market for those options then listed on

the MSE. Upon listing the MSE options

classes, the CBOE will assume full responsibility for floor operations, surveillance and enforcement regarding

trading in those options classes.»

As reported previously.w on October

18, 1978, the Commission approved a

four-month experiment by the options

exchanges to extend trading hours until 4:10 p.m. New York time and to suspend dally closing rotations." On April

27, 1979, the Commission approved

uniform rule proposals by the options

exchanges to permit, on a permanent

basis, options transactions to be effected on the exchanges until 4: 10

p.m. New York time and to provide

that one trading rotation in any class

of options may be completed where

trading in the underlying security

opens or reopens after 3:45 p.m. New

York time, even though completion of

the rotation may occur after 4:10 p.m.

NewYork tlrne.s On July II, 1979, the

Commission approved a second exception to the 4: 10 p.m. closing time

which provides that, if a trading rotation is commenced near the close of

trading because of unusual market

conditions, such as a heavy influx of

6

orders, an options exchange can permit the rotation to be completed after

4:10 p.m. New York time if notice of

the rotation is publicly disseminated

no later than the commencement of

the rotation or 4:00 p.m. New York

time, whichever is earlier.» The Com.

mission has deferred further consideration of certain related rule proposals

until additional experience is gained

respecting the 4:10 p.m. closing hour

and the exceptions described above.

Market Inventory Funds-In October

1978, the Chairman submitted to Senator Harrison A. Williams, Jr. a staff

report on market inventory funds,

which are part of master trusts established by companies to fund and administer employee benefit plans. Market inventory funds have been used

solely in connection with plans of individual companies rather than in connection with pooled benefit plans of

separate companies. The staff found

no clear indication that these funds, as

they had been operated up to that

time, had had an adverse impact upon

the securities markets. The report concluded, however, that such funds could

develop a broad appeal in the future

and that it would be appropriate for the

Commission and its staff to continue

to evaluate the operation of market inventory funds and their impact on the

securities markets.

Trading by Exchange Members-Section 11(a)(1) of the Exchange Act, as

amended in 1975, prohibits, with specified exceptions, any member of ana.

tional securities exchange from effecting any transaction on that exchange

for its own account, the account of an

associated person, or an account with

respect to which it or any of its associated persons exercises investment

discretion. Under this section, the

Commission has authority to fashion

either more flexible or more restrictive

standards in light of changing circumstances. Section II(a) became effec-
tive as to all exchange members on

February 1, 1979.

In January 1979, the Commission

announced the adoption of (a) a temporary rule permitting exchange members to effect certain bona fide hedge

transactions for their own accounts or

the accounts of their associated persons; (b) interpretations concerning

the application of the section to transactions effected through the use of several automated tacilities operated by

national securities exchanges; and (c)

interpretations concerning certain exemptions for specified types of proprietary transactions effected by exchange rnernbers.» Also in January

1979, in connection with its continuing

review of its regulatory program under

Section 11(a), the Commission commenced two surveys designed to elicit

data concerning (a) the effect of the

section on exchange members that

provide money management and brokerage services to discretionary institutional accounts, and (b) market making activities by certain exchange

members.

In July 1979, the Commission also

approved a nine-month extension, until April 30, 1980, of programs designed by the NYSE and the Amex to

supplement the market making capacity of specialists by establishing

classes of registered market makers

whosetransactions are exempted from

the prohibitions of the section.» Dur109 the nine-month period, the Comrrussion will continue its review of the

activities of those registered market

makers to determine whether their

transactions should continue to qualify

for an exemption.

Effects of the Absence of Fixed Commission Rates-In May 1975, the Commission prohibited the national securities exchanges from prescribing fixed

minimum commission rates to be

charged by their members. Later that

year, the Congress enacted a similar

prohibition as part of the 1975 Amendments. Pursuant to that legislation, the

Commission submitted to the Congress five reports covering the first 20

months of commission price competition (through December 31, 1976), describing the effects of the unfixing of

commission rates on the maintenance

of fair and orderly markets and on the

development of a national market system for securities.

Analysis of commission rates is now

integrated into the Commission's ongoing monitoring of the financial condition of the industry. In that connection, the Commission's Directorate of

Economic and Policy Research released to the public on July 26, 1979,

a "Staff Report on the Securities Industry in 1978" (Staff Report), which detailed the results of its commission

rate survey in the context of a wideranging analysis of the basic economic

dynamics of the securities industry.

This Staff Report is the second in a

continuing series of annual reports designed to provide the Commission with

an economic basis for anticipating the

impact of regulatory changes upon the

securities industry, investors and the

broader economy. Beginning with the

1978 Staff Report, the Directorate

greatly expanded the scope of its study

of the securities industry to examine

fundamental industry trends and relationships in addition to the impact of

negotiable commission rates. The

1978 Staff Report analyzed, for example, the profitability of New York Stock

Exchange member firms, the sources

of and trends in revenues of these

firms, firm expensesand balance sheet

data, the trend toward and causes of

increased concentration in the securities industry, the increasing diversification among the larger broker-dealers, the notable growth of discount

broker-dealers, the financial experience of exchange specialists, the economic performance of self-regulatory

7
organizations, and, of course, the economic effects of unfixed brokerage

commission rates.

In general, the reports to the Congress and the two Staff Reports concluded that competitively determined

commission rates do not appear to

have adversely affected the maintenance of fair and orderly markets.

Some of the more specific findings in

regard to commission rates are as follows.

From May 1, 1975 to the end of June

1979, individual investors' effective

commission rates, when measured as

a percent of principal value, declined

19.7 percent. Institutional customers,

because of their larger average order

size and greater bargaining power,

have negotiated discounts averaging

53.6 percent from the pre-May 1975

exchange-prescribed minimum rates.

When commission rates are measured

in cents per share, the declines were

eight percent for individuals and 53.8

percent for institutions. Individuals

paid an average of 27.6 cents per share

on their June 1979 orders, which averaged 400 shares in size. Institutional

orders averaged 2,034 shares in size

and commissions on these orders averaged 12.0 cents per share. Individual

orders of 1,000 shares or more showed

commission rate discounts comparable to similarly sized institutional orders

Broker-dealers were affected by the

elimination of fixed minimum commission rates largely depending upon

the extent to which they served institutional investors. Some firms which

did a large portion of their total business with Institutions have merged

with more diversified firms or have

gone out of business, and a new group

of discount broker-dealers have en.

tered the industry. On the whole, these

changes now offer investors a broader

spectrum of services with a correspondingly broader range of cornrnlssion rates.

8

Regulation of Tender and Exchange

Offers by Issuers-On August 16,

1979, the Commission announced the

adoption of a new Rule 13e-4 and related Schedule 13E-4 under the Exchange Act, effective September 21,

1979, to regulate the increasing number of cash tender and exchange offers

by certain issuers for their own securities.26Rule 13e-4 and Schedule 13E4 had been proposed for public comment on December 4, 1977.27

Rule 13e-4 requires that (a) issuers

with a class of equity securities registered under Section 12 of the Exchange Act; (b) issuers required to file

periodic reports pursuant to Section

15(d) of the Exchange Act; and (c)

closed-end investment companies registered under the Investment Company

Act of 1940 comply with certain disclosure requirements and other provisions governing the manner in which

cash tender and exchange offers may

be made. The requirements of the rule

are patterned substantially on the regulatory scheme established by Section

14(d)of the Exchange Act and existing

rules thereunder which are applicable

in the context of third party tender offers. The information required to be

disclosed in Schedule 13E-4 is substantially the same type of information

which is required by Schedule 14D-1.

The Commission adopted Rule 13e-4

and Schedule 13E-4 to insure that issuer tender offers are conducted in a

manner free of deception, manipulation or fraud

Resale of Restricted Securities-On

August 2, 1979, the Commission authorized the issuance of a release» setting forth the staffs views concerning

certain issues raised by the resale of

restricted and other securities In compliance with Rule 144 under the Securities Act of 1933 (Securities Act). The

release responded to interpretive questions raised by the amendments to that

rule adopted by the Commission in

September 1978,29 which, among
other matters, permit sales under the

rule to be made directly to a market

maker and liberalize restrictions on the

amount of securities which may be resold under the rule.

Regulation of Brokers, Dealers

and Municipal Securities Dealers

Regulatory Burdens on Small Brokers

and Dealers-The Commission is

aware of the need to evaluate the costs

and competitive impact of its regulations on brokers and dealers. Accordingly, in adopting regulatory requirements, the Commission weighs the

benefits to investor protection and

other statutory goals against possible

compliance and competitive burdens.

In addition, the Commission endeavors

to tailor regulatory requirements to

particular business practices so as to

avoid imposing unnecessary regulatory burdens. This effort can particularly benefit smaller, more specialized

brokerage firms.

Lost and Stolen Securities-During

fiscal 1979, several significant developments occurred in the Commission's

Lost and Stolen Securities Program.

On November I, 1978, the Commission announced the redesignation of

Securities Information Center, Inc.

(SIC) as the Commission's designee to

maintain and operate the data base of

missing, lost, counterfeit and stolen

securities for a two-year term commencing January 1, 1979.30 In addition, the Commission, on March 29,

1979, published for public comment

various proposed amendments to the

Commission rule governing the program."

In response to comments received,

the Commission, on May 23, 1979,

adopted amendments to the rule32

which, among other things: (a) established registration requirements for all

institutions subject to the rule

(reporting institution) with certain exceptions; (b) required that losses and

315-805 0 - 80 - 3

thefts of securities of the United States

Government and its agencies be reported to SIC, instead of the Federal

ReserveBanks, in an identical manner

as lost, stolen or counterfeit corporate

and municipal securities; (c) incorporated into the rule the temporary pilot

period exemptions from reporting and

inquiry; (d) established a new exemption from required inquiry for bearer

securities received by a reporting institution directly from a known customer to whom it had previously sold

the securities; and (e) required reporting institutions to report suspect counterfeit securities to a transfer agent for

the issue.

The rule also incorporated two staff

interpretations which exempt from required inquiry (a) securities received

by a reporting mstitution directly from

a "drop" that is affiliated with another

reporting institution for the purposes

of receiving and delivering certifrcates

on behalf of such institution; and (b)

securities received from a Federal Reserve Bank or Branch. At the end of

August 1979, approximately 395,000

reports of missing, lost, counterfeit or

stolen securities, with an aggregate

market value of nearly $2.1 billion,

had been received by SIC since the inception of the program on October 3,

1977.

Securities Confirmations-On December 18, 1978, the Commission's

new rule prescribing delivery and disclosure requirements for securities

transaction confirmations sent by brokers and dealers to customers became

generally effective." The confirmation

is an important disclosure document

that provides an investor with information pertinent to each securities

transaction. For example, the disclosures required in the confirmation provide investors with a basis for comparing transaction costs offered by

competing broker-dealers and for measuring those costs against the quality

of brokerage services provided.

9
In October 1978, before the effective

date of the rule, the Commission

adopted amendrnentss- requiring disclosures relating to odd-lot differentials, remuneration received in "riskless" principal transactions in equity

securities, and market making activities. Also, in October 1978, the Commission announced proposals to

amend the confirmation rule further

and to adopt a new rule extending to

transactions in debt securities the required disclosures of remuneration received in riskless principal transactlons.» At the end of fiscal year, the

Commission was evaluating the public

comments received in response to

those proposals to determine whether

the additional disclosure requirements

are appropriate.

Uniform Dispute Resolution Procedures for Investors-A program to implement uniform, fair and efficient dispute resolution procedures for

investors was undertaken by the Commission in May 1976, in connection

with its establishment of an Office of

Consumer Affairs. The Securities Industry Conference on Arbitration

(SICA), a voluntary group of securities

industry and public representatives,

submitted proposals for a uniform dispute resolution system contemplating

utilization of existing arbitration facilities. Self-regulatory organizations

adopted a series of rules based on

SICA proposals providing procedures

for small claims arbitration which were

approved by the Commission during

the fiscal year 1978. The Commission

reviews the operation of arbitration facilities as part of its general oversight

responsibilities with respect to self-regulatory organizations.

On December 28, 1978, SICA submitted further proposals for a uniform

arbitration code for investor-broker

disputes. The uniform code includes

provisions that are intended to improve the efficiency and fairness of

10

arbitration procedures provided by

self-regulatory organizations. For example, a record of the proceedings

would be kept upon request, the majority of arbitrators on each panel

would not be associated with the securities industry and peremptory challenge of arbitrators by either party

would be allowed. In addition, parties

would be directed to cooperate in the

voluntary exchange of documentary

evidences and would be permitted to

forward documents to the arbitrators

prior to the hearing in order to expedite the proceedings.

Arbitration Clauses in Broker-Dealer

Customer Agreements-Despite its

support for arbitration, the Commission became concerned during the flscal year about the fact that many customer agreement forms used by

broker-dealers contain clauses pur.

porting to require arbitration of all future disputes that might arise between

the securities professional and the customer. In general, broker-dealers did

not inform customers that a number of

court decisions have held such advance agreements to be unenforceable

with respect to causesof action arising

under the Federal securities laws.

Without such information, customers

might be led to believe that they had

prospectively waived any right to a judicial forum for the resolution of disputes related to securities transactions.

In July 1979, the Commission published a release» giving notice to broker-dealers that the use of pre-dispute

arbitration clauses in customer agreement forms, without specifying the

meaning, effect and enforceability

thereof, is inconsistent with just and

equitable principles of trade and may

raise serious questions of compliance

with the antifraud provisions of the

Federal securities laws. The Commission emphasized its support for arbitration as a means of resolving dis-
putes between investors and securities

professionals, but stated that prior

agreements to arbitrate must reflect

current applicable judicial decisions.

Municipal Securities Dealers-On

July 11, 1979, the Commission published for comment proposed amendments to Rule 15bl0-12 under the Exchange Act, allowing an exemption for

certain municipal securities brokers

and municipal securities dealers from

the requirements of the Commission's

SECO (Securities and Exchange Commission Only) proqrarn.» The proposed amendments are designed to

eliminate the current dual regulation

of municipal securities transactions effected by SECO brokers and dealers

which conduct business in both municipal and corporate securities.

During the fiscal year, the Commission, pursuant to Section 17(b) of the

Exchange Act, conducted one Joint examination of a bank municipal securities dealer.

Broker-Dealer Financial Responsibility Requirements-Many broker-dealers subject to the Commission's uniform net capital rule are also

registered with the Commodity Futures Trading Commission (CFTC) as

futures commission merchants

(FCMs).An FCM is, generally, a person

who engages in soliciting or in accepting orders for the purchase or sale of

any commodity for future delivery on

or subject to the rules of any contract

rnarket.» The CFTC hasjurisdiction to

impose minimum financial requirements on FCMs. On September 1,

1978, the CFTC substantially revised

its minimum financial and related reporting requirements imposed upon

registered FCMs, which became effective on December 20, 1978.39 Although

the CFTC's amendments apply only to

FCMs, about half of all commodity

customer business in the futures industry is done by FCMs that are also

registered with the Commission as securities broker-dealers and are therefore subject to the Commission's uniform net capital rule.

In the interest of minimizing duplicative regulation, the CFTC generally

incorporated into Its minimum financial responsibility rules provisions

comparable to the Commission's net

capital requirements applicable to the

securities business of an FCM The

CFTC agreed to accept Part II of the

Financial and Operational Combined

Uniform Single (FOCUS) Report, a

quarterly report filed by broker-dealers

with the Commission, provided it was

amended to incorporate the CFTC's

Schedule of Seqr eqation Requirements and Funds on Deposit in Segregation.

On June 5, 1979, the Commission

generally incorporated into its net capital rule the CFTC's minimum financial

requirements applicable to the commodities business of an FCM.40It also

incorporated the CFTC's segregation

schedule into its FOCUS Report.v The

joint efforts of the two agencies have

generally provided uniform net capital

requirements for entities involved in

both the securities and commodities

businesses and will eliminate duplicative reporting requirements.

Securities Investor Protection Corporation- The Securities Investor Protection Act of 1970 (SIPA)42provides certain protection to customers of brokers

and dealers that fail to meet their obligations to their customers SIPA IS

administered principally by the Securities Investor Protection Corporation

(SIPC), a nonprofit membership corporation, the members of which are all

registered brokers and dealers with

limited exceptions. SIPC is funded

through assessments on its members,

although it may borrow up to $1 billion

from the United States Treasury under

certain emergency conditions. Section

11
3(e) of SIPA requires that SIPCfile proposed rule and bylaw changes with the

Commission. Proposed rule changes

must be approved by the Commission

before they become effective, while

proposed bylaw changes take effect

after a prescribed period unless the

Commission disapproves the bylaw

changes.

On September 20, 1978, SIPC submitted proposed bylaw changes regarding the indemnification of SIPC

directors, and requiring SIPC members

to display the SIPC symbol at their offices and to make reference to their

SIPC membership in certain advertisements. The Commission considered

these proposals on November 8, 1978

and did not disapprove them.

In June 1978, SIPCadopted and submitted to the Commission three sets of

rules under SIPA. The Series 100 rules

and the Series 200 rules establish various capacities in which a customer

may have separate securities accounts

with a single broker-dealer and be protected by SIPC on each account. The

Series 300 rules set forth requirements

for the closeout and completion of

open contractual commitments between a SIPC member undergoing liquidation and other broker-dealers. In

October 1978, the Commission approved the Series 100 and 200 rules.v

Subsequently, in March 1979, the

Commission approved the Series 300

rules.w The Series 300 rules replaced

similar Commission rules that were

promulgated before the passage of

the Securities Investor Protection Act

Amendments of 1978 which gave

SIPC, rather than the Commission, the

authority to adopt such rules.

Because SIPC rules approved by the

Commission have the same force and

effect as Commission rules, the Commission has published those rules in a

separate section of the Code of Federal

Regulations. 4'

12

Oversight of Self-Regulatory

Organizations

Securities Exchanges-As of September 30, 1979, ten exchanges were

registered with the Commission as national securities exchanges pursuant

to Section 6 of the Exchange Act:

American Stock Exchange (Amex);

Boston Stock Exchange (BSE); Chicago Board Options Exchange

(CBOE); Cincinnati Stock Exchange

(CSE); Intermountain Stock Exchange

(ISE); Midwest Stock Exchange (MSE);

New York Stock Exchange (NYSE); Pacific Stock Exchange (PSE); Philadelphia Stock Exchange (Phlx); and

Spokane Stock Exchange (SSE). No

exchange is currently operating under

an exemption from registration as a

national securities exchange.

In connection with the Cornmission's oversight of the delisting of securities traded on national securities

exchanges, the Commission, during

the fiscal year, granted applications by

exchanges to strike 96 equity issues

and 56 debt issues from listing and

registration. The Commission also

granted applications, submitted by issuers, requesting withdrawal from listing and registration for 24 equity issues and four debt issues.

During the fiscal year, the Commission neared completion of its review of

its policies with respect to granting applications for unlisted trading privileges. The Commission's review is designed to develop standards which it

will apply in considering whether an

extension of unlisted trading privileges

is consistent with the maintenance of

fair and orderly markets and the protection of investors under Section

12(f)(2) of the Exchange Act. While

that review continues, the Commission generally has not granted applications for unlisted trading privileges.

In .Junew and again in Auqust-? of the
fiscal year, however, the Commission

approved applications by the MSE for

unlisted odd lot trading privileges in

certain securities which had become

listed on the NYSE subsequent to the

date of a previous Commission order

extending unlisted odd lot trading privileges to the MSE in 865 NYSE-listed

securitles.w

During the fiscal year, the national

securities exchanges reported to the

Commission, pursuant to Section

19(dXl) of the Exchange Act, approximately 200 disciplinary actions imposing a variety of sanctions upon

member firms and their employees. In

addition, the Commission received

from the national securities exchanges

154 filings pursuant to Rule 19b-4 under the Exchange Act, including 98

proposed rule changes and 56 notices

of a stated policy, practice or interpretation not constituting a rule change.

Among the significant rule filings approved by the Commission during the

fiscal year were: (a) a proposal by the

NYSE to establish, on a two-year pilot

basis, a non-disciplinary procedure for

the reallocation of securities among

specialist units who fail to meet certain minimum performance standards

based upon the results of a performance evaluation questionnairess; (b) a

complete revision of the rules of the

CSElO;(c) amendments to the Amex

lIsting standards, expanding the universe of foreign and domestic issuers

whose securities may qualify for listing

on the Amex»: (d) a nine-month extension of the respective NYSE and Amex

rules regarding supplemental market

makers in equity securities"; and (e) a

pricing formula amendment to the

PSE's automated execution system

(COMEX), to provide that orders executed at the best bid or best offer as

determined by quotes received from

all participants in the Intermarket

Trading Systern.v

National Association of Securities

Dealers-The NASD is the only securities association registered with the

Commission. At the close of the fiscal

year, 2800 brokers and dealers were

NASD members.

During the past fiscal year, the

NASD reported to the Commission the

final disposition of 289 disciplinary

complaints. In those disciplinary actions, 143 member firms and 332 individuals were named as respondents.

At the beginning of fiscal 1979, three

proceedings for review of NASD dis.

ciplinary decisions were pending before the Commission, and during the

year 27 additional cases were brought

up for review. The Cornrrussion reviewed 14 of these cases and reduced

the sanctions to be imposed in some

cases.

The Commission also reviewed 39

NASD applications to admit a broker

or dealer to membership or to permit

a person to become associated WIth a

member where the broker or dealer or

person is subject to a statutory disqualification. The Commission has

taken no adverse action WIth respect to

15 notices. Five notices were withdrawn, and at the end of the fiscal year,

19 notices were pending before the

Commission.

During the year, the Commission

continued to review an NASD proposed rule submitted in fiscal 1978 to

prohibit its members from giving discounts to customers in distributions of

securities offered at a fixed price. The

proposal was written in response to a

1976 judicial decision, Papilsky u

Berndt,» which held that such discounts were unlawful in some CIrcumstances, absent a contrary Commission or NASD ruling. In September

1979, the Commission commenced

public hearings to consider the issues

presented by the proposed rule.

During the fiscal year, the Commission also worked with self-regulatory

organizations to simplify and eliminate

13
duplication in the self.regulatory system for brokers and dealers. The Commission extended until January I,

1980, its provisional approval of four

plans proposed by self-regulatory organizations for allocating their responsibilities to perform various regulatory

functions for brokers and dealers

which belong to more than one self.

regulatory organization. The plans represent agreements reached between

the NASD and four exchanges: the

BSE, CSE, MSE and PSE. The plans

assign to the NASD much of the responsibility for conducting onsite examination of dual members and for

processing various applications.

Municipal Securities Rulemaking

Board- As in the case of national securities exchanges and the NASD, the

Commission reviews proposed rule

changes of the Municipal Securities

Rulemaking Board (MSRB). During the

fiscal year, the MSRB filed 14 rule pro.

posals. The Commission considered a

number of those proposals and others

which were pending from the previous

fiscal year.

The Commission approved a comprehensive arbitration code for the municipal securities industry." The code

is designed to provide a means for reo

solving disputes on an expedited and

relatively inexpensive basis. It includes

both special procedures for settling

disputes relating to customer small

claims and more general procedures

which can be used for claims of any

size.

The Commission also approved a

rule relating to the advertising of municipal securltles.» The rule prohibits

a municipal securities professional

from publishing or causing to be pub.

lished an advertisement concerning

municipal securities that such professional knows or has reason to know is

false and misleading. It also requires

all advertisements concerning municipal securities to be approved in writing

14

by appropriate supervisory personnel.

In addition to consideration of MSRB

rule proposals, the Commission proposed a rule to provide the MSRB with

information for use in its rulemaking

activities. On May 30, 1979, the Commission published for comment pro.

posed Rule 15Bc7 -1 under the Exchange Act to make available to the

MSRB information concerning cornpliance examinations of municipal securities brokers and municipal securities

dealers." The proposed rule is designed to establish a mechanism for

furnishing to the MSRB reports of compliance examinations, or information

from such examinations, made by or

furnished to the Commission, the

NASD and the three Federal bank regulatory agencies. (In October 1979,

this rule was adopted by the Commission.»)

Clearing Agencies-The Commission has granted temporary registration to 12 clearing agencies pending

the development of standards for full

registration of clearing agencies. The

Commission also received applications

for temporary registration as a clearing

agency from the Philadelphia Depository Trust Company (Philadep) and the

Fixed Income Clearing Corporatlon.»

The Commission, at year end, was

considering the numerous comment

letters which were received on the reo

vised proposed standards for clearing

agency registration which were published in the previous fiscal year.w The

Commission expects to announce the

standards for full registration within

the next fiscal year.

The Commission has established a

Branch of Securities Processing Inspections whose primary responsibility

is to inspect registered clearing agencies. The branch has embarked on a

program of inspecting each clearing

agency and is developing formal procedures for the inspection of clearing

agencies. On July 10-13, 1979, the
branch conducted an extensive inspection of the Philadep as part of the Commission's consideration of whether to

grant temporary registration as a clearing agency to that applicant. At the

end of the fiscal year, the Commission's staff was continuing to analyze

data gathered in the course of this inspection. After completion of this

work, the findings of this inspection

will be discussed with Philadep. (Subsequent to the close of the fiscal year,

on October 24, 1979, the Commission

announced its order granting temporary registration to Philadep.»)

Arbitrsuon Facilities of Self-Regulatory Organizations-During fiscal

year 1978, the Commission's staff inspected arbitration facilities of the

NASD, Amex, and CBOE. The staff

also completed its analysis of information obtained during an inspection

of the NYSE on September 27-28,

1978. The purpose of these inspections was to determine the efficiency

and fairness of the procedures of these

organizations for the resolution of disputes between investors and brokerdealers. The inspections focused on

the organizational structure of the arbitration departments, the composition of arbitration panels, the time necessary to resolve disputes, the volume

of cases and the range of awards.

As a result of these inspections, the

staff recommended that the self-regulatory organizations prepare materials

to inform investors about the enforceability of agreements to arbitrate future disputes with broker-dealers and

about those issues for which a judicial

forum might be available. The staff

also made certain comments and recommendations regarding the operation of the arbitration programs.

The staff suggested that the NYSE

permit arbitrators, through the arbitration department staff, to refer to disciplinary authorities any apparent violations of applicable rules or laws

discovered in the course of arbitration

proceedings. The staff also suggested

that the NASD attempt to reduce the

time between filing and resolution of

claims and to select public arbitrators

with a greater diversity of experience.

Procedures for Filing Proposed Rule

Changes-Section 19(b) of the Exchange Act, as amended by the 1975

Amendments, requires self-regulatory

organizations to file all proposed rule

changes with the Commission. Shortly

after Section 19(b) became effective,

the Commission adopted Section 19b.

4 and related Form 19b.4A establishing procedures for self-regulatory

organizations to file proposed rule

changes and designating the types of

proposed rule changes that may become effective upon filing.

In May 1979, the Commission pro.

posed for public comment amendments to Rule 19b.4 and related Form

19b-4A.62 Developed in light of the

Commission's experience in adrnimstering Section 19(b), the proposed

amendments are intended to improve

and simplify the procedures for filing

proposed rule changes, thereby expediting the rule review process. The

Commission's proposals include (a) an

amendment to Rule 19b-4to designate

a new category of rules that may become effective upon filing and (b)

amendments to Form 19b-4A to specify, in greater detail the information required by that form.

Inspections of Self-Regulatory Organizations-During the fiscal year, the

Commission reorganized its program

for oversight inspections of the activities of self-regulatory organizations.

This new program has entailed more

frequent and more intensive onsite inquiries into the market surveillance

and compliance systems of the various

national securities exchanges and the

NASD.

In February 1979, the Commission

staff conducted an inspection of the

15
stock market surveillance program of

the Phlx. This inspection disclosed significant inadequacies in the market

surveillance systems of the Phlx.

In April 1979, the Commission staff,

in response to a recommendation of

the Options Study, conducted an inspection of the operations and listed

options market surveillance program

of the MSE. This inspection disclosed

that the MSE program was inadequate

for the detection of certain common

options trading violations.

In June 1979, the Commission staff,

in connection with a pending pilot

trading program, conducted an inspection of the NYSE program for surveillance of the activities of Registered

Competitive Market Makers (RCMMs)

and Registered Competitive Traders

(RCTs). This inspection also included

a review of the exchange's enforcement program for RCMM members.

This inspection disclosed deficiencies

in certain of the techniques employed

by NYSE staff to detect rule violations

by RCMMs and RCTs and other weaknessesin casefile documentation practices. Also discovered was a failure to

take the formal disciplinary action neeessary to enforce RCMM rules effectively.

In April 1979, the Commission staff

inspected the options operations and

market surveillance programs of the

PSE. This inspection disclosed certain inadequacies in some of the exchange's systems which monitor compliance by market professionals with

trading rules and with credit regulations.

In June 1979, the Commission staff

conducted an inspection of the options

operations and market surveillance

systems of the Phlx. This inspection

disclosed significant deficiencies in the

Phlx system to detect options trading

violations and deficiencies in the enforcement of certain Phlx rules.

16

In June 1979, the Commission staff

conducted an inspection of the Securities Qualification Section in the

NASD's NASDAQ Operations Department. The major findings of this inspection were that the NASD had

made marked improvements in the

manner in which it monitors periodic

filings of issuers for compliance with

securities qualification criteria, that

there were shortcomings in the section's administration of the listing exception process and that there were

ambiguities in the NASD rules governing this process.

Between February and July 1979,

the Commission staff conducted inspections of the operations of NASD

district offices located in Philadelphia,

Washington, D.C., New Orleans, Kansas City and Chicago, as well as the

operations of the unit at NASD headquarters assigned to manage and coordinate NASD district office activities. These inspections focused on the

administration of the NASD's program

of examinations and monitoring of

member firms. These Inspections disclosed a number of strengths and

weaknessesin the.requlatory programs

of individual offices as well as several significant weaknesses which appeared to be national in scope. This latter class of weaknesses included (a)

shortcomings in the work paper requirements and document maintenance practices of NASD examiners,

especially with regard to sales practices; (b) the failure of some examiners

to follow procedures prescribed by the

NASD to detect sales practice violations during routine examinations of

member firms; and (c) inadequate

staffing of the district offices of both

examiners and supervisory personnel.

During July 1979, the Commission

staff inspected the operations and market surveillance and enforcement program of the CBOE. The inspection

team found inadequacies in the man-
ner in which the CBOE seeks to detect

certain trading violations.

During August 1979, the Commission staff inspected the options operations and market surveillance and enforcement program of the Amex. This

inspection disclosed certain deficiencies in the market surveillance systems

of the exchange and a failure to enforce certain exchange rules. In addition, the inspection team found a pattern of failure to prosecute certain

cases of apparent rule violations by

floor members.

During February 1979, the Cornrnission staff conducted an examination of

the complaint processing unit of the

Amex. Complaint processing is a function of the Department of Rulings and

Inquiries, Legal and Regulatory Policy

Division, which is also responsible for

issuing interpretations of Amex rules.

The purpose of the inspection was to

determine the responsiveness, efficiency and timeliness of the Amex

complaint handling system. The staff

will continue to monitor that system

and to recommend changes where necessary.

In May 1979, the Commission staff

examined the complaint processing

function of the CBOE. The CBOE

Trading Regulation Department responds to complaints and inquiries

which are floor-related, and the Office

of Inquiries and Complaints handles

matters related to broker-dealer sales

practices. The staff will continue to

monitor the responsiveness of the

CBOE to Investor concerns.

After each of the foregoing inspections, the Commission notified the appropriate self-regulatory organization

of its findings and asked that remedial

action be taken. The Commission is

planning a series of follow-up inspections to ensure that appropriate remedial action has been taken.

Revenues and Expenses of Self-Regulatory Organizations-The regulatory

functions of the various exchangesand

the NASD with regard to their brokerdealer members are financed through

various fees and dues, such as listing

fees and transaction charges. The nature of some of these revenue sources

makes the financial condition of selfregulatory organizations dependent

upon price fluctuations and trading

volume.

Furthermore, the various self-regulatory organizations are quite different

In the extent of their dependence on

particular sources of revenue. Some

sources of revenue, such as transaction, clearing and depository fees,

change directly with changes in share

volume. Others are relatively fixed,

such as listing fees and membership

dues. Additional analysis and statistical detail on share volume, revenues

and expenses of each self-regulatory

organization are presented In the Appendix of this report.

17

The Disclosure System

New Developments in Disclosure

Policy

The "full disclosure" system administered by the Commission is designed

to assure that the securities markets

operate in an environment in which full

and accurate material information

about publicly traded companies IS

available to all interested investors.

During the fiscal year, the Commission

pursued a program designed to enhance the effectiveness of required information, while reducing attendant

burdens to the extent possible. Five

major objectives have been stressed to

attain that goal: (1) Integration of disclosures required by the Securities Act

of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange

Act); (2) narrowing of the differences

between information supplied by registrants to the Commission in formal

filings and to various segments of the

public through informal means; (3) improvement of disclosure requirements;

(4) development of guidance for special situations outside the normal system of continual disclosure; (5) refocusing of the staff review process; and

(6) implementation of a program review of existing rules to delete or

amend unnecessary or outmoded provisions.

Projections of Future Economic Performance-In furtherance of its new

policy of encouraging the disclosure of

earnings forecasts and other forwardlooking information by registrants, the

Commission issued a release on June

25, 1979, which announced the adoption of Rule 175 providing "safe harbor" from the liability provisions of the

Federal securities laws for enumerated

forward-Iookinq information that is

reasonably based and made in good

faith.63 The Commission's initiatives in

voluntary projection disclosure are experimental in nature and a task force

has been set up to assure that the new

policies embodied in the rule do not

yield results inconsistent with investor

protection.

Disclosure Revisions-The Commission has taken a number of steps to improve the format of disclosure, delete

unnecessary requirements, add new requirements, and, generally, make disclosure more effective and flexible. In

one such action, the Commission

adopted amendments to provide relief

from certain portions of the reporting

requirements of the annual and quarterly reports filed with it by registrants

whose equity securities are owned

either directly or indirectly by a single

person which itself is a reporting entity under the Exchange Act.64 The

Amendments are part of the Commission's continuing effort to reduce reporting burdens and paperwork by

more precisely tailoring the reporting

requirements to the characteristics of

particular registrants and to the needs

of their investors.

On September 6, 1979, the Commission proposed the amendment of

Rule 12b-25 and its related form which

would result in the elimination of extensions of time to file reports under

the Exchange Act and, in lieu thereof,

proposed the institution of a system

requiring notification of a registrant's

or reporting person's inability to timely

19
file reports or portions thereof.» By

eliminating the review requirement for

extension of time requests, the Commission hopes to be able to place increased emphasis on the review of all

Exchange Act filings. In this manner,

the Commission will attempt to implement a recommendation of the Advisory Committee on Corporate Disclosure which noted that a substantive

review of periodic reports, consistent

with the quality of information sought

in registration statements, is essential

to the end product of a high quality

disclosure docurnent.w

The Commission also concurrently

proposed for comment a new Rule 12b26 which would require registrants to

prominently disclose, on the cover

pages of periodic reports filed pursuant to Sections 13 or 15(d), any required portion omitted from those

reports. It is believed that this

requirement will assist the investing

public and the Commission in the review of Exchange Act reports.

Corporate Accountabiltty; Management Background and RemunerationResponding to numerous events that

raised questions about the adequacy of

corporate accountability mechanisms,

the Commission established a task

force in 1977 to undertake a broad

reexamination of its rules related to

shareholders communications, shareholder participation in the corporate

electoral process and corporate gov.

ernance generally.67The Commission

determined to address in stages, the

complex issues raised during the en.

suing public hearings. In December

1978, the Commission adopted final

rule, form and schedule amendments

designed to provide shareholders with

additional information about the matters on which their vote is solicited.w

Generally, these amendments require

disclosure of: (1) The existence and

functioning of audit, nominatmq and

compensation committees; (2) attend20

ance of directors at board and committee meetings; (3) certain economic

and personal relationships between directors or nominees and an issuer or its

management; and (4) resignations of

directors.

On August 13, 1979, the Commission proposed a second set of rules related to corporate accountablltty.w The

proposals would require that shareholders be provided with a proxy card

which: (1)Indicates whether the proxy is

solicited by the board of directors; (2)

provides a means to vote for director

nominees individually; and (3) removes discretionary authority to vote

unmarked proxies. The proposed

amendments also would require disclosure of prior year election results in

certain circumstances and would expand the types of communications ex.

empt from the proxy rules. (On November 20, 1979, the Commission

adopted a version of these rules modified to reflect certain comments received.)»

The Task Force on Corporate Accountability was, at the close of the fiscal year, engaged in preparing a com.

prehensive report on the corporate

governance proceeding. The staff monitored governance disclosure appear.

ing in the proxy statements of 1,200

representative issuers during the 1979

proxy season. In addition to analyzing

the results of the disclosure survey, the

report is expected to address such issues as the functions of the board of

directors and its committees; sollcitations of beneficial owners of stock held

in street and nominee name; disclosure of corporate activities having both

economic and social impacts; and the

respective roles of private sector, institutional shareholders, self-regulatory

organizations, the states, the Commission and Congress in corporate accountability. After review of the staff

report, the Commission will consider

what further action, if any, is appropri-
ate and will determine whether to publish additional rulemaking proposals

or to recommend or support new legislation affecting corporate accountability.

In a release dated December 4,

1978, the Commission amended certain disclosure forms and regulations

to standardize and improve the disclosure requirements relating to management remuneratton.» The Amendments revised the management remuneration disclosure provisions in

certain registration statements, periodic reports and proxy and information

statements filed with the Commission

to require tabular and other forms of

disclosures as to all remuneration receivedfrom the corporation and its subsidiaries for services during the latest

fiscal year by certain specified directors, executive officers and officers.

Subsequent to the adoption of these

requirements, the Commission authorized the Division of Corporation Finance (the Division) to issue its interpretive views regarding- certain

aspects of the amendments in order to

give guidance to reqlstrants."-

MOnitoring of EXisting Guidelines-As

a means of accomplishing its stated

disclosure program goals, the staff of

the Division has undertaken a comprehensive revisitation and review of the

disclosure requirements of the Securities Act and Exchange Act. On June

25, 1979, the Commission issued, for

public comment, comprehensive proposed staff guidelines for the disclosure in registration statements and

reports by electric and gas utility

companies.n It is anticipated that

these guidelines will improve the usefulness to investors of the various documents involved by specifying the

types of data which such documents

should disclose. It is also believed that

the guidelines will benefit companies

by increasing the uniformity of disclosure within the industry and eliminating disclosure requirements which are

not meaningful to that industry. The

comment period closed on September

24, 1979, and the staff began analyzing the comments received.

In August of 1979, the Commmission issued a release requesting comments on the quality and desirability of

the disclosure made under the existing

guidelines for "Statistical DIsclosure

by Bank Holding Companies."> These

particular guidelines have been in operation since 1976. The request is part

of the Commission's effort to monitor

the effect and value of its disclosure

rules and guides with a view to amending or rescinding those rules or guides

which do not yield the expected benefits.

On September 6, 1979, the Commission requested comments on the

operation and efficacy of certain of its

recently adopted proxy statement disclosure requirements as well as certain

other disclosure requirements relating

to the structure, functioning, and composition of boards of directors.»

On September 27, 1979, the Commission published an interpretive release76 focusing attention on existing

requirements under the Securines Act

and the Exchange Act concerning environmental disclosure to assist registrants in complying with those requirements and to alert them that the

Commission will continue, in appropriate cases, to take enforcement action in instances of non-compliance.

The release, in particular, addressed

these issues: (1) the need to disclose

total estimated expenditures for environmental compliance beyond two

years in the future; (2) the obligation to

disclose particular types of environmental proceedings; and (3) the circumstances under which companies

must disclose their policies or approaches concerning environmental

compliance. The Commission reviewed

its policies with respect to environ men21
tal disclosure in an administrative pro.

ceedinq'" (which is discussed in the "Enforcement" section of this report).

Small Business

While it should be recognized that

many of the problems which face small

business today result from factors

rooted in the broad economic environment rather than the Federal securities

laws, the Commission is aware that the

rather costly and complicated process

of distributing securities in compliance

with these laws is felt by some to

impede unnecessarily capital formation by small businesses. The Commission has vigorously addressed itself to

these problems by focusing primarily

on its existing rules and regulations

and on the general problem areas under those rules which have been of the

greatest interest to small businesses.

During April and May of 1978, the

Commission held public hearings concerning the effects of its rules and regulations on the ability of small businessesto raise capital and the impact on

small businesses of the disclosure requirements under the Securities Act.

The Commission subsequently

adopted revisions to its rules during fiscal 1978 and has continued to implement the policy of easing the regulatory

burden on small businesses, consistent

with the protection of investors, during

fiscal 1979.

In June 1979, the Office of Small

Business Policy was established within

the Division. The Office: (a) serves as

the focal point of the Commission's

small business rulemaking initiatives;

(b) reviews and comments upon the impact of rule proposals on small businesses; and (c) acts as liaison with

Congressional committees, govern.

ment agencies and other groups concerned with small business. The Office

is responsible for monitoring the quality of disclosure included in offerings

22

registered on Form S-18, which is described below. Since the Form was

adopted on an experimental basis, the

Office will make recommendations as

to the continued use of or appropriate

amendments to the Form.

The Commission has also adopted

certain revisions to Rule 144 and Regulation A. On March 5, 1979, Rule 144

was amended to allow non-affiliates to

disregard the Rule's volume restrictions under certain ctrcumstences.>

To qualify, the seller must have been

a non-affiliate for three months and

must have held the securities: (a) for

three years if they are listed on ana.

tional securities exchange or quoted

on the NASDAQ, or (b) for four years

if the securities are not so listed or

quoted and the issuer files reports

pursuant to the Exchange Act. On

June 1, 1979, the Commission

adopted amendments which permit

the use of a pre-effective selling document in Regulation A offerings, pro.

vided that the securities are sold by underwriter(s) who are broker-dealers

registered under the Exchange Act,79

On March 29, 1979, the Commission

adopted Form S-18 and related amend.

ments concerning simplified reqlstration and reporting requirements for

small issuers.80The Form is available to

certain domestic or Canadian corporate

issuers for offerings of up to $5 million,

of which up to $1.5 million may be

sales by existing security holders. The

Form calls for narrative disclosure

somewhat less extensive than that

presently required by Form S-l and

audited financial statements prepared

in accordance with generally accepted

accounting principles rather than in accordance with Regulation S.X. A corresponding amendment wasalso adopted

which allows issuers to include the narrative and financial disclosure format of

the Form S-18 in its initial Form 10-K

report.» Issuers also have the option of

filing the registration statement at the
appropriate regional office or at the

Headquarters Office.

On September 11, 1979, the Commission proposed Rule 242 which expands the availability of Section 3(b) of

the Securities Act to allow issuers to

sell up to $2 million worth of securities, subject to provisions of integration delineated in the Rule, without

registration or compliance with the

more burdensome requirements found

in other exemptions from registration.82 The two major conceptual

changes embodied in the Rule are,

first, the unregistered sale of securities

to an unlimited number of institutional

investors with no mandated information requirements (relying on the ability of such persons to obtain material

information from the issuer) and, second, the unregistered sale of securities

to a limited number of individuals (35)

with no sophistication test which must

be met, but with an information requirement similar to that found in

Form S-18. (On January 10, 1980, the

Commission adopted Rule 242.)

(On October 10, 1979, the Commission authorized the issuance of a release indicating that it will not take

enforcement action against issuers

utilizing Form S-18 to offer $1,500,000

or less of debt securities for public sale

pursuant to the Securities Act without

filing and qualifying the trust indenture

under the Trust Indenture Act of 1939.

The proposed no-action position would

be taken when it appears that such

compliance would be inconsistent with

both the Commission's ongoing effort

to facilitate small businesses in the

capital formation process and the

Commission's view that qualification is

not required for Regulation A offerings

of debt securitles.)»

Long Range Studies-Policy research

by the Commission's Directorate of

Economic and Policy Research regarding the ability of small firms to raise

capital increased substantially in 1979.

Phase I of the Experimental Technology Incentive Program (ETIP) was

completed in conjunction with the U.S.

Department of Commerce. In this initial effort several policy questions regarding the capital markets confronting small, high technology corporations were addressed. Phase II, now in

progress, implements this system and

expands the scope beyond the capital

raising process to include accountmg

disclosure, tender offers and other

policy concerns relevant to small, innovative enterprises. This effort will be

supplemented in fiscal year 1980 with

an exarmnatron also conducted by the

Directorate of Economic and Policy

Research, of the role regional brokerage firms play in raising capital for issuers through initial public offerings.

Tender Offer Proposal

In February 1979, the Commission

withdrew certain proposed rules with

respect to tender offers which had

been published in 1976, and published

for comment a new proposal and a related schedule.« This action was part

of the Commission's ongoing program

to establish a comprehensive regulatory framework with respect to tender

offers.

The proposal would require Tender

Offer Statements on Schedule 140-1

to be filed by the bidder with the Commission, and sent to certain interested

persons, predicated on the date of

commencement of a tender offer. An

initial filing with the Commission prior

to the date the tender offer is first published, sent or given to security holders

would not be required. Rather than establish a specific time for such filings,

the proposal generally would permit a

filing to be made as soon as practiceble on the date of commencement or,

with respect to amendments, on the

date the material change or additional

tender offer material is first published,

sent or given to security holders. This

23
filing standard is designed to create an

efficient system in conformity with the

Williams Act which will not unduly burden bidders. In addition, the proposal,

which would provide the prompt communication of information regarding

tender offers to trading markets, is intended to assist national securities exchanges and the National Association

of Securities Dealers, in carrying out

their self-regulatory resonsibilities under the Federal securities laws.

In addition to establishing comprehensive disclosure requirements applicable to any tender offer subject to

Section 14(d) of the Exchange Act, the

proposal would also provide a framework for disseminating cash tender offers, and amendments, to security

holders. The proposed rules would add

content and clarity to the term "published, sent or given" to security holders and are intended to afford a greater

number of shareholders the opportunity to receive, consider and evaluate

tender offer materials. Three non-mandatory methods of disseminating cash

tender offers would be provided: longform publication; summary publication; and the use of stockholder lists

and security position listings. To ensure the efficient operation of the latter

method, a procedure would be established under which the bidder's tender

offer materials would be sent to security holders either by the bidder who is

furnished with stockholder lists, or by

the subject company. The choice as to

the method used would be the option

of the subject company.

To further ensure that investors have

an adequate opportunity to consider

communications from the bidder, as

well as the subject company, in deciding whether to tender to the bidder,

sell into the market, or hold part or all

of their securities, the Commission

also proposed rules that would require

all tender offers to remain open for at

least 30 business days and for at least

24

ten business days after any increases

by the bidder in the offered consideration; provide withdrawal rights for

shares deposited by investors during

the first 15 business days of an offer

and an additional ten business days in

the event of a competing offer; and

permit bidders to extend pro rata acceptance rights for periods in excess of

those required by Section 14(d)(6).

Other proposed rules would require

prompt status reports whenever the

length of a tender offer is extended and

payment for or return of deposited securities as soon as reasonably practicable after the tender offer's termination.

The proposal would also revise the

present disclosure requirements relating to subject companies and other

persons making a solicitation or recommendation in connection with a

tender offer subject to Section 14(d).

Thus, proposed Rule 14d-10 and proposed Schedule 14D-10 would replace

current Rule 14d-4 and Schedule 14D,

respectively. While the proposed rule

would require broader disclosure, a

narrower class of persons would be

subject to its requirements than is currently the case. The limitation on the

types of persons who must file a proposed Schedule 14D-1O represents an

effort by the Commission to avoid unnecessary regulation in the context of

tender offers.

While not applying to a bidder, proposed Rule 14e-2(a) would affirm a

duty of disclosure on any other person

who trades on non-public material information obtained directly from a bidder or indirectly from a bidder, such as

from persons involved or consulted by

the bidder in the precommencement

planning and preparation stages of a

tender offer. The Commission believes

that an affirmative duty of disclosure

is necessary for the protection of investors because of past abuses, the vital

importance of such market informa-
tion and the extraordinary nature of

tender offers.

(On November 20, 1979, the Commission adopted a modified version of

these tender offer proposals.)»

Going Private and Sale of Asset

Transactions

On August 2, 1979, the Commission

adopted a new rule and schedule relating to going private transactions by

public companies or their affiliates.86

This was in response to the continued

occurrence of going private transactions, the variety of methods employed

in such transactions, and the need for

disclosure to investors confronted with

these transactions. The rule and schedule are intended to augment and implement the present statutory provisions

by prohibiting fraudulent, deceptive

and manipulative acts or practices in

connection with going private transactions and by prescribing new filing, disclosure and dissemination requirements as a means reasonably designed

to prevent such acts and practices.

During the year, several proxy statements involving novel, multi-step sale

of asset transactions were filed with the

Commission. Typically, the subject

transaction involved a cash sale of substantially all of the assets of a public

company to another company, often a

private company not otherwise engaged in a trade or business. The purchasing company expects to continue

the business of the public selling

company under the public company's

name and hires substantially all of the

seller's managers under long-term employment arrangements to manage the

business. A significant percentage of

the purchase price may be borrowed

by the purchaser and, if so, the assets

purchased are usually directly or indirectly pledged to secure repayment of

the loan. In some cases, the sale of assets, if approved, will be followed by an

315-80~O - 80 - 4

issuer tender offer by the public company to repurchase its shares for cash

out of the proceeds received from the

sale. In addition, the public company

proposes, as part of the transaction, to

amend its certificate of incorporation

to change its business to that of an

investment company. In view of concerns that were expressed by interested shareholders regarding the

adequacy of disclosure; difficulties en.

countered in the administrative review

process; and enforcement actions

which had been taken as a result of failure to comply with the disclosure requirements of the Exchange Act, the

Commission authorized the Division of

Corporation Finance to provide information to the public about current

practices and guidance to issuers in

fulfilling their disclosure obligations.&7

Oversight of the Accounting

Profession

Report on the Accountmg Profession

and the Commission 5 Oversight RoleIn July 1979, the Commission submitted to Congress its second Report on

the Accounting Profession and the

Commission's Oversight Role. This

was in accordance with the Coirnmission's undertaking, during the June

1977 hearings held on the accounting

profession by the Subcommittee on

Reports, Accounting and Management

of the Senate Committee on Governmental Affairs, to report periodically

on the accounting profession's reo

sponse to the challenges which Congress and others have placed before it

and on related Commission initiatives.

The questions raised concerning the

accounting profession and its future

have centered principally on the profession's capability, absent direct government regulation, to regulate and discipline its members, to assure their

independence, and to set auditing and

accounting standards. The Report contained the views of the Commission and

25
the staff on the major issues confronting the accounting profession, and analyzed in detail the recent progress

made by the profession and the Commission, in dealing with them.

In its July 1979 Report, the Commission concluded that progress has

been sufficient to merit continued opportunity for the accounting profession to pursue its efforts at self-regulation. Consequently, the Commission

did not recommend, at the time, legislation to supersede or control the

regulation of accountants. Further, the

Commission continues to believe that

it is too early to reach any definite conclusions with respect to possible future

regulatory action or legislation. If, for

example, the profession's initiatives

are not successful, a legislative alternative might well be required. Additionally, the Commission remains unconvinced that comprehensive direct

governmental regulation of accounting or accountants would afford the

public either increased protection or a

more meaningful basis for confidence

in the work of public accountants.

During the past year, the Commission has worked with the accounting

profession to define the objectives of

the self-regulatory program, to assure

that the profession's proposed implementation is consistent with those objectives, and to suggest ways in which

to achieve the objectives without imposing specific methods. In addition,

the Commission has been active during the past year in overseeing the

profession's initiatives concerning the

independence of auditors and the accounting and auditing standard-setting

processes. In this respect, the Commission has given specific attention to

maintaining the momentum for progress in such areas as reporting on internal accounting control, scope of

services performed by auditors, and

the work of the Financial Accounting

Standards Board (FASB) and of the

26

AICPA. The Commission has criticized

the profession where necessary, complimented it, when deserved, and in

general, has offered its views and in.

sights concerning the self-regulation

effort on which the profession has embarked.

With respect to the accounting standard-setting process, the Commission

believes that the initiative for establishing and improving accounting standards should remain in the private sec.

tor, subject to Commission oversight.

However, to retain that prerogative, the

FASB must continue its efforts to provide leadership and take necessary action in controversial areas. Also, the

members of the accounting profession

and the corporate community must encourage the FASB to provide that lead.

ership, support the FASB's decisions

and join more actively in the standard.

setting process. This next year will be

a critical period in assessing the ability

of the private sector to demonstrate its

ability to move responsibly in addressing the complex, yet essential, issues

with which it is confronted.

The process of demonstrating that

accountants themselves, rather than

government, should (1) retain primary

authority to regulate the profession; (2)

ensure and instill confidence in professionalism and objectivity; (3) maintain

control over the quality of the work of

the profession's members and discipline those who fail to adhere to its

standards; and (4) formulate appropriate accounting and auditing standards,

is one which will demand the profession's and the Commission's continued

commitment. The need for leadership

regarding these essential issues is

greater than ever. Whether it will be

effectively provided by the private sector and, if so, by whom, is not yet certain. The Commission stands ready to

consider any reasonable alternatives to

achieve the essential objectives.

Management Advisory Services
(MAS)- The issue of the appropriate

scope of services to be provided by

independent public accountants to

their audit clients and the effect of such

services on their independence has

been the subject of much discussion.

The problem has been addressed in

various fora-by the accounting

profession, scholars, the Commission,

the Congress, and most recently by the

Public Oversight Board (POB) of the

SEC Practice Section of the Division of

CPA Firms of the AICPA."

In June 1978, the Commission, in

Accounting Series Release No. 250

(ASR No. 250), adopted a rule requiring disclosure in proxy statements of

services provided by the registrant's

principal independent accountants and

disclosure of whether the board of directors or its audit or similar committee had approved each service and

considered its possible effect on independence. In ASR No. 250, the Commission also indicated that it had not

yet determined whether it should propose rules to prohibit public accountants from rendering certain types of

services to their publicly-held audit

clients. The Commission noted that

the SEC Practice Section had asked

the POB to consider the matter and

stated that the POB should be given an

opportunity to present its conclusions

before the Commission acted.

On March 9, 1979, the POB submitted its report, "Scope of Services by

CPA Firms," to the Executive Committee of the Section. In its report, the

POB concluded that proscriptive solutions to the scope of services issue are

not necessary at this time.

The Commission reviewed the report of the POB and concluded that it

did not adequately sensitize the profession and its clients to the potential

effects on the independence of accountants of performance of nonaudit

services for audit clients. Accordingly,

in June 1979, the Commission issued

Accounting Series Release No. 264

(ASR No. 264)89in which it stated its

views concerning certain factors which

accountants should consider in assessing the possible effects upon their independence of the performance of

nonaudit services for publicly-held audit clients. In addition, because of the

impact which any impairment of the

auditor's independence, either in fact

or in appearance, could have on the

credibility and usefulness of the audit

report, the Commission also set forth

certain factors which audit committees, boards of directors, and managements should consider in determining

whether to engage their independent

accountants to perform nonaudit services.

The possible effect upon audit independence of performing nonaudit

services for audit clients is a complex

issue. The Commission, in identifying

the factors set forth in ASR No. 264,

was neither proposing to proscribe particular nonaudit services regardless of

the surrounding circumstances, nor

seeking to deprecate the very real benefits which may accrue from certain

auditor MAS engagements. Rather, the

Commission's objective was to re-enforce the sensitivity of interested parties to the considerations involved in

judging whether particular nonaudit

services should be rendered by a particular registrant's auditor. In each

case, the ultimate issue is one of informed professional judgment; no set

of factors or criteria can substitute for

the careful, case-by-case evaluation

which the exercise of that judgment

entails.

ASR No. 264 did not end examination of the scope of services issue. The

Commission has the responsibility under the securities laws to assure that

accountants who practice before it are

independent. and will continue its oversight of this area.

The Commission recognizes that the

27
question of indep.endent auditor MAS

activity is both difficult and controversial. If future events indicate that further action is necessary. the Commission stands ready to reconsider this

issue in order to assure the confidence

of investors in the financial reporting

of publicly-held companies.

Accounting Standards for Oiland Gas

Producers-During the fiscal year the

Commission, aided by an Advisory

Committee on Oil and Gas Accounting. continued its efforts to implement

its August 1978 decision to consider a

new method of accounting-reserve

recognition accounting (RRA)-for oil

and gas producers. The Commission's

decision resulted from an extensive

public proceeding conducted pursuant

to both the Federal securities laws and

the Energy Policy and Conservation

Act of 1975. which requires that the

Commission assure the development

and observance of uniform accounting

practices for the oil and gas industry.

Because the feasibility of such an

accounting method was not assured,

the Commission outlined a series of

steps for the development and implementation of RRA. As an initial step.

the Commission required that registrants disclose certain oil and gas reserve information beginning in fiscal

years ending after December 25, 1978.

Specifically, on December 19, 1978.

the Commission adopted amendments

to certain forms and regulations to

standardize and improve its disclosure

requirements relating to oil and gas reserves and operetions.w The amendments incorporated into Regulation SK requirements for disclosure of: (1)

The present value of future net revenues from estimated production of

proved oil and gas reserves; (2) any favorable or adverse event since the end

of the most recent fiscal year which is

believed to have caused a significant

change in the proved reserves; (3) the

average sale price and average produc28

tion cost per unit of oil and gas pro.

duced; and (4) historical information

concerning the number of productive

and dry wells drilled. The amendments

expanded the disclosure of the net

quantities of proved reserves from "as

of a reasonably current date" to ape.

riod of five years, and expanded the

types of companies which are required

to disclose information concerning the

estimated availability of oil and gas

from principal sources. An exemption

from these disclosure requirements

was provided for registrants whose oil

and gas activities do not exceed specified criteria.

In September 1979. the Commission

adopted a requirement for oil and gas

producers to include in their financial

statements for fiscal years ending after

December 25, 1979. a supplemental

summary of oil and gas producing activities prepared on the basis of RRA.

The information generated and the experience gained from the presentation

of this supplemental summary will provide much of the basis for an eventual

decision by the Commission as to

whether RRA should be required as the

accounting method for the primary financial statements of oil and gas producers.

FASB Conceptual Framework Project-The FASB project to develop a

conceptual framework as a basis for addressing emerging accounting problems is the most important financial

reporting matter confronting the profession. The Commission continues to

support the efforts of the FASB in this

area.

The conceptual framework project

continues to be given a high priority by

the FASB. The most notable actions

during the last year were the issuance

of: (1) Statement of Financial Accounting Concepts No.1 (FAC No.1), "Objectives of Financial Reporting by Business Enterprises" (November 1978).

which establishes the objectives of
general purpose external financial reporting by business enterprises; and (2)

Statement of Financial Accounting

Standards No. 33 (FAS-33), "Financial

Reporting and Changing Prices" (September 1979), which requires certain

large, publicly-held enterprises to disclose supplementary information about

how inflation and changing prices affect

their businesses.

The FASS has made important

strides in dealing with some of the fundamental issues inherent in the standard-setting process. FAC No. I,for example, does not limit the scope of

financial reporting objectives to financial statements, but rather sets forth

those objectives in terms of financial

reporting in general. In addition, its focus on users of financial information

and their interest in evaluating future

performance, including earnings, is a

significant and worthwhile step. The

Commission is optimistic that a consequence of that focus will be more

thought, experimentation, and timely

action in achieving improvements in

financial reporting.

A major element of the conceptual

framework should be to rethink the objectives of the primary financial statements-and, therefore, to rethink what

type of information should be included

and what information should be presented outside the financial statements. Ideally, the most relevant information would be a projection of cash

flows for future periods. However, such

information may be highly uncertain

and surrogates may have to be used.

The decision as to what that relevant

information is and whether it should be

included in the primary financial statements will be influenced by its measurability. The August 9,1979 exposure

draft of the FASS on qualitative characteristics, "Qualitative Characteristics: Criteria for Selecting and EvaluatIng Financial Accounting and

Reporting Policies," addresses this issue. The factors involved in the tradeoff between reliability and relevance are

the key to developing guidelines for the

type of information that should be included in financial statements. Further

clarification of this issue is necessary

before display issues, such as the reporting of earnings, can finally be resolved. Additionally, the development

of the recognition criteria phase of the

conceptual framework project will be

critical to the FASS in its search for a

definition of "earnings." It is expected

that the FASS will give appropriate attention and priority to these important

issues.

The current status of financial reporting of oil and gas producing companies reflects the nature of these issues. The Commission's efforts to

develop a more useful method of accounting would benefit from the existence of a conceptual framework. It

should be recognized that in developing the concept of reserve recognition

accounting, the Commission, will, of

necessity, have to deal with issues relating to the conceptual framework if

they have not, by then, been resolved.

Accounting For the Effects of Changing Prices-The Commission believes

that the FASS's requirement that

large, publicly-held enterprises disclose certain effects of general inflation and of price changes in specific

goods and services is a positive development in providing useful information. Accounting for the effects of inflation and changing prices is one of

the most important issues facing the

FASS, the profession, the business

community and the general public.

Conflicting reports of record profits on

the one hand and inadequate earnings

to maintain and expand capacity on

the other, serve only to confuse the issue. Further, they raise questions

about the integrity of financial reporting. The basic question in a period of

inflation and changing prices is how

29
best to report the effects of all economic events, and not only the effects

of transactions with outside parties. If

the objective is to measure only the

general impact of inflation on business

entities, then a general purchasing

power or constant dollar approach

might suffice. However, that approach

may not, and often does not, adequately portray the specific effects of

price changes on companies or industries. Therefore, it does not adequately

assist investors in assessingor projecting future cash flows or dividend paying capacity-important objectives of

financial reporting as set forth in FAC

No.1. The Commission remains fully

committed to ensuring that users receive adequate information about the

impact of changing prices on corporate earnings and assets.

The Commission recognizes that the

effectiveness of the FASB's new standard will depend, in large part, on the

efforts of the accounting profession

and the corporate community in applying the standard, and evaluating and

providing additional disclosures which

may help users assess the impact of

changing prices on particular business

entities and industries. With respect

thereto, the new standard should be

viewed as a requirement for the minimum information to be presented to

investors-an area where the corporate community must make a positive

contribution to the standard setting

process by volunteering additional information necessary to make the reporting more useful and meaningful in

the particular corporate circumstances.

Last year, the Commission determined to delay reexamination and expansion of its replacement cost rule,

adopted In Accounting Series Release

No. 190, so as not to conflict with the

FASB's consideration of these issues.

Based on its evaluation of the FASB

statement, the Commission staff in30

tends to recommend that the Commission take action to delete the requirement for reporting replacement cost

information once the disclosure requirements of the FASB statement are

fully effective. (On October 24, 1979,

the Commission adopted the staffs

recommendation and determined to

delete the disclosure required by ASR

190 once the requirements of FAS 33

become fully effective.)

Reporting on Internal Accounting

Control-Since the disclosure in the

1970's of widespread questionable or

illegal corporate payments and enactment of the Foreign Corrupt Practices

Act of 1977, there has been increasing

attention to, and interest in, the effectiveness of internal accounting controls. The accounting profession, both

institutionally through the AICPA's

Special Advisory Committee on Internal Accounting Control and individually by many accounting firms, has

responded to the need for guidance in

evaluating systems of internal accounting control, and the AICPA's

Auditing Standards Board is developing standards for public reporting on

internal accounting control.

In April 1979, the Commission proposed for comment rules which would

require inclusion of a statement by

management on internal accounting

control in annual reports on Form 10-

K filed with the Commission under the

Exchange Act, and in annual reports to

security holders furnished pursuant to

the proxy rules. The rules, if adopted,

would also require that such statement

of management be examined and reported on by an independent public

accountant. The Commission believes

that information regarding the effectiveness of an issuer's system of internal accounting control may be necessary to enable investors to better

evaluate management's performance

of its stewardship responsibilities and

the reliability of interim financial state-
ments and other unaudited financial

information generated from the accounting system.

At the close of the fiscal year, the

Commission was reviewing the large

number of comments received on the

proposed rules.

Unaudited Interim Financial Information-Since the issuance of Statement

of Auditing Standards No. 24 (SAS No.

24) by the Auditing Standards Board of

The American Institute of Certified

Public Accountants (AICPA) in March

1979, several reports by independent

accountants on Interim unaudited financial information have been included in Securities Act filings on

Form S-16 or S-14. Such filings have

raised a question as to whether accountants could be liable under Section 11(a) of the Securities Act (which

imposes liability on every accountant

"who has with his consent been named

as having prepared ... any report") in

such circumstances. On September

20, 1979, the Commission proposed

for comment two alternative rules»

either of which, if adopted, would have

the effect of excluding accountants issuing such reports from Section 11(a)

liability. In encouraging reviews by

auditors of interim financial information, the Commission has noted that

"the involvement of independent accounts will add the expertise of professional accountants with wide experience in reporting problems .... This

should improve individual company

reporting and direct greater professional attention to the general problems of interim reporting."92 (On December 28, 1979, the Commission

adopted a rule having the effect of excluding accountants issuing SAS No.

24 reports from Section 11(a)liability.)

31

Investment Companies and Advisors

The Investment Company Act

Study

The Investment Company Act special study group which was established

at the end of the last fiscal year by the

Division of Investment Management

(the Division), continued its comprehensive review of the Investment Company Act of 1940 and the rules, regulations and administrative practices

under it with the aim of simplifying, to

the extent practicable, the regulation of

investment companies, especially by

eliminating unreasonably burdensome

regulations. The guiding principal of

this effort is that whenever possible,

and subject to safeguards necessary

for the protection of investors, investment companies and their managers

should have responsibility for management decisions. Accordingly, the Investment Company Act Study (the

Study) has sought to lessen the instances in which the staff of the Commission need participate in the decision-making process by (1) replacing

administrative review of proposed investment company activities with rules

establishing general criteria under

which the activities are permissible;

and (2) refining the Investment Company Act's sometimes sweeping statutory prohibitions so as to permit activity not originally contemplated as

being within a provision's technical

scopeor underlying purpose.

The linchpin of the program is

enhancement of the authority and responsibility of investment company

directors, particularly disinterested directors, as primary overseers of management decisions. This greater reliance on directors, in many instances,

permits the withdrawal of the staff asan

active participant in certain management decisions while enabling the Commission to preserve, through its compliance and enforcement program an

active oversight capability.

Consistent with the goal of greater

director responsibility and reduced

staff participation in management decisions, the Commission, during the

fiscal year, adopted several rules which

permit certain transactions between an

investment company and its affiliated

person with regard to: (l) joint purchase of liability insurance pollcles:»

(2) the receipt of cash or securities pursuant to a portfolio company's plan of

reorganization;94 (3) the purchase of securities from an affiliated underwriting

syndlcate:» (4) certain purchase, sale

or lending transactions between affiliated perties.w and (5) the receipt of

stock exchange commissions by affiliated brokers.w During that period, the

Commission also adopted rules (l) providing unit investment trusts with startup exemptions from the Investment

Company Act's requirements regarding minimum net worth, frequency of

capital gains distribution, and forward

pricing; 98 and (2) providing increased

flexibility in determining when an investment company must price an investment company's redeemable securltres.» The Commission also proposed rules to ease problems arising

when certain contracts for investment

advisory or principal underwriting

services are terminated. 100

33
In addition, for several years the

Commission has been considering

whether mutual funds (open.end man.

agement investment companies)

should be permitted to finance distribution of their own shares. The Commission has been reluctant to permit

funds to incur distribution expenses

because of doubts about (1) whether

funds benefit from salesof their shares;

(2) whether funds' investment advisers'

conflicts of interest could be regulated

adequately; and (3) whether it would be

fair to existing shareholders for funds to

undertake such expenses. After reconsidering the matter in light of the objectives of the Study, the Commission on

September 7, 1979, published for comment Rule 12b-1 under the Investment

Company Act and certain related

rules.v» If adopted, Rule 12b.1 would

permit use of fund assets for distribution if approved by shareholders, the

board of directors as a whole, and the

disinterested directors. The proposed

rule contains conditions intended to increase the independence of the disinterested directors and ensure that the

directors permit such a use of fund assets only after considering all pertinent

facts and concluding that financial distribution would be likely to benefit the

fund and its shareholders.

Disclosure Study

In addition to the foregoing review

of the investment company regulatory

system, the Division established another study group to undertake a thorough review of investment company

disclosure requirements under the Securities Act of 1933 (Securities Act)

and the Investment Company Act. The

new disclosure study will explore ways

to reduce unnecessary burdens on

both the industry and the staff which

result from present disclosure requirements. Initially, the study group will

undertake two major projects: a review

34

of current procedures for processing

post-effective amendments to registration statements, which form the bulk

of the Division's workload in the disclosure area; and a review of ways to

eliminate duplicative reporting requirements in documents transmitted

to investment company shareholders.

Investment Company Advertising

During the fiscal year, the Commission took several actions to reduce restrictions applicable to the promotion

and sale of investment company shares

without diminishing essential investor

protections. On March 8, 1979, the

Commission withdrew its Statement of

Policy on Investment Company Sales

Llterature.w- The Statement of Policy,

which had been in effect since 1950,

wasa lengthy document detailing types

of representations which would or

would not be considered misleading in

investment company sales literature.

By its specificity, the Statement of Policy tended to induce conformity to prescribed formats. The result may have

been to limit innovations unduly and,

at the same time, insulate sales literature, which complied mechanically

with the Statement of Policy, but was

used in a misleading way. At the same

time that it withdrew the Statement of

Policy, the Commission proposed for

comment Rule 156 under the Securities Act, an interpretive rule which

briefly and in relatively general terms

highlighted what experience has suggested are problem areas in investment company sales Htereture.ws

(Subsequent to the end of the fiscal

year on October 24, 1979, the Commission adopted Rule 156 as

revised.104)

On August 31, 1979, the Commission adopted Rule 434d under the Securities ActIO' which, in effect, permits

investment companies to include far

more information in mass media advertisements. In the past, investment com-
panies, like other issuers, have been restricted to so-called "tombstone ads"

which may contain only relatively limited information about the security and

the issuer. However, Rule 434d permits

advertisements to include any information which is taken from or which

fairly summarizes the full statutory

prospectus. The rule should permit investment companies to more effectively communicate important facts,

such as performance data, to investors.

At the same time, in order to protect

investors from misleading statements,

Rule 434d advertisements would be

subject to some of the liability provisions of the Securities Act applicable

to prospectuses.

Institutional Disclosure Program

Beginning on February 14, 1979,

more than 650 major institutional investment managers began filing quarterly reports on Form 13F reporting to

the Commission on their significant

equity holdings pursuant to Rule 13f-1

under Section 13(f) of the Securities

Exchange Act of 1934. These reports

are transferred to the Commission's

Public Reference Room as promptly as

reasonably possible after filing, and

are normally available to the public

within a day to two after they are filed.

The tabulations of the data on Forms

13F, required by Section 13(f)(3), are

done by an independent contractor selected through the competitive bidding

process. The contractor is required to

make a variety of specified tabulations

available to the public at reasonable

prices within 10 days after receipt of

the reports. Since the contractor provides its services without charge to the

Commission, the only material costs to

the Commission of administrating the

program are in staff time. The Commission's various responsibilities are

carried out in several different offices

and Divisions, making it difficult to be

certain how much staff time is devoted

to the program, but it is probably on

the order of two to four man years.

Because the program is in its first

year of operation and the Commission

has only limited resources to devote to

its operation, the staff and the Commission have, so far, been concerned

with resolving technical problems with

Form 13F, interpretive questions, and

collateral issues such as confidential

treatment. No attempt has yet been

made to analyze or otherwise use the

information which has been filed. After

receiving public comment, the Commission decided that it would be unduly burdensome to require reports in

machine readable form since managers use a variety of computer systems and some compile reports manually. The independent contractor

does prepare a magnetic tape of which

may be obtained from either the Commission or the contractor.

Office of Investment Adviser

Regulation

The Office was established within

the Division of Investment Management in October 1978. The Office was

created in recognition of the need to

reevaluate the Commission's advisory

regulatory program in light of the dramatic growth in the advisory industry

and the developments in the kinds of

advisory services provided by investment advisers.

The Commission, in January 1979,

adopted new investment adviser requirements concerning disclosure, recordkeeping, applications for registration and annual filings.'06 These requirements include: (1) adoption of a

new disclosure rule (Brochure Rule) under the Investment Advisers Act of 1940

(Investment Advisers Act) (2) amendment of two rules under the Investment

Advisers Act relating to recordkeeping

and amendments to the investment adviser registration form; (3) adoption of

a new annual report form for invest35
ment advisers; (4) revision of certain

schedules used by investment advisers

and broker-dealers in connection with

the respective registration forms for

such persons. Concurrently with the

adoption of the above rules and forms,

the Commission amended a rule and

certain forms to require disclosure of

brokerage placement practices.w? A

similar disclosure requirement is imposed on investment advisers as part

of the Brochure Rule. Taken together,

these actions will result in the Commission and the public being apprised

of a great deal of material information

about investment advisers which was

not previously disclosed in any systematic way.

In other significant rulemakings, in

July 1979, the Commission adopted

new requirements under the Investment Advisers Act governing the payment of cash referral fees by investment advisers.ws The adoption of the

36

new rule makes it unlawful, except under specified circumstances and subject to certain conditions, for an investment adviser to make a cash

payment to a person ("solicitor") who

directly or indirectly solicits any client

for, or refers any client to, an investment adviser. In addition, in June

1979, the Commission issuedfor public

comment a proposed rule under the Investment Advisers Act which would

permit certain registered investment

advisers to business development companies (asdefined in the rule) to be compensated on the basis of a share of net

capital gains upon, or net capital appreciation of, the funds, or any portion of

the funds of the business development

company. 109 Such means of compensation is currently prohibited by the Investment Advisers Act. At the close of

the fiscal year, the staff was reconsidering the proposed rule in light of the

comments received.
Enforcement Program

The Commission's enforcement program is designed to secure as broad a

regulatory impact as possible with the

limited resources available. To this

end, the Commission relies heavily

upon private civil damage actions,

Federal securities laws, and upon self

regulatory and state and local law enforcement agencies. With respect to

those agencies, the Commission devotes substantial efforts towards promoting the effective coordination of

enforcement activities. In this manner,

the Commission seeks to make maximum effective use of available resources in order to obtain an increased

enforcement presence concerning

matters within its jurisdiction.

The cases described here reflect the

breadth of the Commission's responsibilities and its enforcement responses, and the continued vigor and

effectiveness of the enforcement program.

Sanctions and Remedies

The Federal securities laws provide

administrative, civil and criminal remedies for violations of those laws.Sanctions in administrative proceedings for

those subject to the Commission's regulatory jurisdiction may range from

the imposition of a censure to the barring of a securities professional from

the profession. The civil court remedy

usually available to the Commission is

court entry of an injunction barring further violations. The courts often enter

orders providing for appropriate additional relief. Criminal sanctions provided by the Federal securities laws include fines and imprisonment.

The Federal securities laws are primarily remedial in nature. In recognition of that purpose, in the litigation

and settlement of its proceedings the

Commission makes every attempt to

prevent a recurrence of violative activity and to rectify the result of past violations. The Commission has been

particularly successful in securing appropriate relief in injunctive actions

and during fiscal year 1979 such relief

included, in one case, an order requiring the defendant to return $30 million

alleged to have been wrongfully obtainedllo; the appointment of individuals or committees for the purpose of

conducting further investigations and

reporting publicly the results'»: the appointment to boards of directors of

persons previously unaffiliated with

the corporatlonu-: restrictions on the

future employment of defendants as

officers or directors of publicly-held

cornpaniesus: limitations upon the voting of securitles->: the return to publicly-held corporations of monies improperly obtained by insldersr»: and

the appointment of an independent

master to oversee the operations of a

corporatlon'>.

In the majority of its cases,the Commission is able to settle with respondents or defendants on terms which secure the necessary remedial relief.

Generally, respondents or defendants

who consent to such settlements with

the Commission do so without admitting or denying the factual allegations

contained in the Commission's com37
plaint or order for proceedings. Thus,

unless otherwise noted, in the discussion of cases which follows, it should

be assumed that settlements achieved

were upon that basis.

Energy-Related Cases

Due to the tax consequences of investments in certain energy-related

products, particularly oil and gas, and

the inherent attraction of such investments to investors, the Commission

has long had to devote enforcement

resources to the control of fraudulent

offerings in this field. With the advent

of the nation's energy crisis, fraudulent

offerings (and the Commission's response to them) have intensified.

Investors in these offerings are often

initially contacted as part of a nationwide, long-distance telephone solicitation campaign by salesmen.u? These

campaigns are typified by offerings

which fail to comply with the registration requirements of the Securities

Act of 1933 (Securities Act) and by the

making fraudulent statements to

investors to induce them to invest in

the offering. Investors are often persuaded to make their investments on

the basis of false statements or omissions concerning, among other things,

the funding of the entity in which the

investment is made and the use of the

investors' funds derived from the offeringliS; the risks associated with the investrnentus: the experience of the issuers' principalsw'; and the use of

special accounts in which investors'

funds would, purportedly, be placed

for protectionw, One of the major inducements to investors is the purported availability of special tax benefits. 122

SEC v. Atlas 011Exploration. Inc. 123_

On July 12, 1979,the Commission filed

a civil injunctive action against Atlas

Oil Exploration, Inc. (Atlas) and a number of other entities and individuals re38

lated to it. The Commission's complaint alleged that, in connection with

the offer and sale of approximately $3

million in unregistered fractional undivided working interests in oil and gas

leases, the defendants made a number

of untrue statements of material facts

concerning, among other things: (1)

the use of "special escrow" or "trust"

acounts for the protection of investors;

(2) that investors could recover their

investments in 1-'/2-2 years; (3) the experience of the driller of oil wells; (4)

that state securities commissioners

were receptive to Atlas' "openness and

full disclosure"; and (5) that wells

drilled would produce on the average

of ten barrels of oil a day per well. The

complaint also alleged that the defendants omitted to state material facts

concerning, among other matters: (1)

the entry of cease and desist orders in

seven states prohibiting the sale of Atlas securities; (2) the misuse of at least

$275,000 of the proceeds of the offerings; (3) that wells in the field where

the subject wells were to be drilled

were averaging less than one barrel of

oil per day per well; (4) that, based

upon the experience with production

of initial wells drilled by Atlas, investors could not recover their investment

in less than eight years; and, (5) that,

prior to their involvement with Atlas,

the oil well driller had drilled only 12

wells and the experience of the president and controlling shareholder of

Atlas was as a salesman with a com.

pany that had been enjoined in an action previously brought by the Commission. Additionally, in connection

with one of the offerings involved, the

complaint alleged the failure to disclose (1) contingencies in securities

gas pipeline connections; (2) that the

proceeds of the offering would be commingled; and (3) that 22 percent of the

total proceeds of the offering would be

paid to the president and a vice president of a related corporation.
Several of the issuers named as defendants in the Commission's action

consented to the entry of final judgments of permanent injunction. The defendants were enjoined from further violations of the registration and

antifraud provisions of the Securities

Act and the antifraud provisions of the

Securities Exchange Act of 1934 (Exchange Act). Individual defendants

consented to the entry of permanent injunctions enjoining them from further

violations of the antifraud provisions

of the Federal securities laws. Additionally, another corporation and its

principal officers and directors were

enjoined from further violations of the

antifraud provisions of the Federal securities laws and the defendant officers and directors were ordered to file

with the court an accounting setting

forth the receipts and disbursements

of five of the corporation's offerings.

SEC v. Advanced Fuel Systems,

Inc.124-On December 6, 1978, the

Commission filed a complaint against

Advanced Fuel Systems, Inc. (AFSI)

and an individual. The complaint alleged violations of the registration provisions of the Securities Act and certain of the antifraud provisions of the

Federal securities laws based on untrue statements of material fact and

omissions to state material facts to

investors including: (1) that $1 million

had been committed to AFSI for research and development of a fuel system when in fact less than $145,000

was available; (2) information that an

"international financier" was backing

the corporation with "unlimited funds"

when no such backing existed; (3)

omitting to disclose to investors the

dilution effect of previous stock splits

benefiting insiders; (4) failure to follow

generally accepted accounting principles when valuing a licensing agreement in financial statements. resulting

in an over evaluation of the agreement

by about 500 percent; (5) claiming the

availability of special tax benefits when

not available; (6) representations that

the fuel system would yield 100 miles

per gallon for automobiles when it was

known that that was not true; (7) omitting to disclose that claims of 66.8

miles per gallon in certain tests were

based on unsophisticated, nonscientific, nonverifiable and widely varying

test results; (8) representations regarding the cost of the finished product

when no facts were available to support any cost prediction; and, (9) omissions to disclose that funds from the

securities sales would be paid to the

individual.

The defendants consented to the entry of judgments of permanent injunction enjoining them from further violations of the registration and antifrauc

provisions of the Federal securities

laws. The order of the court also requires the defendants to provide a

copy of the ascertainable investors in

AFSI.

Questionable Payments

The Foreign Corrupt Practices Act of

1977 [Sections 13(b)(2), 30A and 31(c)

of the Exchange Act] (Foreign Corrupt

Practices Act) was signed into law in

December 1977. That Act prohibits issuers from, among other things, corruptly making payments to officials of

foreign governments in order to induce

such officials to use either their authority or influence to obtain business

for the issuer in that country. Among

other things, the Act also requires corporations to maintain systems of internal accounting controls which provide

reasonable assurance that certain objectives are met.

Disclosures of unethical and illegal

corporate activity resulting in part

from the Commission's enforcement

activities contributed to Congress' enactment of the Foreign Corrupt Practices Act. During the past year, the

Commission's enforcement interests in

39
this area continued and three of the important cases brought are described in

the following summaries.

SEC v. Hospital Corporation of America (HCA)12l-The Commission's complaint in the HCA case alleged violations of the antifraud provisions of the

Securities Act and the antifraud, reo

porting, and proxy provisions of the

Exchange Act in connection with disclosures regarding a contract for the

management of a hospital in Saudi

Arabia. The complaint alleged that,

prior to entering into the contract,

HCA was informed of facts which indicated that payments to persons of

power and influence in Saudi Arabia

would have to be made by HCA in connection with the contract. The complaint further alleged that a Liechtenstein entity which received a total of

$3.393 million from HCA, purportedly

for consulting and other services, was

merely a conduit for the improper payments. The Commission's complaint

also alleged that HCA made false and

misleading statements in registration

statements, proxy statements, and

other public documents filed with the

Commission and in connection with

statements made to the staff of the

Commission during an informal inquiry.

HCA consented to the entry of a final

judgment of permanent injunction

from violations of the antifraud provisions of the Securities Act and the antifraud, reporting, and proxy provisions

of the Exchange Act. In addition to the

injunctive relief the terms of the settlement provide that HCA's audit committee, acting with the assistance of its

counsel and its independent auditors,

will conduct a review of prior investigations by HCA of (1) direct or indirect

payments, if any, to agents, employees, or officials of foreign and domestic governments and of foreign domestic customers during a five year period

and (2) of the accuracy of HCA's books

40

and records as to the foregoing. HCA's

audit committee will prepare a written

report containing its findings and recommendations and any action taken

by HCA in response to the report will

be described in a current report filed

with the Commission.

SEC v. Schenley Industries, Inc.

(Schenley)126- This case involved allegations that Schenley had expended

at least $6 million by granting illegal

discounts, in the form of cash, credit,

free merchandise or other things of

value to selected purchasers of Schenley's products in violation ofstate liquor

regulations. As a result, the complaint

alleged, Schenley had jeopardized its licenses to do business in the 35 states of

the United States in which Schenley operated as a producer, importer and

seller of alcoholic beverages. The Com.

mission's complaint alleged violations

of the antifraud provisions of the securities laws.

The defendants consented to the entry of final judgments of permanent injunction. As part of its consent, Schenley agreed to, among other things, the

appointment of a Special Agent to conduct an investigation of Schenley and

its subsidiaries and render a report to

the Court and to the Commission de.

tailing: (1) illegal political contrlbutions made by Schenley and its subsidiaries; (2) illegal foreign payments

made by Schenley and its subsidiaries

for the purpose of influencing any foreign government or official thereof or

evading the laws of a foreign sovereign; (3) illegal kickbacks, rebates, discounts, refunds, allowances , or other

expenditures made by Schenley and its

subsidiaries to induce the purchase of

Schenley products, and the approximate dollar amount expended to the

extent that these facts have not been

previously disclosed; and (4) pending

investigations by state or Federal governmental authorities regulating the
liquor industry which may result in the

commencement of legal proceedings.

In addition, Rapid-American agreed

to file with the Commission a current

report: (a) within 30 days after the entry of the final judgments, setting forth

all facts, known as of that date, concerning Schenley's practice of granting

illegal discounts to induce and promote the purchase of Schenley products; and (b) upon the filing of the Special Agent's report, setting forth all

material facts contained therein.

SEC v. International Systems and

Controls Corporetionm-s-uv this action,

the Commission filed a complaint

against International Systems and

Controls Corporation (ISC) and certain

officers and directors seeking injunctive relief, appointment of a receiver

and other equitable relief.

The complaint alleged violations of

the antifraud, reporting and proxy provisions of the Federal securities lawsas

well as violations of the accounting

provisions of the Foreign Corrupt Practices Act. According to the complaint

the corporation made false and misleading disclosures or failed to disclose its commitments to pay a total of

$33 million, its payment of approximately $23 million in connection with

the securing or solicitation of business

in several foreign countries, its overstatement of its assets, earnings and

shareholders' equity. The complaint

further alleged that the corporation

failed to disclose that certain officers

were the prime beneficiaries of a deferred compensation plan and that corporate funds were used to purchase,

furnish and maintain a summer residence for the Chairman of the Board

of the firm.

The Commission simultaneously

filed with the complaint a motion for

a preliminary injunction against ISC

and for the appointment of a Special

Agent of the Court to take custody and

control of all assets of ISC; to oversee

the business activities of ISC to assure

that they are carried out for legitimate

purposes of ISC and not for the per.

sonal benefit of any control person,

officer, director or employee of ISC; to

determine whether ISC entered into

any transactions involving expenditure

of substantial funds or assetswhich appear not to have been engaged in for

legitimate business or are not adequately explained on ISC's books and

records; to recover any funds or assets

or enforce any liability to ISC; to oversee ISC's filings with the Commission;

and to authorize the agent to report his

findings to the Court within 60 days.

Government and Municipal

Securities

As indicated in last year's annual report.w the trading of government and

municipal securities has increased significantly in recent years. Due to the

continuation of questionable issuing

and trading practices in this area, the

Commission's enforcement interest

has also continued.

In February 1979, the Commission

transmitted to Congress its Final Report In the Matter of Transactions in the

Securities of the City of New York, and

simultaneously announced its conclusion of the investigation in that matter.129 The investigation, one of the

largest of most complex in the Commission's history, dealt with events occurring during the period from October 1974 to April 1975 when the City

faced a fiscal crisis and issued large

amounts of short-term securities. The

Commission had previously issued a

detailed Staff Report which described

the events leading to the City's fiscal

crisis. no

The Final Report issued in February

called for legislative action to solve the

deficiencies in the issuance and mar.

keting of municipal securities and concluded that the Commission should de41
vote its efforts to support such legislative solutions. The Final Report

also stated the Commission's conclusion that no enforcement proceedings

should be instituted in the matter.

Among the factors cited in the Final

Report for the Commission's decision

were the issuance of the comprehensive Staff Report-»: the change in the

City's administration since the issuance of the Staff Report; various remedial actions taken by those who

were mentioned in the Staff Report,

most particularly by the City itself;

Congressional and state actions with

respect to New York City's financial

difficulties, including the Federal legislation enacted in August 1978 which

imposes certain financial controls over

the City and requires, among other

things, that the City's financial statements be audited; and, finally, the

Commission's determination that enforcement action would have limited

additional remedial value and would

require the commitment of substantial

additional resources which, in light of

the above, could otherwise be used

more efficiently in discharging the

Commission's responsibilities.

The Final Report focused attention

on the area of municipal accounting

and financial reporting and stated:

"The Commission believes that legislation designed to standardize the

methods used in the preparation of

municipal accounts and the form and

content of municipalities' financial

statements should be accorded the

highest legislative authority."132

The University of Houston case-The

Commission continues to note instances of questionable practices in

connection with United States Government securities and related securities.

In this connection, of particular importance during fiscal year 1979 was the

Commission's so-called "University of

Houston" case.t» The case involved a

group consisting of an employee of the

42

University who was its government securities trader and various individuals

and securities firms. Securities involved in the case were government

securities (including so-called Ginnie

Mae's) and reverse repurchase agreements (a pledge of securities which

takes the form of a sale and buy-back

obligation).

The Commission alleged in its complaint that the University's employee

channelled securities transactions

through the securities firms and individuals who were defendants in the action,

to their benefit and to the University's

detriment. The complaint also alleged

that one of the securities firms involved

charged excessive fees to the University

and charged commissions to both sides

of transactions while purportedly acting

as a broker for the University. That firm

also allegedly agreed to execute transactions for the University at prices

away from the market and to "park"

government securities with the University. The complaint alleged that in the

event that the market price for securities increased, the securities were to be

sold back to the firm at the original

price. In addition, the complaint alleged that the firm, acting as a broker

or principal in trades with the University, engaged in trades covering approximately $318 million in securities

upon which the firm made profits or

commissions of approximately

$590,000.

The complaint also charged that another firm had defrauded the University

by charging excessive fees and by interpositioning with respect to $35 million

in government securities transactions

by the University. Over $130,000 in

commissions were generated by these

transactions.

Finally, the complaint alleged that

another firm was needlessly interpositioned with respect to the University's

trades in government securities to the

financial detriment of the University
and that excessive fees were charged

to the University in connection with reverse repurchase transactions. These

transactions were, allegedly, employed

by the University's employee as part of

an investment strategy whereby government securities were pledged in

connection with cash loans. The loans

were used in turn to purchase additional government securities. The firm

acted as a broker for the University in

trades involving about $1 billion in reverse repurchases and about $73 million in government securities transactions. The case resulted in the issuance

of injunctions against the principal defendants as well as a criminal proceeding in which they were found guilty and

sentenced to four years in prlson.i»

Industrial Development Revenue

Bonds-A persistent concern of the

Commission in the area of government

securities has been abuses in the offer

and sale of industrial development revenue bonds. These securities generally

are issued by municipalities to obtain

funds to erect industrial facilities which

are then leased to private corporations

for business use. Principal and interest

on the bonds is paid only with revenues

of the private corporation.

Industrial revenue bonds, though

subject to the antifraud provisions of

the Federal securities laws, are exempt

from the registration requirements of

those laws.

The Commission's Staff Report On

Transactions In the Marine Protein Corporation Industrial Development Revenue Bonds is illustrative of the types of

concerns arising in this area.m The

staff report details an unusually instructive situation involving a corporation which had sold stock to the public in an offering registered with the

Commission and, shortly thereafter,

also participated in an offering of industrial revenue bonds which were issued for the purpose of providing

funds to construct facilities for the corporation. The staff report discussed

disclosures made in the prosepctus for

the registered stock offering and compared them with disclosures in connection with the industrial development

revenue bond offering. The staff report

concluded:

'", [T]hat risk factors and other

important information relating to the

speculative nature of an investment in

Marine that were included in the common stock prospectus are absent from

the bond 'offering prospectus' and that

document contains considerable bullish promotional information that is inappropriate in a prospectus used to sell

securities."136

Other areas of questionable activities in connection with industrial revenue bonds which were the subject of

Commission action this year included

alleged situations where bonds were

sold prior to issuance, but after collecting the money from purchasers,

the promised bonds were not issued to

customers and, instead, the customers'

funds were converted to the promoter's

user»: nearly worthless bonds were

sold to investors at 94-98 percent of

face value138; principal and interest

payments were made from proceeds of

bond sales to conceal the fact that the

private corporation was not a going

concernus: and misleading quotations

were placed in interdealer quotations

rnedia'w

Options, Corporate Takeovers

and Tender Offers

During the fiscal year, the Commission brought a number of cases in situations where the investing public was

harmed as a result of practices by market professionals and others in connection with trading in options. Additionally, as the Commission noted in last

year's annual reportwr, the recent increase in the number of corporate

takeovers and tender offers has led to

an increasing number of Commission

43

"
enforcement actions in this area. In

this connection, the Commission has

brought an increasing number of cases

alleging insider trading based upon

material information regarding corporte takeovers and tender offers.

Options- The Commission's option

casesinvolved allegations that material

misstatements and omissions were

made to customers concerning, among

other things, the risks inherent in option trading strategiesl42; the potential

profits and rates of return involved in

options tradingI4'; and the suitability of

tradings strategies used for lnvestorsw.

In the Matter of Bear Stearns &

Co. 14'_This case is illustrative of the

types of trading practices which the

Commission uncovered during the

course of its investigations this year. In

this case, the Commission's Order Instituting Proceedings and Imposing

Remedial Sanctions alleged that transactions executed in accounts as to

which discretionary authority existed

were excessive in size and frequency in

light of the financial resources and

character of the accounts and that, in

connection with options trading, mao

terial misstatements were made concerning the existence of margin accounts, the meaning and purpose of

margin call notices sent to customers,

the significance of the large number of

confirmations slips received by customers and the meaning and purpose

of correspondence sent to a customer

with regard to activity in the customer's account. Additionally, the Order alleged that transactions in customer accounts were effected which

were not authorized by the customers

including trading in the options market, trading on a principal basis, and

trading in a margin account. Finally,

the Order alleged that transactions in

customer accounts were effected in

unseasoned and speculative securities

in disregard of or without inquiry regarding the suitability of the securities

44

to individual customer needs, circumstances or objectives.

SEC v. Santangelo & Co., 146_ This

was another significant action by the

Commission in the options area during

this year. The case involved fictitious

reports of options transactions on the

New York Stock Exchange (NYSE) and

the American Stock Exchange (Amex).

Specifically, the Commission's com.

plaint alleged that in varying periods

in 1974, 1975, and 1976, hundreds of

transactions in options were printed on

the stock and options tape of the Amex

when in fact no transactions had occurred. Additionally, the complaint alleged that during 1976 transactions in

stocks which should have been reported on the tape of the NYSE as single transactions were reported as several transactions. The complaint

further alleged that various of the defendants, either as specialists on the

subject exchanges or otherwise, either

caused a substantial number of such

erroneous reports or had reason to

know that those reports were being

printed and failed to take reasonable

and appropriate steps to prevent such

reports from being made.

Tender Offers-The Commission's

actions in the area of tender offers during the past year involved situations

where the Commission alleged that materially false and misleading statements

were made to investors concerning,

among other matters, the purposes of

the tender offer-v: financing arrangements with respect to the tender

offerl48, and the intentions of the tender

offerorl49

The defendants, two broker-dealers

registered with the Commission and

partners of each firm, consented to the

entry of judgments of permanent in.

junction enjoining them from violating

the antifraud provision of the Exchange

Act.

SEC v. BOC International Limitedvw-«

This was one of the more significant

•
Commission actions brought in the

tender offer areaduring the past year. In

this case, the Commission filed a complaint seeking injunctive relief against

aoc International Limited (SOC) a

United Kingdom corporation and its

wholly-owned subsidiary, SOC Financial Corporation (SOCF), a Delaware

corporation. The complaint alleged

that the defendants violated the tender

offer and reporting provisions of theExchange Act in connection with SOC's

tender offer for shares of Airco Inc.

(Airco).

According to the Commission's

complaint, SOC and Airco entered into

a series of agreements governing potential tender offers by one firm for the

securities of the other. Pursuant to

these agreements, SOC acquired a 34

percent interest in Airco and subsequently increased that interest to 49

percent. The latter tender offer was

oversubscribed. SOC subsequently announced a tender offer for all Airco

shares at the same price as the previous offer. Pursuant to their agreement, Airco disapproved the tender

offer for the remaining outstanding

shares based upon the inadequacy of

the price and sued SOC to rescind the

offer. SOC withdrew the offer for all

outstanding shares but pursuant to a

prior agreement purchased an additional 6 percent of Airco. The latter

purchases were designed to frustrate

any competing offers for Airco and to

avoid entering a bidding contest for

Airco. Subsequently, Airco announced

an agreement in principle for a takeover of Airco by a third company at

$50 per share. Shortly after this announcement, SOC and Airco announced a settlement of their action,

pursuant to which aoc offered an additional $7 to all those who tendered

their shares in the offer that resulted in

SOC's obtaining the additional 15 percent of Airco, and agreed to make a

$50 offer for all remaining Airco

shares.

The Commission, in its complaint,

charged that SOC Ltd. violated the

antifraud provisions of the secunties

laws in that the tender offer materials

failed to disclose that in obtaining a

loan for the second tender offer, SOC

sought sufficient funds to acquire additional shares, that SOC's agreement

with its investment banker Included an

additional $1.5 million fee if SOC acquired 100 percent of Airco, and that

Airco's investment banker had formed

an opinion that a fair price for Airco

shares was $50-$55 per share. The

complaint also charged that SOC

failed to amend its statement filed with

the Commission with respect to its

holding of Airco shares on a timely basis and, when it did so, failed to disclose the purpose of its acquisitions

and subsequent action.

SOC consented to the entry of an injunction requiring compliance with the

tender offer and reporting provisions

of the Federal securities laws. SOC

also agreed to pay $2.75 million to certain individuals who tendered Airco

stock and to keep open the $7 offer to

Airco shareholders who tendered their

stock

SEC v. Sun Company, Inc.-In last

year's annual report, the Commission

noted the Sun case as one of its important actions in the tender offer

area.!» That case involved, among

other things, a Commission allegation

that the acquisition of approximately

34 percent of the outstanding common

stock of a publicly-held corporation by

means of an offer to certain institutional investors which was not made

available to the general public nevertheless constituted a tender offer. On

July 9, 1979 the United States District

Court for the Southern District of New

York rendered an opinion which found

that, indeed, that acquisition consti45
tuted a tender offer and was, accordingly, made in violation of the tender

offer provisions of the Exchange

Act.'"

Insider Trading-Among the Commission's actions in the insider trading

area during the last year, one of the

more important was In the Matter of

Oppenheimer [; Co. 1B The Commission

instituted proceedings in this matter to

determine whether Oppenheimer &

Co., Inc. (Oppenheimer), a registered

broker-dealer, failed to supervise Ira J.

Hechler (Hechler), a person subject to

its supervision with a view to prevent.

ing violations of the antifraud provisions of the Exchange Act.

Accordlnq to the Commission's Order Instituting Proceedings Hechler

was retained by Oppenheimer asa con.

sultant for special acquisitions. Hechler occupied offices at Oppenheimer

and utilized their facilities. Transactions proposed and the companies recommended by Hechler as potential

subjects for special acquisitions were

reviewed by senior principals of Oppenheimer.

In his capacity as a consultant

for special acquisitions, Hechler researched and investigated publiclyheld companies for sale of assets transactions and often engaged in the negotiations involved in such transactions. As result of these activities,

Hechler obtained material non-public

information concerning the companies

involved in such transactions as well as

the likelihood that the sale of assets

transactions would be consummated.

Specifically, Hechler knew that if the

transactions were consummated a

company involved in the transaction

would make a tender offer at substantial premiums above then prevailing

market prices.

The Commission determined that

Oppenheimer failed to reasonably supervise Hechler and thereby prevent

violations of the antifraud provisions.

46

Pursuant to an offer of settlement, Oppenheimer was censured and agreed to

comply with certain undertakings. The

undertakings included among other

things, (1) that Oppenheimer would

obtain a written agreement from Hechler that neither he nor members of his

immediate household will maintain

any accounts with any other brokerdealer, (2) that as long as he is associated with Oppenheimer neither he

nor his immediate family will trade in

the stock of any company he is considering asa potential participant in a sale

of assets transaction without obtaining

prior written approval which Oppenheimer will not give unless the trading

is not based upon non-public information, and (3) that as long as Hechler

is associated with Oppenheimer he will

make all disclosures and reports that

Oppenheimer's employees are required to make in accordance with Oppenheimer's regular compliance procedures.

Other Significant Enforcement

Matters

In the Matter of United States Steel

Corporetioniw-« The Commission instituted proceedings in this matter to determine whether certain of the filings

of United States Steel Corporation

(USSC) made with the Commission

were deficient with respect to USSC's

policy concerning environmental regulation, its capital expenditure for

compliance with environmental control and its involvement in legal proceedings arising from its compliance

with environmental regulation.

In 1971, in recognition that environmental laws could have a material economic impact on corporations subject

to such environmental regulation, the

Commission issued a release informing registrants that disclosure of material environmental information i~-

c1uding environmental litigation and

the capital expenditure, earning pow-
ers, and business charge efforts in

connection with compliance with environmental laws was required by

Commission rules.i» In 1973, the

Commission adopted specific environmental rules which required disclosure

of material effects that compliance

with environmental regulation might

have upon a Registrant's economic position and disclosure of any administrative or judicial proceedings known

to be contemplated by governmental

authorities concerning violations of

environmental requlatlons.vs Subsequently, the Commission adopted a

rule requiring registrants to disclose

certain material estimated capital expenditures for environmental control

facilities.m

According to the Commission's Order Instituting Proceedings, USSCwas

aware that compliance with environmental regulations would require sub.

stantial expenditures. USSC prepared

its own estimates as to the cost of compliance as regulations were proposed

and adopted. USSC, in its filings, set

forth amounts spent or authorized for

certain periods without disclosing that

it had developed estimates of costs for

additional years, which costs would involve material capital expenditures.

USSC disclosed pending judicial proceedings, but failed to disclose exist.

ing administrative proceedings. Additionally, USSCstated in its filings that

it intended to resolve its environmental

problems. In fact, USSC pursued an

environmental policy of actively resisting environmental requirements

which it maintained were unreasonable. While the Commission's rules do

not require a disclosure of a general

corporate policy with respect to environmental regulation, if such a disclosure is made it must be accurate and

the disclosing corporation must make

any additional disclosures necessaryto

render the voluntary disclosure not

misleading. Also, if a corporation has

a policy toward compliance with environmental regulations which is reasonably likely to result in substantial potential fines or penalties, or other

significant effects on the corporation,

it may be necessary for the registrant

to disclose the magnitude of such

fines, penalties and other material off.

sets in order to prevent from being

misleading with regard to required dis.

closures concerning such matters as

descriptions or disclosures relating to

the corporation's business, financial

statements, capital expenditures for

environmental compliance or legal

proceedings. USSC did not make such

additional, necessary disclosures.

The Commission determined that

USSC's reports filed with the Commission for the years and interim periods

1973 to 1977 failed to comply with the

disclosure requirements of Section 13

of the Act and the applicable rules reo

lating to disclosures of environmental

matters. USSC submitted an Offer of

Settlement which the Commission determined to accept. The Commission's

Order required USSC to comply with

the undertakings set forth in its offer

of settlement which include, among

other things, that USSCwill, by various

means, provide notice to its stockholders of the existence of these proceedings and the Commission's Order, that

USSCwill amend its past filing with the

Commission concerning envlronrnental matters and that USSCwill retain a

consultant to conduct a study for the

purpose of estimating potential costs

to USSC of complying with environmental regulations.

SEC v. Rapid American Corporationiw-« The Commission filed a civil

injunctive action against Rapid American Corporation (Rapid), its subsidiary

McCrory Corporation (McCrory), Kenton Corporation (Kenton) and Meshulam Riklis (Riklis), Rapid's Chairman of

the Board, alleging violations of the

reporting provisions of the Federal se47
curities laws. The complaint also alleges that Rapid, McCrory and Riklis

violated the proxy provisions and that

Riklis and Kenton violated the beneficial ownership reporting provisions of

the Federal securities laws.

According to the Commission's complaint, Rapid, McCrory and Kenton

failed to disclose that they entered into

agreements with and paid fees to personswho were either personal creditors

of Riklis or persons who had a personal

business relationship with Riklis. The

agreements and transactions in question were allegedly either negotiated

or approved by Riklis at a time when

he was in serious financial difficulty.

The complaint also alleged that Riklis

was in a conflict of interest position in

negotiating and approving transactions with persons with whom he had

personal business dealings and that

these conflicts were not disclosed to

the Boards of Directors of Rapid,

McCrory, Kenton, security holders or

the public.

The defendants consented to the entry of final judgments of permanent injunction enjoining them from violating

the provisions of the Federal securities

laws charged in the complaint. In addition to consenting to the entry of an

injunction, Rapid agreed to appoint

four persons who had no previous affiliation with Rapid to its board of directors, and to form and maintain for

five years a Transaction Review Committee, composed of the four new directors, to review transactions between

Rapid and its officers, directors and

control persons. McCrory agreed to

abide by the undertakings of Rapid,

while Kenton agreed to adopt similar

policies. Riklis agreed to abide by

the undertakings instituted by Rapid,

McCrory and Kenton.

SEC v. The Fundpeck, Inc. u9_ln this

case the Commission sought injunctive relief against a mutual fund complex, the- investment adviser to the

48

funds and its broker-dealer subsidiaries, and certain directors, officers

and employees of these entities. The

Commission's complaint alleged violations of the antifraud, registration,

reporting, proxy and fiduciary obligation provisions of the Federal securities laws.

The complaint alleged that the investment adviser, in disregard of the

interests of the mutual funds and their

shareholders and in order to increase

profits to the adviser, promoted an

investment arrangement known as

switching. The switching program permitted and encouraged the funds'

shareholders to transfer their investments among the funds immediately

upon the placing of a telephone order.

This program resulted in frequent fluctuations in the assets of the funds and,

accordingly, an extremely high portfolio turnover with an attendant increase in brokerage expenses most of

which were rebated to the investment

adviser.

The complaint also alleged that each

of the directors of the Fundpack, Inc.

(Fundpack), in breach of his fiduciary

duty involving personal misconduct,

favored the management of the funds

by acquiescing in this conduct and by

renewing the investment advisory contract. The complaint further alleged

that the directors failed to conduct inquiries and consider information necessary for them to evaluate the switching program and the self-dealing

transactions by the investment adviser.

The mutual funds consented to the

entry of an order directing the appointment of independent directors and

special counsel. This order concludes

the Commission's action against the

funds; the action against other corporate and individual defendants continues.

Pursuant to the Final Order, the

Funds are required to appoint and

thereafter nominate and recommend
for election to their respective boards

of directors four individuals satlsfactory to the Commission, and the funds

must maintain, until at least one year

after the next meeting of their shareholders, boards of directors not less

than 80 percent of whose members are

satisfactory to the Commission. The

newly constituted boards are required

to call meetings of the Funds' shareholders within six months, at which

time they must recommend to shareholders the election of the required

proportion of directors satisfactory to

the Commission and recommend arrangements for the future management and disposition of the funds.

In addition, the Final Order requires

that the Funds retain a Special Counsel

to advise them until after the aforementioned shareholders' meetings.

The Special Counsel must among

other things, (1) supervise the filing and dissemination of registration

statements, prospectuses, annual and

periodic reports and sales literature,

receipts and disbursements by the

Funds, portfolio transactions and

proxy solicitations; (2) consult with and

report to the Commission and the

Court; and (3) advise the Funds' boards

in their consideration of arrangements

for the future management and disposition of the Funds. After the perform.

ance of all of his duties, the Special

Counsel must submit a final report to

the Commission and the Court.

The Final Order also requires that

within 20 days, the Funds must report

to shareholders concerning the Commission's Complaint, the history of this

litigation, and the actions taken and to

be taken pursuant to the Final Order

and any other consents, undertakings,

agreements or orders entered in the

action.

SEC v. Starr Broadcasting Group,

Inc.l60-ln February 1979, the Commission announced the filing of a complaint in the United States District of

Columbia against The Starr Broadcast.

ing Group, Inc. (SSG); William F. Buck.

ley Jr. (Buckley), formerly Chariman of

the Board of SBG; Peter H. Starr (Peter

Starr), formerly President and a director of SBG; Michael F. Starr (Michael

Starr), formerly Vice-President and a

director of SBG; Gordon M. Ryan

(Ryan), formerly General Counsel and

a director of SBG; Glenn E. Burrus

(Burrus), formerly a director of SBG;

Maurice L. McGill (McGill), formerly a

director of SBG; Mack H. Hannah, Jr.

(Hannah), a director of SBG; and Columbia Union National Bank & Trust

Company (Columbia Union), one of

SBG's lenders.

The Commission's complaint alleged that certain of SBG's officers

directors, and others engaged in a five.

year course of business ultimately resulting in the purchase. by SBG of seventeen theatre properties (the Sitco

transaction) from Sitco, Ltd. (a partnership whose members were Buckley

Peter Starr, Michael Starr and Ryan)for

the purpose of extricating Buckley, Peter Starr, Michael Starr and Ryan from

a financial situation which would have

resulted in their personal bankruptcy;

that various filings of SBG failed to disclose or contained misleading disclosures with respect to the Sitco transaction: that SBG's outside directors,

after acting on behalf of SBG in approving the Sitco transaction, failed to

insure the accuracy of SBG's disclosures relating to this transaction; that

Burrus, as Columbia Union's senior

loan officer responsible for loans to

both SBG and Sitco, Ltd., was acting

in a manner which benefitted Columbia Union, to the detriment of SBG, by

approving the Sitco transaction, and

also failed to insure accurate disclosure of these matters.

Pursuant to the consents of the defendants, the Court enjoined SGB from

further violations of the reporting,

proxy, ownership reporting and margin

49
requirements provisions of the Federal

securities laws. Buckley, Michael Starr,

Peter Starr, Ryan, and Burrus, were en.

joined from violating the antifraud, reo

porting, proxy, ownership reporting,

and margin requirement provisions of

the Federal securities laws. Columbia

Union was enjoined from violations of

the reporting provisions of the Federal

securities laws. Smith, McGill, Francis

and Hannah were enjoined from fur.

ther violations of the reporting,

ownership reporting and margin reo

quirement provisions of the Federal

securities laws.

In addition to the entry of the in.

junctions, certain other equitable relief

was ordered by the Court or under.

taken by the defendants, including an

order to make disgorgement and an

order compelling Buckley, Michael

Starr, Ryan and Burrus to comply with

their undertakings that none will seek

employment asan officer or director of

a publicly-traded corporation responsible for filings with the Commission

for a period of years.

SEC v. American Financial Corpora.

tion161 The Commission filed a com.

plaint seeking injunctive relief and

other equitable relief against American

Financial Corporation (AFC), Carl H.

Lindner (Lindner), President, Chairman

of the Board and controlling share.

holder of AFC, Charles H. Keating Jr.

(Keating) former Executive Vice-President and Director of AFC, and Donald

P. Klekamp (Klekamp) a former director of a subsidiary of AFC. The

complaint alleged that the defendants

violated the antifraud, proxy and reo

porting provisions of the Federal securities laws.

According to the Commission's com.

plaint, Lindner and Keating caused, authorized or permitted a bank subsidiary

50

of AFC to extend substantial loans on

preferential terms to officers and dlrectors of AFC and to other persons associated with AFC, its subsidiaries, Lind.

ner or Keating. The complaint further

alleged that as the financial condition

of the borrowers deteriorated from

1973 through 1976 demands on the

prior loans were not made and new

loans were extended enabling the borrowers to pay interest on the prior

loans and service loans from other.

The complaint also alleged that

Lindner and Keating caused a subsldiary of AFC to advance funds to Klekarnp for the purchase of AFC stock on

the open market. The subsidiary failed

to disclose these loans in a registration

statement filed with the Commission.

While the subsidiary did disclose the

extension of such loans in its annual

report filed with the Commission, it

failed to disclose relevant facts and clrcumstances concerning the loans. AFC

and its subsidiary also made false reo

ports in filings with the Commission

concerning loans to Klekamp. The

complaint alleged numerous other vi.

olations concerning the extension of

loans by AFC subsidiaries.

The defendants consented to the en.

try of final judgments of permanent injunction enjoining them from further

violations of the antifraud, reporting

and proxy violations. Additionally, the

order consented to by the defendants

required AFC to establish and maintain an audit committee of its board of

directors consisting of at least two directors not having any previous business affiliations with AFC or its subsidiaries and to amend and correct its

prior filings with the Commission with

respect to matters alleged in the com.

plaint.

-
Programmatic Litigation and Legal Work

The Commission, through its Office

of the General Counsel, participates as

a party and as amicus in a substantial

amount of litigation in addition to its

enforcement actions. The results in

these suits often affect existing interpretations of the Federal securities

laws and/or the scope of the Commission's authority. The Office of the General Counsel is also involved in important non-Iitigatory work. The following

is a summary of some of the important

actions which were litigated in the past

year, and the status of other projects

of significance to the Commission and

the public.

Significant Court Actions

Touche Ross & Co., et al v. SECTouche Ross raised questions about

the Commission's power to regulate

the conduct of accountants and other

professionals who practice before it.

Rule 2(e) of the Commission's rules of

practice, first promulgated over 40

years ago, authorizes the Commission

to censure, suspend, or bar from Commission practice, professionals found

to have engaged in various unethical

or unlawful conduct. The rule reflects

the Commission's need to rely heavily

on the integrity of accountants and

other professionals who prepare and

certify the accuracy of corporate filings

vital to investors.

Pursuant to Rule 2(e), the Commission had instituted proceedings

against Touche Ross and three of its

former partners. The order for proceedings alleged that in examining two

public companies, the accountants had

failed to follow generally accepted accounting standards and had no reasonable basis for their opinions regarding

the financial statements of these com.

panies. The respondents filed a district

court action attempting to halt the proceedings. They alleged that the Commission was without authority to

promulgate Rule 2(e), and had acted

"without authority of law" In instituting

the proceedings. On a motion from the

Commission, the district court dismissed the Touche Ross action, holding that the plantiffs had failed to exhaust their administrative remedies.

On appeal, the United States Court

of Appeals for the Second Circuit upheld the Commission's power to promulgate Rule 2(e). The Court first held

that the traditional exhaustion doctrine

did not apply where plaintiffs had challenged the agency's very authority to

promulgate the rule. In such cases, judicial review would not be enhanced

significantly by allowing the agency to

first develop the facts or apply its expertise. And, although the agency

could theoretically hold its own rule invalid, such a result was unlikely.

Turning to the merits, the Court held

that, the promulgation of Rule 2(e) was

valid as a "legitimate, reasonable and

direct adjunct to the Commission's explicit statutory power." The Court reasoned that a central purpose of the securities laws was the protection of

investors through the requirement that

issuing companies disclose fully to the

public information material to investment decision-making. The Commission, with its small staff, could not pos51
sibly review in detail each company's

financial statements; necessarily, then,

the Commission had to rely heavily on

both legal and accounting professionals to perform their tasks diligently

and responsibly. The Court concluded

that Rule 2(e) represents an attempt by

the Commission to protect the integrity of its most important processes,

and is therefore a valid exercise of

the Commission's general rulemaking

power.

SEC v. Aaron: SEC v. Coven-The

Aaron and Coven cases raised the important issue of whether the Commission must prove scienter in injunctive

actions brought under the antifraud

provisions of the Securities Act of

1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange

Act). In both cases, the United States

Court of Appeals for the Second Circuit held that scienter need not be

proved in such an action.

The Court of Appeals' holding in

Coven involved proceedings brought

under Section 17(a) of the Securities

Act. The Court noted that the language

of Section 17(a) does not indicate that

liability must be predicated in an intent

to manipulate, deceive or defraud, and

thus concluded that scienter is not an

element of a violation of that section.

The Court also stated that even negligent conduct is sufficient to impose liability upon an alleged aider and abettor who "should be able to conclude

that his act was likely to be used in issuance of the illegal activity ...... The

Supreme Court thereafter declined to

review the Court's decision in Coven.

In Aaron, the Court's holding involved injunctive proceedings under

both Section 17(a)of the Securities Act

and Section 1O(b)of the Exchange Act,

and Rule 10b.5 thereunder. Based on

its analysis of the language of Section

lO(b), the legislative history of the Exchange Act, the relationship between

Section 1O(b) and the express private

52

remedy provisrons of the securities

laws, and the effect of scienter standards on the overall enforcement

scheme contemplated by those statutes, the United States Court of Appeals for the Second Circuit rejected

Mr. Aaron's contention that the Supreme Court's decision in Emst & Emst

v. Hochfelder, 425 U.S. 185 (1976) in

which it was held that scienter is necessary in a private damage action under

Section 100b),compels the same result

in a Commission injunctive action. The

Court also rejected a scienter requirement for Commission injunctive actions brought under Section 17(a),

relying on its prior decision in Coven.

Mr. Aaron subsequently filed a petition

for certiorari in the Supreme Court.

The imposition of a scienter requirement in all Commission proceedings

brought to prevent recurrence of conduct that operates as fraud or deceit on

public investors, and the resulting difficulty in providing a defendant's state

of mind, would erode significantly the

Commission's ability to enforce the

Federal securities laws and deprive

investors of needed protections. Moreover, the question of whether scienter

is required in an injunctive proceeding

of Section 17(a) and Section 19(b) has

been and continues to be the subject

of substantial litigation. With respect

to Section lO(b), there has been great

uncertainty in the courts of appeals

and the district courts as to whether

scienter is an element.

Recognizing these factors, the Commission, in responding to Mr. Aaron's

petition for certiorari, has urged the

Supreme Court to grant the petition in

order to bring certainty to the administration of the Federal securities laws

and to conserve the resources now

being expended by courts and parties,

including the Commission, in litigating these issues. (The petition for certiorari was granted by the Supreme

Court on October 15. 1979.)
Burks v. Lasker-The issue raised in

Burks involved the extent to which

Federal policy, as articulated in the Investment Company Act of 1940 (Investment Company Act), limits the

power of directors of an investment

company to terminate derivative litigation brought by its shareholders.

Shareholders of an investment company registered under the Investment

Company Act sued the company's directors and its registered investment

adviser. The plaintiffs alleged that the

defendants had violated their duties

under the Investment Company Act

and the Investment Advisers Act in

connection with a purchase by the

company of Penn Central commercial

paper. The investment company's dis.

interested directors concluded that the

suit was contrary to the best interests

of the company and its shareholders

and moved the district court to dismiss

the action, which motion was granted.

The United States Court of Appeals

for the Second Circuit held that the Investment Company Act deprives independent directors of an investment

company of authority to terminate

nonfrivolous derivative litigation. The

Commission appeared amicus before

the Supreme Court, contending that

the Investment Company Act does permit investment company directors to

terminate such litigation, but only if

they are independent, fully informed,

and their decision is reasonable. The

Commission's primary purpose in participating was to persuade the Court

that consideration of State and Federal

law must be balanced and that Federal

law imposes a minimum standard on

directors' decisions to terminate derivative litigation, notwithstanding any

lesser standard of State law.

The Supreme Court held that State

law governing the authority of independent directors to discontinue derivative suits should be applied to the extent State law is consistent with the

policies of the Investment Company

and Investment Advisers Acts. The

Court reasoned:

"Although [a] state statute cannot be

considered 'inconsistent' with federal

law merely because the statute causes

the plaintiff to lose the litigation ... ,

federal courts must be ever vigilant to

insure that application of state law

poses no significant threat to any identifiable federal policy or interest. ...

"And, of course, this means that unreasonable ... or specific abberant or

hostile state rules ... will not be applied .... The consistency test guarantees that [n]othing that the state can

do will be allowed to destroy the federal right ... , and yet relieves federal

courts of the necessity to fashion an

entire body of federal corporate law

out of whole cloth."

Accordingly, the Court remanded

the case so that the Court of Appeals

could determine the scope of directors'

authority under State law to terminate

derivative litigation, and determine

whether State law is consistent with the

policies of the Investment Company

Act and the Investment Advisers Act.

With respect to this latter inquiry, the

Supreme Court observed that there

may well be "situations in which the

independent directors could reasonably believe that the best interests of

the shareholders call for a decision not

to sue .... " The implication of this

language is that it would be inconsistent with Federal policies to give effect

to a board of directors' decision which

is unreasonable-a pnnciple urged by

the Commission.

Ludlow Corporation v. SEC-In Ludlow, the United States Court of Appeals for the District of Columbia

Circuit affirmed the order of the

Commission approving the application

of the Boston Stock Exchange (BSE)

for unlisted trading privileges in the

common stock of Ludlow Corporation

(Ludlow). Ludlow raised the issue of

53
whether an exchange, in applying for

unlisted trading privileges in a stock,

must demonstrate that active trading

in the stock will take place in Its market. In approving the BSE's unlisted

trading application, the Commission

rejected such a requirement, in keeping with the Commission's long-standing policy, endorsed by Congress, of

liberally granting unlisted trading privileges as a means of promoting competition among the nations securities

markets.

In affirming the Commission's order,

the Court of Appeals emphasized the

importance which Congress attached

to the liberal grant of unlisted trading

privileges as a means to foster competition among exchanges, and the

role which unlisted trading must play

in achieving the objectives of a national market system. In specific, the

Court also clarified that the Commission's grant of unlisted trading privileges does not require a determination

that an active market will develop on

the applicant exchange. Rather, an applicant need only show that if an active

trading should develop, it will proceed

in a fair and orderly manner. As a result of Ludlow, the Commission has received renewedsupport to pursue a liberal approach in granting unlisted

trading privileges, thereby enhancing

the Commission's ability to facilitate

intermarket competition in a national

market system.

Belenke v. SEC-In Belenke, the

United States Court of Appeals for the

Seventh Circuit affirmed the Commission's order approving a proposed rule

change of the Chicago Board Options

Exchange (CBOE) to improve the

CBOE's system for handling and executing "limit" orders of public customers. "Limit" orders are those which

specify a minimum price at which a

customer is willing to sell, or alternatively, a maximum price at which a

customer is willing to buy a particular

54

security. Prior to the Commission's approval of the CBOE rule, members of

the CBOE were given exclusive appointments as board brokers to accept

limit orders in particular options from

other brokers on the floor, to store

those orders in limit order books, and

to assure timely execution of those orders when, and if, the prevailing market price matched the specified limit

order price. The CBOE rule eliminates

the system of exclusive appointment of

board brokers, and instead permits the

CBOE directly to provide limit order

book services through employees

known as "order book officials."

In its order approving the CBOE rule

pursuant to Section 19(b) of the Exchange Act, the Commission found

that the rule would further several

purposes of the Act-by improving the

efficiency of the CBOE's market, enhancing the floor surveillance capabilities of the CBOE, and fostering competition between the CBOE and other

options exchanges. The Court of Appeals, in affirming the Commission's

order in all respects, stressed that the

Commission's findings were predictive, policy-oriented decisions, and

hence judicial deference to the Commission's expertise was particularly appropriate. Applying a limited scope of

review, the Court of Appeals found that

the Commission's substantive findings

were not arbitrary or capricious. The

Court also found that the informal notice and comment procedures followed

by the Commission comported with

the requirements of the Exchange Act.

The Court thus rejected petitioners' argument that the more elaborate procedures of Section 6(e) of the Exchange Act were inapplicable, since

the fees fer limit order services under

the CBOE rule were not fees "charged

by members," but rather were fees

charged by the CBOE itself.

The Belenke decision is of importance both to national securities ex-
changes and the Commission as judicial recognition of an exchange's

ability to improve the operational efficiency of its market, consistent with

the purposes of the Exchange Act. The

Court of Appeals' decision reaffirms

that judicial deference should be accorded to the decisions of the Commission in exercising regulatory or

oversight authority over the operations of the nation's securities markets. Finally, this case gives effect to

Congress' intent that the Commission

have considerable flexibility in fashioning its administrative procedures

where the Commission acts through

informal, legislative-type proceedings.

Other Significant Projects

Implied Rights of Action-A number

of caseswere decided by the Supreme

Court in the past term concerning implied rights of action, which have a

substantial impact with regard to the

Federal securities laws. In Touche Ross

& Company, Inc. v. Redington, the

Court refused to imply a private cause

of action for violation of the books and

recordkeeping provision of the Exchange Act, becausethat provision, in

the Court's view, neither conferred special rights on particular parties nor prohibited certain conduct as unlawful.

Because the Court believed that the

provision was intended by Congress to

act as an early warning system-so

that the Commission could pursue its

enforcement obligations after reviewing the filings required to be madeimplied actions have by no means

been denied entirely.

The Court ordered that reargument

be held in Lewis v. Transamenca Mortgage Advisers, Inc., where the sole issue was whether private cause of action was implied for violations of the

antifraud provision of the Investment

Advisers Act. The Court had recognized the existence of private action

under the comparable antifraud provision of the Exchange Act, in Superintendent of Insurance v. Bankers Casualty & Life. While the Lewis case has

not yet been decided, the Court's opinion in non-securities cases, as well as

Touche Ross, bear on the continued inability of private actions for the violations of some of the statutory provisions of the Federal securities laws.

ALI Code-Over the past ten years,

the American Law Institute has sponsored the drafting of a Federal Securities Code, under the direction of Professor Louis Loss of the Harvard Law

School. In May 1978, the Institute's

membership approved a 766-page

"Proposed Official Draft" of the Code,

which is designed to replace the six

separate Federal statutes administered

by the Commission with a single comprehensive and unified piece of legislation.

The Commission and its staff spent

a great deal of time and effort during

the fiscal year analyzing and studying

the proposed Code in preparation for

its expected introduction in Congress.

The task of evaluating the benefits the

Code would offer and the possible difficulties it might create, in terms of

maintaining an effective scheme of

investor protection, is exceedingly

complex. While in many respects the

ALI draft seeks simply to codify exrsting law, it would make significant substantive changes in many other respects.

For example, the Code would replace the current emphasis on registration of individual offerings of securities

with a "continuous disclosure" system

based on issuer registration, and providing for less stringent filing and disclosure requirements in connection

with certain distributions of the securities of "one-year registrants" (i.e., issuers that have been registered for one

year). In addition, certain changes

would be made in tender offer regulation, including a ten-day preacquisi55
tion notice and publicity requirement,

along with express preemption of State

tender offer legislation. Also, investment advisers would be subject for the

first time to qualification and financial

responsibility requirements, and the

Commission would be given rulernaking authority over the unethical conduct of securities professionals. In the

area of civil liability, there would be

many new express rights of action created, along with a grant of authority to

the courts to imply private rights of action in certain circumstances. These

are but a few of the literally hundreds

of modifications that the Code would

make as compared with current law.

During the initial review of the proposed Code, members of the Comrnis56

sion staff held a series of meetings with

Professor Loss and his group of advisers to discuss concerns about both

substantive positions taken in the

Code and the drafting of various Code

provisions. In response, Professor Loss

has made a substantial number of technical amendments to the Code. In September 1979, the Commission itself

began meeting with Professor Loss, in

sessions open to the public, to discuss

the issues raised by the staff. As the

Code nears the beginning of Congressional consideration, the Commission

will be drawing together the results of

its review to help it determine what formal position to take before Congress

with respect to the Code.
POBLIC OTILITY

HOLDING COMPANIES

Composition

Under the Public Utility Holding

Company Act of 1935 (Holding Company Act), the Commission regulates

interstate public utility holding company systems engaged in the electric

utility business or in the retail distribution of gas. The Commission's jurisdiction also covers natural gas pipeline

companies and nonutility companies

which are subsidiary companies of registered holding companies.

There are presently 14 registered

holding company systems with aggregate assets, as of June 30, 1979, of

$47.5 billion. Total holding company

system assets increased by over $1.1

billion in fiscal 1979, even with the loss

of Ohio Edison Company who was

granted a Section 3(aX2) exemption

from the Holding Company Act in

April 1979. Total operating revenues,

as of June 30, 1979, were $17.9 billion, a $700 million increase over the

previous year. In the 14 systems there

are 60 electric and/or gas utility subsidiaries, 70 nonutility subsidiaries,

and 20 inactive companies, or a total

of 168 system companies, including

the top parent and subholding companies. Table 35 in the Appendix lists

the systems and Table 36 lists their aggregate assets and operating revenues.

Financing

During fiscal year 1979, approximately $2.7 billion of senior securities

and common stock financing of the 14

registered systems was approved by

315-805 0 - 80 - 6

the Commission. Of this amount, approximately $1.6 billion was long-term

debt financing, and over $1 billion was

for equity financing. These amounts

represent a 24 percent decrease in

long-term debt financing over fiscal

year 1978 and a 19 percent increase in

the sale of common and preferred

stock. In addition, the Commission approved over $3.5 billion of short-term

debt financing and $291 million of pollution control financing for the 14 registered holding company systems. Table 37 in the Appendix presents the

amount and types of securities issued

under the Holding Company Act by

these holding company systems.

Fuel Programs

During fiscal year 1979, the Commission authorized $460.6 million of

fuel exploration and development capital expenditures for the holding company systems. These expenditures

cover annual fuel programs subject to

regulation under the Holding Company

Act defined on geographical and functional terms. Table 38 in the Appendix

lists the authorization by holding company system for each fuel program.

Largely as a result of the energy crisis, holding companies have embarked

on major and expensive new commitments to acquire substantial additional

capital. Generally, the arrangements

involve formation of several new subsidiaries for producing, transporting

and financing fuel supplies or the investment of capital for the exploration

of and development drilling for minerai reserves with a right to production

57
accruing to such investment. Since

1971, the Commission has authorized

expenditures of over $2.6 billion for

fuel programs of holding companies.

Service Company Operations

At the end of calendar year 1978,

there were 11 subsidiary service companies providing managerial, accounting, administrative and engineering

services to 11 of the 14 holding companies registered under the Holding

Company Att. The billings for services

rendered to the holding company systems amount to $423 million or 2.37

percent of the total revenues generated

by the electric and gas operating utilities of the holding company systems.

All services are rendered at cost to the

operating utilities, with several systems including a return on capital in58

vested by the parent holding company.

Because the subsidiary service companies are service oriented, they are

heavily labor intensive having 11,061

employees and assets of over $229

million. During February 1979, the

Commission approved a proposed

amendment to the Uniform System of

Accounts for public utility service

companies. The revised system of accounts will (1) provide for closer coordination with the Federal Energy Regulatory Commission's Uniform System

of Accounts for electric and gas public

utilities, (2) facilities for conduct of audit and account inspection programs,

and (3) Improve reports filed by service

companies subject to the Act. The revised system of accounts is effective

January 1, 1980, for the 11 subsidiary

service companies.
CORPORATE REORGANIZATIONS

The Commission's role under Chapter X of the Bankruptcy Act, which provides a procedure for reorganizing corporations in the United States district

courts, differs from that under the various other statutes which it administers. The Commission does not intiate

Chapter X proceedings or hold its own

hearings, and it has no authority to de.

termine any of the issues in such proceedings. The Commission participates in proceedings under Chapter X

to provide independent, expert assist.

ance to the courts, participants, and

investors in a highly complex area of

corporate law and finance. It pays special attention to the interests of public

security holders who may not otherwise be represented effectively.

Where the scheduled indebtedness

of a debtor corporation exceeds $3

million, Section 172 of Chapter X requires the court, before approving any

plan of reorganization, to submit it to

the Commission for its examination

and report. If the indebtedness does

not exceed $3 million, the court may,

if it deems it advisable to do so, submit

the plan to the Commission before deciding whether to approve it. When the

Commission files a report, copies or

summaries must be sent to all security

holders and creditors when they are

asked to vote on the plan. The Commission has no authority to veto a plan

of reorganization or to require its

adoption.

The Commission has not considered

it necessary or appropriate to participate in every Chapter X case. Apart

from the excessive administrative burden, many of the cases involve only

trade or bank creditors and few public

investors. The Commission seeks to

participate principally in those proceedings in which a substantial public

investor interest is involved. However,

the Commission may also participate

because an unfair plan has been or is

about to be proposed, public security

holders are not represented adequately, the reorganization proceedings are being conducted in violation

of important provisions of the Act, the

facts indicate that the Commission can

perform a useful service, or the court

requests the Commission's participation.

The Commission in its Chapter X activities has divided the country into

five geographical areas. The New York,

Chicago, Los Angeles and Seattle reo

gional offices of the Commission each

have responsibility for one of these

areas. Supervision and review of the

regional offices' Chapter X work is the

responsibility of the Division of Cor.

porate Regulation of the Commission

which, through its Branch of Reorganization, also serves as a field office for

the southeastern area of the United

States.

During the fiscal year, the Commission entered three new Chapter X proceedings involving companies with aggregate stated assets of approximately

$69.9 million and aggregate indebtedness of approximately $93.6 million.

Including the new proceedings, the

Commission was a party in a total of

97 reorganization proceedings during

the fiscal year (a list of these proceed59
ings appears in Table 39 in the Appendix of this report). The stated assets of

the companies involved in these proceedings totaled approximately $4.9

billion and their indebtedness about

$4.5 billion.

60

During the fiscal year nine proceedings were closed, leaving 88 in which

the Commission was a party at year

end.
ADMINISTRATION AND

MANAGEMENT

During the fiscal year 1979, the

Commission stressed, more than ever

before, its commitment to improving

management information systems and

strengthening internal management

capabilities. This heightened emphasis

on enhanced administrative and managerial support is a direct reflection of

increased recognition of potential benefits that can flow to the public from

better systems, procedures, plans, and

organization structures. It is intended

that the initiatives of 1979 will emerge

in the form of operational economies,

increased effectiveness and greater responsiveness in the 1980's.

General Management and

Program Developments

The Commission undertook several

projects during the fiscal year which

resulted in management improvements and program efficiencies.

A management study conducted by

the Executive Director's Office in fiscal

year 1978 was the catalyst for organizational changes in the Division of Corporation Finance that will be implemented during the next fiscal year.

Major recommendations for the study

concerned development of a review

strategy for disclosure filings and the

need to restructure the division's workload by industry groupings so as to allow Commission staff an opportunity

to develop expertise concerning peculiar industry patterns and trends, and

to allow more informed review of priority filings. During 1979, a Corporation

Finance task force studied these recommendations to assesstheir feasibility and to propose a plan for implementation. Based on the findings of

the task force, a plan for such a restructuring wasaccepted and is intended for

implementation during fiscal 1980. At

the close of the fiscal year, negotiations were underway, with faculty from

the Harvard Business School, to provide expertise and assistance in implementing industry specialization, a new

and cost effective filings review strategy, and a quality control program.

An intensive workload/cost analysis

of the Chicago Regional Office resulted in decisions to close the Cleveland and St. Louis Branch Offices and

to consolidate these operations with

those of the parent office In Chicago.

This decision was based on a changing

dispersion of activities due to the

emergence of options markets in Chicago, a reduction of enforcement activity in the branches and development

of specialized units in Chrcaqo, Apart

from major operational improvements,

it was also concluded that there were

some cost benefits to be derived from

taking advantage of the economies of

scale available through consolidation

of activities at the principal office.

An organizational analysis of the Office of Public Affairs led to a decision

to split the legislative and public information functions. A new Office of Legislative Affairs was created within the

Office of the Chairman and given responsibility for handling matters relating to legislation and legislative liaison. The Office of Public Affairs will

continue to handle general public in61
formation and press relations functions.

The Office of the Executive Director

conducted a major management review of the Division of Market Regulation. The study report to the director

and management staff of the division

resulted in significant changes in both

internal procedures and organizational

structure. The study also served as a

basis for an increased focus, within the

division, on such issues as communication, project management, training,

recruitment, and financial recordkeeping and controls.

Information Systems Management

In fiscal year 1979 the Commission

made vast progress toward improving

its information handling processes.

Detailed specifications regarding computer processing capabilities that will

be required to meet the agency's data

processing needs over the next five to

eight years were completed, and a

formal request for delegated procurement authority was presented to the

General Services Administration

(GSA). In anticipation of GSA approval, steps were taken to develop solicitation documents that will result in

the installation of a new computer system by the end of fiscal year 1980.

Fectlities Improvement-While much

was accomplished in fiscal year 1979

toward meeting its long-term information processing needs, the Commission continued to make more efficient

and effective use of the existing IBM

360-65 computer installed in 1978. In

this regard, the memory capacity of

the central processing unit was increased and several components were

added to expand our on-line storage

capability-two actions that enabled

the Commission to process an immensely increased workload without

any degradation in system perform62

ance. Other steps taken to improve

processing activities included conversion to a more efficient operating system control program and utilization of

on-line programming and file maintenance techniques. As a result of these

improvements the Commission has

been able to continue to make significant progress in the development and

implementation of new information

systems while concurrently expanding

the use of the teleprocessing network

to include all of the Commission's regional offices. The network was scheduled to be further extended to include

four of the largest branch offices during the first quarter of fiscal 1980, with

the remaining branches scheduled to

come on line later in the year.

Major System Enhancements-Major

information systems implemented during 1979 included two systems for

which developmental work was initiated in 1978. The first was a comprehensive records management system

which, utilizing microfilm and teleprocessmg techniques, provides the

staff with the capability for directly entering and retrieving information relating to the receipt and disposition of

various reports filed with the Commission. As part of this project, on february 5, 1979, the Commission officially adopted microfilm as a substitute record for many of the paper files

previously maintained. Under this

mode of operation, microfiche copies

of filings can be easily and quickly

reproduced and distributed to all requesters, thus ensuring the highest

possible level of integrity as the official

file is centrally retained at all times.

Expansion of the micrographics program to include additional Commission files was scheduled for the first

and second quarter in fiscal 1980.

The second system involves an expansion of the Commission's Name

and Relationship Search system. The

new process provides the staff with a
facility for immediate terminal access

to an index of name and associated

data on companies and individuals

having a direct or indirect relationship

with the Commission, and replaces a

system of manual requests which very

often required several days to process.

A third system initiated in 1978, for

which extensive development work

was accomplished in 1979, is the Com.

mission's Case Activity Tracking System (CATS). Scheduled for operational

testing early in fiscal year 1980 and lrnplementation in the second quarter,

this system will promote better man.

agement by providing the Commission

with an efficient means of monitoring

current events and status of all active

investigations and litigation.

Other important systems work pursued in 1979 included the initiative of

a prototype correspondence tracking

system to more effectively control the

thousands of pieces of correspondence

flowing through the Office of the

Chairman, refinement and enhancement of various internal personnel,

position management, and cost accounting systems; expansion of the

complaint processing system to allow

for the experimental preparation of let.

ters and notices by means of automated electronic techniques; develop.

ment of a series of statistical programs

for use by the Commission's staff in its

special study of the options market;

expansion of the broker dealer/investment adviser data baseto produce various statistics incidental to a corporate

governance study being conducted by

the Division of Corporation Finance;

and development of a system for maintaining and reporting data filed pur.

suant to Section 4(2), Rule 146, of the

Securities Act of 1933 (Securities Act).

Developmental work on several

other information systems was also in.

itiated during fiscal year 1979, many

of which will be implemented by fiscal

year 1980. These included establishment of a generalized, user-oriented

information retrieval capability that

will operate through teleprocessing

and data base management tech.

niques; expansion of an existing system for analyzing data contained in Investment Company Annual Reports,

Form N-1R; creation of an on-line system for retrieving index information

relating to releases published in the

SEC Docket; and development of a series of computer programs for producing a variety of reports from data filed

by certain institutional investors and

investment managers under Rules 13d,

13f, and 13g.

Systems Administration-In addition

to these enhancements of agency information systems and automated

processing techniques, several other

measures were taken in fiscal year

1979 to enhance the internal management and administration of the Commission's data processing activity. An

important event was the reorgnization

of the Office of Data Processing designed to make it more adaptable and

responsive to the changing nature of

the Commission's automated data

processing (ADP) needs. A second undertaking involved an intensive program to enhance interrelationship between the ADP staff and the users of

ADP services. This was accomplished

through the adoption of a formal pro.

cedure for identifying and requesting

ADP support, the creation of a Com.

mission-wide ADP liaison group, and

the establishment of more effective

communication procedures to insure

that critical information waseffectively

relayed to and from ADP personnel.

Another step taken to increase ADP

efficiency was the elimination of inter.

nal cardpunching and transfer of this

function to a commercial concern. In

addition to substantial dollar savings,

this action has provided the Commission with much more flexibility in reo

63
sponding to changing data entry requirements.

One final issue receiving much emphasis dunnq 1979 was ADP security.

Recognizing that an expanded ADP

program would require much tighter

control and protection of ADP reo

sources, the Commission has taken

several actions toward bolstering its

ADP security program. These included

the establishment of a full-time position of ADP security officer, the conduct of an ADP risk assessment (to be

completed early in fiscal year 1980),

formalization of an interagericy agreement for back-up computer processing

time, and establishment of a personnel

screening program for ADP staff, as

mandated by the Office of Personnel

Management (OPM).

Market Oversight Surveillance

System

The Office of the Executive Director,

in cooperation with the DIvisions of

Enforcement and Market Regulation

and utilizing the services of an independent systems consultant, has been

engaged in the study and design of a

market oversiqht and surveillance system during the past year. That project

has resulted in a proposed design,

which is presently being reviewed by

the Commission staff. In addition, the

Commission is undertaking to implement a pilot of the proposed design in

order to test the design and evaluate its

potential for enhancing the Commission's oversight and surveillance functions. Budgetary approval by the Office of Management and Budget (OMB)

and Congress and procurement approval by GSA will be required before

any portion of the larger overall system

can be implemented. By mid spring

1980 the Commission is hopeful that

a determination will have been made

as to the scope and timetable for implementation of a larger system.

64

The proposed system would monitor

all securities markets activities and

seek to identify possible market irregulanties or violations of self-regulatory

organization rules and the Federal securities laws. It would thus enhance existing Commission facilities in areas

such as market surveillance and inspections of self-regulatory organizations and broker-dealers. Such a system will neither diminish nor supplant

the efforts of self-regulatory organizations to regulate their market places

and market professionals; rather it is

intended to provide the Commission

with a greater capability to detect and

follow-up on abberrant tradinq practices, particularly when subjects outside the jurisdiction of the self-regula.

tory organizations are involved. By

providing the Commission with enhanced Information analyzed for particular trading patterns, the system will

place the Commission in a better position to coordinate, with each self-regulatory organization, the Investigation

and follow-up of particular matters.

If the proposed system receives the

approval of the requisite governmental

bodies, implementation is expected to

require at least five years. Implementation will be geared to advancements

in the securities industry and to developments in the evolving national mar.

ket system.

Financial Management

The Commission collects fees for

the registration of securities, securities

transactions on national securities exchanges, and miscellaneous filings, reports and applications. In fiscal year

'1979, the Commission collected a record $33 million dollars in fees, representing approximately 47 percent of

the total funds appropriated by the

Congress for Commission operations.

These figures are up from $26 million,

representing 42 percent of funds appropriated in fiscal year 1978. Nearly
$4 million of the increase in collections was attributed to Securities Act

registration fees resulting from both

higher volumes and larger offerings,

while higher stock exchange volumes

accounted for $2.3 million of the increase.

In 1979, the Office of the Comptroller initiated implementation of an automated integrated financial management system. By the end of the fiscal

year, the system was producing comprehensive accounting and budget ex.

ecution reports which provide timely

information for budgetary review and

policy planning both Commissionwide and by organizational unit.

Fiscal year 1979 also saw partial implementation of"a budget formulation

system. Reports generated by this system present budgetary alternatives at

various levels of staffing and funding,

and are of considerable benefit in analyzing different zero base budget possibilities.

A position tracking system, developed in fiscal year 1979, has been implemented and will be fully operational

in the first quarter of fiscal year 1980.

Other current initiatives intended to

improve financial management or con.

serve resources include completion of

a budget handbook, continued automation of payroll, fee collection and

budget call procedures, and establishment of uniform agency policies on the

use of overtime and the employment

of temporaries. These projects will all

be carried over into fiscal year 1980.

Personnel Management

At the close of the fiscal year, the

Commission's total strength was approximately 2,020. About two-thirds of

these personnel were employed in the

agency headquarters in Washington,

D.C.; the remaining one-third were located in the nine regional and six

branch offices located in major financial centers throughout the United

States.

Although relatively small by Federal

agency standards, the Commission

recognizes the importance of personnel management as an internal part of

overall management effectiveness. It

has, therefore, initiated innovative programs leading to both more effective

use of personnel resources and the integration of personnel management

into general decision-making. Enactment of the Civil Service Reform Act

of 1978 (CSRA) has encouraged and

accelerated these Commission initiatives. The intent of the CSRA is to

place greater stress on performance, to

give managers the tools needed to

carry out their assignments and to hold

managers accountable for the effectiveness of their units. As a result, a

very substantial investment of staff

time and funds has been devoted to the

implementation of the Act, and an

even greater commitment will be required in fiscal year 1980. Although

the full benefit of this investment will

not be realized for several years, significant accomplishments are already

noticeable durmq the first year of the

CSRA's existence.

Senior. Executive SerUlce- The Commission was alloted 46 senior executive positions in the initial Senior Executive Service (SES) allocation, 44 of

which were filled by incumbents, as

provided by the new law.

Extensive training was given to senior executives regarding the objectives

and policies of the senior executive

service. This training included in-depth

briefings by officials for OPM, working

seminars of senior executives conducted by the Chairman and the Executive Director, and training sessions

presented by personnel consultants.

This training program had as its purpose education of key Commission officials as to the f1exibilities and opportunities offered by the CSRA for

65
increased effectiveness in personnel

management.

Based on a careful review of the literature, interviews and personnel specialists from academia and from the private

sector, and a review of programs in

other agencies, a performance appraisal system has been developed and

implemented for the members of the

SES. This system, which will be used as

a basis for determining assignments

and compensation, will be monitored

closely to identify necessary refinements and to ensure that it continues to

meet all of the objectives prescribed by

the CSRA_ Finally, an Executive Resource Board and a Performance Review Board have been established to

oversee and coordinate manpower

planning, recruiting, performance appraisals and other aspects of executive

personnel management.

Performance Appraisal-A great deal

of research and planning has gone into

the development of performance appraisal systems at the Commission. A

comprehensive promotion appraisal

program being conducted by OPM (and

reported in the 1978 Annual Report) is

continuing. When completed, this program is expected to replace fairly subjective judgments with valid iI1tlicators

of successful performance in attorney

positions. In addition to achieving a

higher degree of equity in awarding promotions, it is hoped that the new system

will enable Commission managers to

predict success in specific positions

with a higher degree of accuracy.

This effort is complemented by aseparate study being undertaken by a private consultant and an anticipated con.

tract with other consultants from OPM.

When these studies are completed, it is

expected that they will provide the basis

for a comprehensive, valid and equitable appraisal system for managers, supervisors, professional staff members

and clerical personnel.

Other Accomplishments Under the

66

CSRA-Procedures have been developed and implemented for the establishment of a probationary period for

newly appointed managers and supervisors, as provided in Title III of the

CSRA. This program enables division

directors and office heads to promote

qualified technicians and specialists

into supervisory positions, with the understanding that they can revert back

to prior positions after six months if

they do not give evidence of supervisory effectiveness. Planning is currently under way for the merit pay program required by Title V of the CSRA,

under which supervisors and middle

managers would be compensated on

the basis of accomplishments and organizational performance, rather than

on the basis of length of service.

On-going Programs-Title III of the

CSRA authorizes acceptance of volunteer services where they provide educational experiences for students. The

Commission is making extensive use

of this provision of the CSRA through

its student observer program, under

which law students work for the Commission for up to 20 hours a week. The

students receive course credits in lieu

of salary, as well as a first hand acquaintance with Federal employment.

A number of student observers have

already become permanent staff members following graduation from law

school.

Despite the heavy investment of

time devoted to implementation of the

CSRA, the Commission continued to

stress and initiate improvements in

other traditional areas of human resource management.

The Commission has continued to

refine its attorney recruitment system,

with the dual goal of attracting top caliber applicants and ensuring that persons employed represent a cross section of all segments of American

society. One notable achievement in

fiscal year 1979 was the Commission's
special effort to attract minority law

graduates. This was accomplished by

means of an enormously successful

"job fair" to which 129 law students

were invited. The students heard presentations from the Chairman, several

Commissioners, the Executive Director and the heads of all major offices,

resulting in the permanent employment of 11 minority attorneys and

summer job opportunities for four second year students. Another program,

carried out under the sponsorship of

the Office of General Counsel, resulted

in the hiring of four outstanding graduates who had served as law clerks to

district and appellate court judges.

The highly successful upward mobility program instituted in fiscal year

1978 was continued and expanded.

Ten additional upward mobility positions were established, bringing the total number of positions under this program to 22. This number, however,

only partially reflects the Commission's progress in upward mobility. As

a direct result of early successes with

this program, a number of entry-level

positions were established outside the

formal program; this will further assist

the agency in using the capabilities of

its existing staff, while at the same

time providing other bonafide ad.

vancement opportunities for lower

grade employees.

The Commission continued to em.

phasize staff training in fiscal year

1979. Approximately 850 of the Commission's 2,000 staff members attended formal training or development

programs during the year, an approximate 10 percent increase over 1978.

In particular, more staff time and

funds were allocated to managerial

and executive development than in any

previous year. The Commission was

represented at the Federal Executive

Institute's (FEI) seven week Senior Executive Education Program for the first

time, while five other senior managers

participated in FEl's three week leadership program. In addition, other key

staff members attended the Program

for Senior Managers at Harvard Business School, Managerial Grid, team

building programs and a program

sponsored by the National Institute of

Trial Advocacy at the University of Colorado. This emphasis reflects recognition of the increased attention to executive development that is required by

the CSRA, and will be further expanded in fiscal year 1980.

The employee counseling program

begun in fiscal year 1978 was expanded in an effort to be more responsive to the needs of employees, and to

enhance the role of the Commission

as a responsible and concerned employer. A discrete Employee Relations

unit was established in the Office of

Personnel, and its accomplishments

numbered among them expanded retirement counseling, counseling on financial planning, and more cornprehensive counseling on insurance plans.

The Commission conducted an aggressive Vietnam Veterans Week program, consistent with the spirit of the

Congressional resolution on this subject. The thrust of the program was to

sensitize the staff to the particular

needs of the Vietnam veteran, to promote the hiring and professional development of these veterans, and to

recognize their post-service as well as

service accomplishments.

The Commission also continues to

emphasize its highly successful program for the recruitment of handicapped persons. This effort reflects a

commitment to remove artificial bar.

riers-both architectural and attitudinal-to the employment of full utilization of individuals who, despite

handicapping conditions, are able to

make a meaningful contribution to

Commission objectives.

Equal Employment Opportunity-In

response to Title III of the CSRA, the

67
Commission has undertaken extensive

efforts to identify underrepresentation

of minorities and women on the staff,

both by grade level and by occupation. Strategies are being implemented

to correct the underrepresentation

through enhanced recruiting efforts directed to schools with large minority

and female enrollment, maintenance

of equal opportunity recruitment files,

expansion of the upward mobility program, activation of individual training

and development plans, and cooperation with OPM in eliminating many of

the complex procedures and requirements which have raised barriers to the

recruitment and hiring of minorities

and women. These procedural efforts

will be combined with seminars for

managers and supervisors designed to

stress recognition of EEO responslbilities and provide instructions in the

strategies which may be employed to

eliminate underrepresentation.

In part because of these efforts, the

total number of women attorneys in

the work force at the Commission continues to increase. Since 1977, 63

women attorneys obtained employment at the Commission, bringing

their total representation to 168 as of

the end of fiscal 1979. This increase

represents a 60 percent rise in female

attorney employment during the two

year span.

Correspondent to the rise in the

number of women attorneys, there has

been an overall increase in their total

percent of the Commission's attorney

work force. In 1977, women attorneys

represented 16.4 percent of the total

work force, whereas 22.5 percent of

attorney positions were held by women

in 1979.

Minority attorney employment rose

a healthy 21.4 percent during the period between 1977 and 1979. At the

end of fiscal year 1979, there were 51

minority attorneys employed at the

Commission as compared to 42 in

68

1977, 33 in 1975, and 11 in 1973.

Minorities generally registered

across the board gains in key professional and middle management positions (GS-13-15)' between fiscal years

1977 and 1979. At the close of fiscal

year 1977, there were only 37 minorities occupying positions in these

grades in contrast to 49 at the end of

fiscal year 1979, for a 32.4 percent increaseduring the two year period. Simi1arly, women also showed an increase

during this period-holding 82 GS-13

through 15 positions, up from 56 in

1977.

Activity Onder The Freedom Of

Information Act

Commission rules implementing the

Freedom of Information Act provide

that the public may inspect or obtain

copies of records maintained by the

Commission, with the exception of certain specified categories of information. During 1979, the Commission reo

ceived 1,318 requests for information;

up 5 percent from 1978.

Space Management

Problems stemming from inadequate and poorly planned space continue to present some of the Com.

mission's most serious operational

difficulties. Headquarters personnel

are scattered among three locations,

requiring costly, time consuming and

inefficient movement of equipment,

personnel and files. Some $150,000 is

spent on alterations each year in an

attempt to accommodate changing

staff requirements. In fiscal year 1979,

documentation for a consol ida ted

Headquarters building was again prepared and submitted to GSA.

In the meantime, the Office of Administrative Services and the Division

of Corporation Finance have continued to work with GSA in connection
with the refurnishing and alterations

necessary to allow for the eventual

movement of Commission personnel

from the sixth and seventh floors of the

old Federal Home Loan Bank Board

building to the third and fourth floors.

69

'Securities Exchange Act Release No.

15251 (October 20, 1978), 15 SEC Docket

1370.

'Securities Exchange Act Release No.

15250 (October 20, 1978), 15 SEC Docket

1355.

'SecurIties Exchange Act Release No.

15671 (March 22, 1979), 17 SEC Docket 24.

'Securities Exchange Act Release No.

15770 (April 26, 1979), 17 SEC Docket

369.

'Securities Exchange Act Release No.

16214 (September 21, 1979), 18 SEC

Docket 467.

"SecurIties Exchange Act Release Nos.

15413 (December 15, 1978) and 16215

(September 21, 1979), 16 SEC Docket 510

and 18 SEC Docket 475.

'Securities Exchange Act Release No.

15769 (April 26, 1979), 17 SEC Docket

361.

Securrties Exchange Act Release No.

15926 (June 15, 1979),17 SEC Docket 950.

9Bradford National Clearing Corporation et

al. v. Securities and Exchange Comrmssron

et sl , 590 F.2d 1085 (D.C. Cir 1978).

IOSecurities Exchange Act Release No.

15640 (March 14, 1979), 16 SEC Docket

1318.

Illd.

"44th Annual Report at 6.

"Securities Exchange Act Release Nos.

13760 (June 18, 1977), 12 SEC Docket

1275; 14056 (October 17, 1977), 13 SEC

Docket 366; 14057 (October 17, 1977), 13

SEC Docket 375; 14878 (June 22, 1978), 15

SEC Docket 98; 15026 (August 3, 1978), 15

SEC Docket 494; and 14991 (July 25,

1978), 15 SEC Docket 359.

"House Comm. on Interstate and Foreign

Commerce, 96th Cong., 1st Sess , Report of

the Special Study of the Options Markets to

the Securities and Exchange Commlssion

(Comm. Print 1978).

»ta. at 1.

'"Id.

FOOTNOTES

"Securities Exchange Act Release No.

15575 (February 22,1979),16 SEC Docket

1163.

"Securities and Exchange Commission

file Nos. SR-Amex-79-11, Securities Exchange Act Release No. 16145 (August 29,

1979),18 SEC Docket 195, SR-CBOE-79.9,

Securities Exchange Act Release No 16127

(August 21, 1979), 18 SEC Docket 162; SR.

MSE.79.18, Securities Exchange Act Release No 16254 (October 5,1979),18 SEC

Docket 612; SR-Phlx-79.7, Securities Exchange Act Release No. 16253 (October 5,

1979), 18 SEC Docket 611; and SR.PSE. 79-

13, Securitres Exchange Act Release No

16234 (October 2, 1979), 18 SEC Docket

561.

19Securities Exchange Act Release No.

15762 (April 24, 1979), 17 SEC Docket

356.

'044th Annual Report at 13.

"Securlties Exchange Act Release No.

15241 (October 18, 1978), 15 SEC Docket

1319.

"Securities Exchange Act Release No.

15765 (April 27, 1979), 17 SEC Docket

416.

"Securities Exchange Act Release No

16017 (July 11, 1979), 17 SEC Docket

1243.

"Securities Exchange Act Release No

15533 (January 29, 1979), 16 SEC Docket

854.

"SecuritIes Exchange Act Release No.

16049 (July 27, 1979), 17 SEC Docket

1475.

"Securities Exchange Act Release No.

16112 (August 16, 1979), 18 SEC Docket

67.

"Securities Exchange Act Release No.

14234 (December 14, 1977). 13 SEC

Docket 999.

'.Securities Act Release No 6099 (August2, 1979), 17 SEC Docket 1422

71

•
"Securities Act Release No 5979 (September 19.1978).15 SEC Docket 1109

'.Securltles Exchange Act Release No.

15289. (November 1. 1978). 16 SEC Docket

12.

"Securities Exchange Act Release No.

15683 (March 29. 1979). 17 SEC Docket

92

"SecuritIes Exchange Act Release No.

15867 (May 23. 1979). 17 SEC Docket 698

HExchange Act RuIe 1Ob-lO.Certain paragraphs of the rule became effective on

June 1. 1977. Securities Exchange Act Release Nos. 13508 (May 5. 1977). 12 SEC

Docket 299; and 14942 (July 7. 1978). 15

SEC Docket 245

"SecuritIes Exchange Act Release No.

15219 (October 6. 1978), 15 SEC Docket

1245.

"Securities Exchange Act Release No.

15220 (October 6. 1978), 15 SEC Docket

1260.

'6Securitles Exchange Act Release No.

15984 (July 2, 1979), 17 SEC Docket 1167

"SecuritIes Exchange Act Release No

16018 (July 11, 1979). 17 SEC Docket

1244.

38Commodlty Exchange Act, 7 U.S.c. ~2

(1977)

"43 FR 39956 (September 8, 1978).

'.SeCUrltles Exchange Act Release No

15898 (June 5.1979),17 SEC Docket 810

"Securlties Exchange Act Release No.

15899 (June 5, 1979), 17 SEC Docket 819.

4215 U.S.C. ~78aaa.7811l, as amended by

the Securities Investor Protection Act

Amendments of 1978. Pub. L No. 95-283.

92 Stat. 249

"Securities Investor Protection Act Release No 78 (October 20. 1978), 15 SEC

Docket 1438.

"'Securlties Investor Protection Act Release No. 86 (March 30. 1979), 17 SEC

Docket 235.

"17 C F.R. 300100 et seq

"Securities Exchange Act Release No.

15906 (June 8,1979).17 SEC Docket 891.

"Securlties Exchange Act Release No.

16156 (August 31. 1979). 18 SEC Docket

237

'.Securitles Exchange Act Release No.

14800 (May 25. 1978). 14 SEC Docket

1178.

"Securities Exchange Act Release No.

15827 (May 15. 1979). 17 SEC Docket 589.

72

'.Securitles Exchange Act Release No.

15998 (July 5. 1979), 17 SEC Docket 1176.

"Securities Exchange Act Release No.

15376 (December 1. 1978). 16 SEC Docket

333.

>2Securlties Exchange Act Release No.

16049 (July 27, 1979). 17 SEC Docket

1475.

»Securlnes Exchange Act Release No.

15812 (May 11. 1979). 17 SEC Docket 582

"[1976-1977 Transfer Binder] Fed. Sec.

L. Rep. (CCH) '95.627 (S D.N.Y. 1976).

"Securities Exchange Act Release No.

15411 (December 13, 1978) 16 SEC

Docket 435.

'6Securities Exchange Act Release No.

15936 (June 19, 1979), 17 SEC Docket 985

l1Securities Exchange Act Release No.

15885 (May 30, 1979), 17 SEC Docket 754.

'.Securlties Exchange Act Release No.

16282 (October 16. 1979). 18 SEC Docket

673.

"Securitles Exchange Act Release No.

15860 (May 23. 1979). 17 SEC Docket 695;

Securities Exchange Act Release No. 16208

(September 18. 1979), 18 SEC Docket 403

"Securities Exchange Act Release No.

14531 (March 6, 1978).14 SEC Docket 356.

6'Securlties Exchange Act Release No.

16294 (October 24, 1979), 18 SEC Docket

728.

"Securlties Exchange Act Release No.

15838 (May 18. 1979), 17 SEC Docket 678

6'Securities Act Release No. 6084 (June

25. 1979), 17 SEC Docket 1048.

"Securities Exchange Act Release No

16226 (September 27, 1979). 18 SEC

Docket 509.

6'Securities Exchange Act Release No.

16162 (September 6. 1979). 18 SEC Docket

241.

66Report of the Advisory Committee on

Corporate Disclosure, Chapter XIV. Page

427 (1977).

61Securlties Exchange Act Release No.

13482 (April 28. 1977). 12 SEC Docket

239. Securities Exchange Act Release No.

13901 (August 29. 1977). 12 SEC Docket

1630.

"Securities Exchange Act Release No.

15384 (December 6. 1978), 16 SEC Docket

348.

6'Securities Exchange Act Release No.

16104 (August 13. 1979), 18 SEC Docket

91.
1°Securities Exchange Act Release No.

16356 (November 21, 1979) 18 SEC

Docket 997

"Securities Act Release No. 6003 (De.

cember 4, 1978), 16 SEC Docket 320.

"Securities Act Release No. 6027 (February 2, 1979), 16 SEC Docket 1138.

13Secunties Act Release No. 6085 (June

25, 1979), 17 SEC Docket 1057.

"Securities Act Release No. 6115 (August 30, 1979), 18 SEC Docket 220.

"Secunties Exchange Act Release No.

16163 (September 6, 1979), 18 SEC Docket

248.

1.Securities Act Release No. 6130 (September 27, 1979), 18 SEC Docket 453.

17lnthe Matter of Umted States Steel Corporation, Secunties Exchange Act Release

No. 16223 (September 27, 1979), 18 SEC

Docket 497.

18Securities Act Release No. 6032 (March

5, 1979), 16 SEC Docket 1261

19Secuntles Act Release No. 6075 (June

I, 1979), 17 SEC Docket 798.

8°Securities Act Release No. 6049 (April

3,1979),17 SEC Docket 153.

»ta.

8'Securities Act Release No. 6121 (September II, 1979), 18 SEC Docket 287.

"'SecuritIes Act Release No. 6136 (October 16, 1979), 18 SEC Docket 662.

84Securitles Act Release No. 6022 (February 15, 1979), 16 SEC Docket 973.

8'Secuntles Act Release No 6158 (November 29, 1979), 18 SEC Docket 1053;

Securities Act Release No_6159 (November

29, 1979), 18 SEC Docket 1092; and Securitres Act Release No. 6160 (November

29, 1979), 18 SEC Docket 1111.

8.Securities Act Release No 6100 (August 2, 1979), 17 SEC Docket 1449.

81Securitles Exchange Act Release No.

15572 (February 15,1979),16 SEC Docket

1155.

"44th Annual Report at 21.

89Securities Exchange Act Release No.

15920 (June 14, 1979), 17 SEC Docket 877.

"Securities Act Release No. 6006 (December 19, 1978), 16 SEC Docket 477; Securities Act Release No. 6007 (December

19, 1978), 16 SEC Docket 492; Securities

Act Release No. 6008 (December 19, 1978),

16 SEC Docket 498.

91Secunties Act Release No. 6127 (September 20, 1979), 18 SEC Docket 384.

315-805 0 - 80 - 7

9'Accounting Series Release No. 177

(September 10, 1975).

"Investment Company Act Release No.

10891 (October 4, 1979), 18 SEC Docket

637.

"Investment Company Act Release No.

10890 (October 4, 1979), 18 SEC Docket

635.

9'lnvestment Company Act Release No.

10736 (June 14, 1979), 17 SEC Docket 937.

96lnvestment Company Act Release No.

10828 (August 13, 1979), 18 SEC Docket

122

911nvestment Company Act Release No.

10740 (June 20, 1979), 17 SEC Docket

1021.

981nvestment Company Act Release No.

10690 (May 15, 1979), 17 SEC Docket 611.

99lnvestment Company Act Release No.

10827 (August 13, 1979), 18 SEC Docket

120.

'OOlnvestmentCompany Act Release No.

10809 (August 6, 1979), 18 SEC Docket 25

IOllnvestment Company Act Release No.

10862 (September 7, 1979), 18 SEC Docket

271.

IO'Securities Act Release No. 6034 (March

8, 1979), 16 SEC Docket 1267.

IO'ld.

I04SecuritiesAct Release No. 6140 (October 26, 1979), 18 SEC Docket 801.

!O'Securities Act Release No 6116 (August 31, 1979), 18 SEC Docket 222.

106lnvestment Advisers Act Release No.

664 (January 30, 1979), 16 SEC Docket

901

!01Securities Act Release No. 6019

(January 30,1979), 16 SEC Docket 837.

108lnvestment Advisers Act Release No.

680 (June 19, 1979), 17 SEC Docket 1029.

109lnvestment Advisers Act Release No.

688 (July 12, 1979), 17 SEC Docket 1293.

l1°SEC v. Lurnmis, Civ. Act. No. 75-

1089AJ2 (N.D. CaL), Litigation Release No.

8650 (January 19, 1979), 16 SEC Docket

833.

11IE.g., SEC v. lntemetionel Telephone {;

Telegraph Corporation, Civ Act. No 78-

0807 (D D.C.), Litigation Release No. 8834

(August 8, 1979), 18 SEC Docket 145.

I12E.g., SEC v. Rapid-American Corporation, CIV.Act. No. 79-2128, (D.D.C., filed August 16, 1979), litigation Release No. 8841

(August 16, 1979), 18 SEC Docket 149.

mE.g., SEC v. The Starr Broadcasting

73
Group, lnc., CIV. Act. No. 79-0357 (D.D.C.,

filed February 7, 1979), Litigation Release

Nos. 8667 (February 7, 1979), 16 SEC

Docket 1084, 8702 (March 26, 1979), 17

SEC Docket 147,8713 (April 9, 1979), 11

SEC Docket 286, and 8792 (June 22, 1979),

17 SEC Docket 1137.

114E.g., SEC v Amencan Ftnenciel Corporation, Civ. Act. No. 79.1701 (D.D.C.,

filed July 2, 1979), litigation Release No.

8806 (July 2,1979),17 SEC Docket 1219.

"'SEC v. Marlene Industries Corp., Civ.

Act No 79-1959 (S.D.N.Y., filed April 26,

1979), Litigation Release No. 8733 (April

26, 1979), 17 SEC Docket 406.

116SECv. The Fundpeck, lnc., Civ. Act.

No. 79.0859 (D.D.C., filed March 21, 1979),

Litigation Release No. 8698 (March 22,

1979), 17 SEC Docket 72.

117SECv. Production 011 Corporation, Civ.

Act. No. 135R (D. Miss.), Litigation Release

No. 8765 (May 24, 1979), 17 SEC Docket

792.

l1°SEC v. Advanced Fuel Systems, lnc.,

Civ. Act. No. 78-759M (W.D. Wash., filed

December 6, 1978), Litigation Release No.

8621 (December 21, 1978), 11 SEC Docket

581: In the Matter of Asset Secunties, lnc.,

Securities Exchange Act Release No. 16189

(September 12, 1979), 18 SEC Docket 317.

119SECv. Atlas Oil Exploration, lnc., Civ.

Act. No. S-79.0259(r) (S.D. Miss., flied July

13, 1979), Litigation Release No. 8835

(August 13, 1979), 18 SEC Docket 146;

SEC v. High Valley Investments, lnc., Civ.

Act. No. 76-39.M (D. Mont.), Litigation Release No. 8846 (August 21,1979),18 SEC

Docket 179; U.S. v. Carter, Crrrn. No. SA78-CR-015 (W.D. Tex.), Litigation Release

No. 8641 (January 11, 1979), 16 SEC

Docket 801; SEC v. Martin, Civ. Action No.

78-918 PHX CAM (D. Arlz., filed December

1, 1978), 16 SEC Docket 582.

'''''SEC v. Atlas Oil Exploration, lnc., supra

note 10; U.S. v Jones, Crim. Act. No. 78-

30019 (W.D. La., Indictment filed Septernber 30, 1978), Litigation Release No. 8566

(October 19, 1978) 15 SEC Docket 1349.

I2lSEC v. Atlas Oil Exploration, lnc., supra

note 10.

122SECv. Advanced Fuel Systems, lnc.,

supra note 9; U.S. v. Trahan, Crim. Act. No.

79.50008.01 (W.D. La., filed April 13,

1979), Litigation Release No. 8760 (May 17,

1979), 17 SEC Docket 652.

74

mSEC v. Atlas Exploration, lnc., supra

note 10.

124SECv. Advanced Fuel Systems, lnc.,

supra note 9.

I2lSEC v. Hospuei Corporation of America,

CIV. Act. No. 78.2027 (D.D.C., filed October

27, 1978), Litigation Release No., 8586

(October 27, 1978), 16 SEC Docket 72.

'26SEC v. Schenley Industries, lnc., Civ.

Act. No. 79-0855 (S.D.N.Y., filed February

26, 1979), Litigation Release No. 8679

(February 26, 1979), 16 SEC Docket 1256

I27SECv. Intemational Systems & Controls

Corporetion, Civ. Act. No. 79.1760 (D.D.C.,

filed July 9, 1979), Litigation Release No.

8815 (July 9, 1979), 17 SEC Docket 1302.

128SECAnnual Report 1978, at 34.

129Securities Act Release No. 6021

(February 5, 1979), 16 SEC Docket 951.

130Securities and Exchange Cornrnrssron

Staff Report on Transactions in Securities of

the City of New York, October 1977.

1311bld.

mSecurities Act Release No. 6021

(February 5, 1979), 16 SEC Docket 951,

959.

mSECv. Harwell, Civ. Act. No. H-78-1916

(S.D. Tex., filed October 5, 1978), Litigation

Release No. 8559 (October 5, 1978), 15

SEC Docket 1242; see also Litigation Release Nos. 8417 (May 24, 1978), 14 SEC

Docket 1216, 8541 (September 20, 1978),

15 SEC Docket 1150, 8600 (November 21,

1978), 16 SEC Docket 261 and 8690

(March 13, 1979), 16 SEC Docket 1355.

134UnitedStates v. Harwell, Crim. Act. No.

787.H.78-87 (S.D. Tex.), Litigation Release

No. 8600 (November 21, 1978), 16 SEC

Docket 261.

I3lSecurities Exchange Act Release No.

15719 (April 11, 1979), 17 SEC Docket

257.

136Ibld.at 259.

mU.S. v. Speer. Crim. Act. Nos. 77-

10034-01 and 10062-01 (D. Kan., filed

March 15, 1977), Litigation Release Nos.

8758 (May 17, 1979), 17 SEC Docket 651

and 8800 (June 27, 1979), 17 SEC Docket

1142.

13°SECv. Roberts, Civ. Act. No. 78-809

(W.D. Mo., filed October 16, 1978), Lltlqation Release Nos. 8564 (October 17, 1978),

15 SEC Docket 1347, and 8595 (November

6, 1978), 16 SEC Docket 139.
139Ibid.

'40lbid.

14lSECAnnual Report 1978, at 31.

lOIn the Matter of E.F. Hutton & Company,

lnc., Securities Exchange Act Release No.

15537 (January 30, 1979), 16 SEC Docket

871; SEC u. Fred Blumenstein, 78 Civ. Act.

No. 4805 (S.D.N.Y., filed October 13,1978),

Litigation Release No. 8569 (October 19,

1978), 15 SEC Docket 1350; In the Matter

of Robert T. ODonnell, Secunties Exchange

Act Release No. 15868 (May 24,1979), 17

SEC Docket 743.

wln the Matter of E.F. Hutton & Company,

lric., supra note 34; SEC u. Blumenstein, suo

pre note 34; In the Matter of Robert T.

O'Donnell, supra note 34.

'"In the Matter of E.F. Hutton & Company,

lnc., supra note 34; In the Matter of Robert

T. O'Donnell, supra note 34.

'''Securities Exchange Act Release Nos.

16023 and 16025 (July 16,1979),17 SEC

Docket 1313.15.

146SECo. Santangelo & Co., Civ. Act. No.

79.2097 (S.D.N. V., filed April 23, 1979), Lit.

igation Release No. 8729 (April 23, 1979),

17 SEC Docket 404.

,oSEC u. Telco Marketing Services, lnc.,

(D.D.C., filed July 13, 1979), Litigation Release No. 8821 (July 13, 1979), 17 SEC

Docket 1362.

'48SEC e. Fuqua Industries, lnc., Civ. Act.

No. 79.2204 (D.D.C., filed August 21,

1979), Litigation Release No. 8847 (August

21, 1979), 18 SEC Docket 180; SEC u. BOC

International Limned, Civ. Act. No. 79.0888

(S.D.N.V., rIled February 24, 1979), LItigation Release No. 8673 (February 21, 1979),

16 SEC Docket 1193.

'49SEC v. Telco Marketing Services, lnc.,

supra note 39; SEC v. Unued Technologies

Corporetion, Civ. Act. No 79.1648 (D.D.C.,

filed June 25, 1979), Litiqatlon Release No.

8793 (June 25, 1979), 17 SEC Docket 1137.

'''Supra note 40.

"'SEC Annual Report 1978, at 32.

152Litigation Release No. 8816 (July 10,

1979), 17 SEC Docket 1303

'''Securities Exchange Act Release No.

15994 (July 5, 1979), 16 SEC Docket 1172.

154Securities Exchange Act Release No.

16223 (September 27, 1979), 18 SEC

Docket 497.

"'Securities Act Release No. 5170 (July

19,1971).

156SecuritiesAct Release No. 5386 (April

20, 1973), 1 SEC Docket No. 12, p. 1.

Il7Securitles Act Release No. 5704 (May

6, 1976), 9 SEC Docket 540.

"'SEC v Repid-Amencen Corporation, supra note 3.

'''SEC u. The Fundpack, lnc., supra note

7.

'60SEC v. The Starr Broadcasting Group,

Inc., supra note 4.

161SEC u. Amencan Fmancial Corporeuon,

supra note 5.

75

Appendix

THE SEC(JRITIES IND(JSTRY

Income, Expenses and Selected

Balance Sheet Items

Registered broker-dealers recorded

total revenue of $11.2 billion in 1978,

25 percent above the level of 1977.

Securities commissions increased 34

percent in 1978, inflecting the surge in

trading volume, and represented 40

percent of total revenue. Trading profits were 18 percent higher in 1978 and

also represented 18 percent of revenue. Underwriting revenue declined

$42 million in 1978, after a similar $44

million decline in 1977 and represents

8 percent of total revenue.

Pre-tax income increased $46 million, or 8 percent, in 1978 because increased expenses nearly matched the

growth in revenues. Ownership equity

at the end of 1977 was $4,659 billion,

reflecting an increase of $544 million

or 13 percent during the year.

79
Table 1

FINANCIAL INFORMATION FOR BIlOI(ER.DElliRS

1975-1978

(11111_ of DalIan1

1975 1976 1977R 1978P

A. .....

1 Secunties CommISSIOns $ 3,378 $ 3,657 $ 3,334 $ 4,480

2 Gain (Loss) In Trading 1,202 1,828 1,691 1,993 3 G3In (Loss) In In>estments 132 269 353 391 4 Profrt (Loss) From Undefwntlng and Seiling Groups 930 1,035 991 949

5 Revenue from Sale of Investment Company Secunhes 140 165 161 162

6 Marlin Interest Income 476 557 782 1,223

7 Other Revenue Related to Securrt .. s BUSiness 897 1,168 1,055 1,696 8 Revenue from All Other Sources 218 236 564 303 9 Total Revenue $ 7,373 $ 8,915 $ 8,931 $11,197

I.Elpooses

10 Registered Represenlahves' Compensation $ 1,284 $ 1,575 $ 1,541 $ 1,945

II Employee Compensalion and Benefits 1,413 1,664 1769 2,143 12 Iornmrsstcns and Clearance Paid to Other Brokers 524 535 585 793 13 Interest Expense 668 900 1,246 1.964 14 Communications and Data Processing 488 590 708 780

15 Occupancy and EqUipment m 485 m 439

16 Promotion 159 203 203 218 17 Regulatory Fees and Expenses 76 81 69 72 18 Compensation to Partners and Voting Stockholder Officers 488 572 553 608 19 All Other Operating Expenses 681 805 1,255 1,598

20 Total Expenses $ 6,253 $ 7,410 $ 8,340 $10,560

21 Pre-Tax Income $ 1,120 s 1,505 $ 591 $ 637

C. Assets, lJaIxl_ and CoprtJl

22 Total Assets $31,851 $48,983 $54,670 $66,470

23 liabilities

a Total liabilities (excluding subordinated debt) 26,352 42842 48,794 59,500 b Subordmated debl 836 858 948 1,181

c Total liabilities (230 + 23b) $27,188 $43,700 $49743 $60,681

24 Ownership EQurly $ 4,663 $ 5,283 $ 4,927 s 5,789 25 Total lrabllrtles and Ownership EQUity $31,851 $48,983 $54,670 $66,470

Number of Firms 4,079 4,315 4,484 4,998

R R.. ised P Preliminary

Sources Form X-17A-10 and FOCUSReports

Office 01 Secunties Industry and Sell-Regulatory Economics

DIrectorate of Economic and Policy Research

Historical Financial Information

of Broker-Dealers with Securities

Related Revenue of $500,000 or

More

Brokerage firm revenue increased

23 percent in 1978 on share volume

which increased 37 percent over 1977.

Commission revenue and trading profits each increased, while underwriting

revenue declined somewhat from 1977

levels. Investment profits, interest income, commodity and other revenue

80

related to the securities business each

rose from the previous year. Pre-tax income increased 38 percent with this 23

percent rise in revenue.

Firms that reported securities-related revenue of $500,000 or more

held approximately 89 percent of the

industry's assets and reported 90 percent of all revenue in 1978. Balance

sheet data for the most recent two

years are not comparable with earlier

years because of changes made in the

brokerage firm reporting system.

=

=
Table 2

HISTORICAL CONSOLIDATED REVENUE AND EXPENSES Of BRDKER.DEALERS

WITH SECURITIES RELATED REVENUE OF $500,000 OR MORE

111011_ 01 DoIIonl

1970 1971 1972 1973 1974 1975 1976 1977R 1978P

1_••

1 Securrtles CommiSSIons $2,267 $3,287 $3404 $2816 $2438 $3,220 $3516 $2984 $3964 2 Gam (loss) on FirmSecuntles Trading and Investment

Accounts

a Gain (loss) In trading 824 1,056 994 590 m 1143 1757 1,512 1773 b Gam (loss) In meestrnents 75 243 209 -3 55 131 253 326 356 c Ictal I'ln (los<) 898 1299 1203 587 777 1274 2010 1838 2129 Proht (loss) from Underwriting and Seiling Groups 601 957 914 494 496 914 1021 929 838 Revenue from Sale of Investment Company Secunnes 184 196 151 149 79 120 146 138 138 Margin Interest Income 379 364 527 621 622 466 550 734 1107 Fees for Account Supemsmn. Investment AdviSOry,

and AdministratIve Services 64 82 99 83 85 156 207 176 232 Commodity Revenue 88 98 175 178 168 187 236 266 350 Other Revenue Related to Secunties BUSiness N/A N/A N/A N/A N/A 509 691 689 960 Revenue from All Other Sources 266 300 306 323 400 167 201 478 410

10 Total Revenue $4 747 $6583 $6,729 $5250 $5,065 $7013 $8,577 $8232 $10 128

lfI_

11 Registered Representatives' Compensatlon s 778 $1.139 $1.198 $ 937 $ 949 $1278 $1576 $1428 $ 1714

12 Employee Compensat,on and Benefrts 1,086 1300 1392 1,184 1,097 1376 1,668 1593 1,925

13 CommiSSions Paid to Other Brokers' 128 182 186 188 151 209 168 530 707 14 Interest Expense 540 520 634 796 750 582 839 1 149 1787

15 Communications and Data Processing 370 434 488 461 463 482 590 649 694

16 Occupancy and Equipment 349 413 460 433 440 464 486 372 381

17 Promollon 157 188 214 186 172 157 202 186 1%

18 All Other Operatlnl Expenses 606 787 794 686 634 1,416 1633 1639 1,776

19 Total Expenses $4 013 $4,962 $5,365 $4,871 $4655 $5963 $7162 $7546 $ 9181

C. .. 111 Income 20 Pre-Tax Income 734 $1621 $1365 s 378 410 $1,050 $1415 686 947

Number of FIrms 655 788 817 652 609 764 930 857 961

'Includes clearance paid to others beginning In 1977

R Re~sed

P Preliminary

Sources Form X.17A.10 and FOCUS Reports Office of Secunties Industry and Self.Regulatory Economics

Directorate of Eccnomrc and Policy Research

81

"

=

=
r.ble 3

HISTORICAL BALANCE SHEET FOR BROKER-DEALERS WITH

SECURITIES RELATED REVENUE Of $500,000 OR MORE

(11'1_ 01Dolllrtl

1970 1911 1972 1973 197( 1975 1976 1977 1978

A. AaoIs1 Cash, c1ea"ng funds and other deposits $ 1,162 $ I.221 $ 1,281 $ 1,139 $ 9(0 $ 925 $ U35 $ 979 $ UOS 2 Recel.. bles from other bro,",r.dealers

a Secuntles failed to deliver 2,319 2,230 2,568 1.8« 1.220 1,«6 2,215 2,375 2,m b Secunnes bofrowed 865 1,022 1,3M 1,096 889 1,366 2,091 2,307 2,819 c Other recelY3b1es 198 295 382 330 905 1.011 1,093 682 899 RecetYables from customers 7,077 9,6« 13,373 9,056 7,(50 8,(M 12,80( 13,728 15,(31

Market value or fair value of long positions," secuntres and commodities 10,261 11,667 11,870 9,722 10.789 12,901 21,392 28,521 33,061 5 Exchange membenhlps at market .. Iue 210 200 208 123 101 118 1(2 117 277 6 Other assets 1,392 I.M6 1.70( 1.879 1.(93 (,535 7,203 3,038 3,211

7 Total assets $23,W $27,925 $32,750 $25,189 $23.787 $30,826 $(8,075 $51,W $59,219

B.1JIbof_

8 Money borrowed $ 8,99( $11.286 $1(,398 s 9,878 $10,m $ H88 $11,802 $26,503 $27,565 9 Payables to other broker.dealers a Secunnes failed to receIVe 2,706 H2O 2,732 1.72( 1,281 1,(16 2,152 2,598 2,(50 b Secunues borrowed 836 98( 1,28( 8(7 579 1.Q6( 1.61( 1,770 2.1(3 c Other payables 198 3(5 35( 365 1,059 1.088 1,019 1.092 888 10 Payables to customers (,m V36 5,228 (,978 3,986 (,696 6,m 5.158 7,691

11 Short posmons In seeusnes and ccmrnodities 707 907 1,525 1.158 1.038 U65 2,555 (,83( 7,097 12 Subordmated borroWings Ml 728 m M2 m 767 799 8(0 973

13 Other "abilitIes 2,3(3 2,859 2,505 2,550 2,099 7,203 17,118 (,837 5,753

1( Total "abl"tleS 20,667 2UM 28,802 22,1(2 21,056 26,887 (3,293 (7,632 5(,560

C. Ow...... , EqallJ

15 Ownership equrty 2,818 3,661 3,9(8 3,0(7 2,731 3,939 V82 H15 (,659

16 Total "abl"tles and capital $23,(8( $27,925 132.750 $25,189 $23,787 $30,826 $48,075 $51.W $59,219

Number of Frrms 655 788 817 652 609 770 932 857 961

IThe balance sheet for 1977 IS not comparable WIth preY'Ous years' data because of changes the reportlOg form Sources Form X.I1A-I0 and FOCUS Reports

Office of secu"tleS Indust/} and self RegulatO/} EconomICS DIrectorate of EconomiC and PolIcy Research

Securities Industry Dollar: 1978

Securities commissions represented

39.1 cents of each dollar of securities

industry revenue. Another 17.5 cents

of each dollar came from trading activities and underwriting revenue contributed 8.3 cents. Together, these three

activities accounted for 64.9 cents of

each revenue dollar.

The largest portion of this revenue

82

dollar-35.9 cents-went to pay registered representatives and support

personnel (clerical and administrative

employees). Another 10.7 cents was

spent on communications, occupancy

and equipment. General partners and

voting stockholder officers' compensation amounted to 5.0 cents of each

dollar, with 9.3 cents remaining for

pre-tax income. This margin was 11

percent above the 1977 figure.

'

'"
w

::EoozX

<t

I-w

a:

a.. CZ

<t

enw

enzw

a.. Xww

::l Zw>w

a:

u.. o

enwo

II:

::l o

en

eel o e .~

0)-" ."'" e 0 <0:1 ...

Eo..

E:ll

0<0

00

iiieosEo

It

83

~
Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers increased from 4,484 in 1977 to 4,998 in

1978. Following the upward trend of

broker-dealers, the number of branch

offices increased to 6,706.

84

There were approximately 36,500

full-time registered representatives associated with members of the New

York Stock Exchange at the end of

1977.
Broker-Dealers and Branch Offices

o 3000 6000 9000

1972

1973

1974

1975

1976

1977

1978

T

T

~~:~~~~~~~~~~~~~~~:I~.: ....:~:~tlli~\~\;\~{(~::.:.:t~~~\~j~j~j\j~jt~:r.:;;./:~i~j~l 4255 I

I 7334

I

.;:~: :~.'~~:::':::::::~:~:~:~~~~~~I' ..:;:~:I~~~~~~I"" ..:./\nt?~ 4088 I

I 7223

I

'~1~1t:~:':'::i:1::~::;':.: :.t~:1t:r~:r;::'::':~:i:i:~:;:: 1~;~1~1;:1r::::'i:::i:\J~~~~\~1 4081 I

I 6301

I

~~::::::~:r:::~::~;:;}.:.: ..../i.:~::t:::~:~::ti~~~.;.:;;:~:;;~;1:~i{~:::~~\i:i:::.;.;:;~:;:t~1 4113 I

I 626 7

I

i:i:ii;1:i:::l1:::::::1;~\;:~:::~;ii1}~(}:~::;::.::.t(1t~:?:~::i:.::::t:{~:.:'J4315 1

I 6290

I

I t=t:::::..:::., ::/ij?i:i i;;:":::.:.:::.t~/?:::: :"':'::~:':'fb1{\;: :-,::.j~H 4484

I 6498

I

:::~~t\::.:.:.:.:.:.r;:~t~~~":~:.b" I -,:::.(:tIt.: .~)~~~f:::' .(\t~.'''14998 .:::: P .. .....

I 6706t

. 1 I ,

t: .::(t'i:" :J Broker -Dealers "",, .... '-- __ I Branch Offices

Rr Revised Er Esttrnate

SOURCE X-17A-l0 AND FOCUS REPORTS

85

~

'
Tlble 4

BROKERS AND DEALERSREGISTERED UNDER THE SECURInES ACTOF 1934-EFFECTIVE REGISmnONS AS OF

SEPTEMBER 30, 1979 ClASSIFIED BY TYPE OF ORGANIZATION AND BY LOCAnON OF PRINCIPAL OFFICE

Number of PropndlllS, Number of Registrants p.rt ners, OffIl:.... etc

locatIOn of Pnnelpll OffiCes Sole Sole Pro- p.rt. Cor. Pro- p.rt. Co< ToIIl pr> nero poq. ToIIl ,,> nero p0llet". ships bons etor. shiPS tKIIIS ships shiPS

AI.bam. 28 2 1 25 142 2 3 137

AlISkI 0 0 0 0 0 0 0 0 Anzona 22 3 I 18 80 3 5 71 ArlilnSls 18 2 0 16 79 2 0 77 Callforma 533 166 60 307 2.489 166 279 20« CoI".do 66 2 5 59 365 2 62 301 ConnectICut 66 9 8 49 360 9 41 310 Oefaware II 3 0 8 36 3 0 33 iJlstnct of Columbia 33 2 5 26 270 2 25 243 A",da 161 15 6 140 533 15 12 Georfa 44 1 2 41 288 1 4 283 HawaII 14 0 1 13 75 0 2 73 Idaho 8 2 0 6 24 2 0 22 IIl1l101s 1.854 1.358 145 351 3,438 1.358 694 1,386 Indiana .. 5 1 38 245 5 2 238 Iowa 29 2 0 27 134 2 0 132 Kansas 28 2 2 24 143 2 9 132 !(entucky 10 1 0 9 68 1 0 67 loutslana 24 5 4 15 188 5 16 167 Mame 8 0 3 5 41 0 19 22 Maryland 46 5 4 37 312 5 122 185 MasSlchusetts 151 24 14 113 879 24 85 770 Michigan 57 5 4 48 369 5 105 259 Minnesota 76 1 0 75 612 1 0 611 MISSISSIppi 19 0 3 16 80 0 7 73 MISSOUri 63 2 4 57 683 2 107 m Montana 4 1 0 3 23 1 0 22 Nehnslil 13 0 0 13 92 0 0 92 Nevada 2 1 0 1 4 I 0 3 New Hampshire 5 I 1 3 17 1 3 13 New Jeney 194 37 25 132 685 37 68 580 New MeXICO 8 1 0 7 37 I 0 36 New York (excludmg NY City) 279 87 24 168 1,092 87 202 803 North CaroilOa 29 4 0 25 145 4 0 141 North Dakota 4 0 0 4 16 0 0 16 OhiO 86 4 13 69 570 4 193 373 ~ahoma 25 4 0 21 123 4 0 119 Oregon 29 1 1 27 118 1 4 113 PennsylY301a 218 29 48 141 1.092 29 186 877 Rhode I~and 18 5 2 II 46 5 8 33 South CaroilOa 9 1 1 7 34 1 2 31 South Dakota 1 0 0 I II 0 0 II

Tennessee 45 2 2 41 312 2 29 281 Texas 156 15 7 134 1,063 15 31 1,017

Utah 30 2 2 26 135 2 7 126 Vermont 4 1 1 2 21 1 2 18 Virginia 29 4 4 21 284 4 15 265 WoshlOgton 60 5 0 55 315 5 0 310 west Virginia 6 I 0 5 20 1 0 19 WisconSin 41 8 0 33 378 8 0 370 Wyoming 6 1 0 5 22 1 0 21

Total (excludlOg NY Crty) 4.714 1.832 404 2,478 18.588 1,832 2.349 14.407 New York City 1.512 593 269 650 9.045 593 2119 6.333

Subtotal 6,226 2.425 673 3,128 27.633 2.421 4.468 20,740

For"gn 20 0 2 18 138 0 9 129

Grand Total 6.246 2.425 675 3.146 27,771 2.m 4.417 20.869

'Registrants whose pnnclpal offices are located In foreign countnes Of other luns(hctJons not lISted llndudes directors OffiCers, trustees and all other persons occupying Similar status performing smsar functIons

'AllocatIons made on the basrs of locatIOn of pnnelpll off.ces of registrants, not actual locatIOns of person~ 'Includes .11 forms of "ianllahons other than sole "opnetorshlps and partnershIps

86

~
Table 5

PRINCIPAL BUSINESS OF SECO BROKER.DEALERS

Exchange member pflmanly engaged In exchange ccmmesien business

Exchange member pnmanly engaged In floor activities

Broker or dealer In general secunbes business

Mutual fund underwrlter* Mutual fund distributor.

Broker or dealer seiling vanable annuity contracts

Solicitor of saVings and loan accounts

Real estate syndicator and mortgage broker and banker

Real estate condormmurn Interests.

limited partnership interests" Broker or dealer seiling 011and gas Interests

Put and call broker or dealer Of option writer (non-exchange options)

Broker Of dealer seiling secunnes of only one Issuer or essocrated ISSUers (other than mutual funds)

Broker or dealer sellmg church secunties

Government bond dealer (other than mUOIcipaQ

Broker or dealer In rnumopal bonds"

8foker or dealer In other secunties business

No secunnes busmess

Totals

.Not tabulated In prior years, new category on the Form SECD-4-76

"Based on data pronded by 316 of the 346 broker dealers

••• Based on data prtmded by 305 of the 387 broker-dealers

Fiscal year~nd

1977 1978 1979

18 15 6 11 18 8 61 65 33 9 11 7

5 4 1

10 11 8

5 6 5 33 35 31

3 5 1

13 15 71 11 10 19

3 5 4

11 13 33

10 11 9

1 3 0

5 5 4

46 18 38

11 15 15

309 316" 305'"

87
T,bI.6

APPUCATIONS AND REGISTRATIONS Of BROIlERS AND DEAL£RS

F/SCIIv.... 1979

8IOItEB-DDI.EB APPUCATIOIIS

ApplicatIOns pendIRg at close of precedIRg year

ApplicatIOns recerred dUring I/SCII 1979

TollIl appllcallons for dlsposrlJon

llosposrllon of ApplicatIOns

Accepted to< filing

Returned

Wrthdrawn

Denied Total applications dISposed of

ApphcatlOns pendIRg as of September 30 1979

BIOIEI-DDI.EB BEGISTBATIOIIS

Effectr .. registratIOns at close of precedIRg year

Regrstratlons effectIVe dUring fiscal 1979

Total registrations

Registrations termmated dunng fiscal 1979 Withdrawn

Rewked

Cancelled

Total registrations terminated

Total registratIOns at end of fiscal 1979

INVESTllEIIT AD¥ISlB APPUCAnOIlS

ApphcatlOns pendIRg at close of precedIRg year

ApplicatIOns received dunng fiscal 1979

Total apphcanons for dlSposr!lon

DISposition of applicatIOns

Accepted for filing

Returned

Withdrawn

Denied

Total apphcatons drsposed of

Apphcatlons pendIRg as of September 30, 1979

INVESTllEIIT AD¥ISlB BEGISTBAnONS

EffectIVe registrations at close of preceding year

RegIstrations effectl" dUring fIScal 1979

Total registrations

Reglstrallons terminated dUring fiscal 1979

Wrthdrawn

Rewked

Cancelled

Total reglstratKJnS termmated

Total regIstratIOns at end 01 fiscal 1979

88

ess

1,379

2,2«

1,025

328

0

0

l.353

891

6.007

1,025

7,032

7840

2

786

6,246

926

1,291

2,217

688

4800

0

1.168

1.049

5,205

688

5,893

2290

0 229

5,664
Table 7

APPUCATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES

DEALERS AIID TRANSFER AGENTS

f"Cal Y.. r 1979

IIl111lC1~ALSECUlmES DEAl£1S APPUCAT1011S

APllhcatoons pend,ng It dose of precedlnl ,..r

APllhcatoons receNOd dunnl f,seal 1979

ToIIl IpphcatlOllS for dlSj)OSlbon

DlsposrIlOn of Apphcabons

Accepted lor "lInl Returned

Wrthdrawn

Denied ToIIl IPllhcabons dISposed of

Appllcat,ons pendlnl as of Septembe, 30, 1979

IIUIICI~AL SECUlmES DEAl£1S IfGISTUTIOIIS

Effect"" re&.stratIOnS It dose of precedlnl ,.., R"IIslratlOns effect"" dunnl fiseal 1979

ToIIl 'er.strat,ons

HOIIstrabons term,nated dunnl fiscal 1979 Withdrawn

Cancelled

Suspended

Toul 'erlstritoons term,nated

Total rer,stratlons It end of f'SClI 1979

TlMSftI AGENTS APPUCAT1011S

ApplicatIOns pendlnl It close of precedlnl ,..r

Appllcat,ons 'ecetwed dunnl "seal 1979

Toul apphcatons for dlSpo$lt.on

Ilrsposrt,on of appllcahons

Accepted for f,lInl

Returned

Withdrawn

Den'ed Total appllclllOns dISposed of

ApplicatIons pendmg as of September 30, 1979

TlMSftI AGENTS IEGISTUT1011S

Effect,ve re&'strIllOns at close of p,eced,nl ,..r

RerlSl,at,ons effect"" dU'lnl f'SClI 1979

Total registratIOns

Rer,st,at,ons terminated dunnl "seal 1979 Wdhdrawn

Cancelled

Suspended

Toul 'erlstrabons term,nated

Total reglstratrons at end of fiscal 1979

315-805 0 - 80 - 8

10

1

o

o

32

3

o

o

21

11

32

11

21

336

10

346

346

19

34

53

35

18

861

32

893

891

89
Self-Regulatory Organization

Revenue and Expenses

Self-regulatory organizations receive approximately 70 percent of

their revenue from four sources: transaction charges, listing fees, communication fees and depository fees. The

nature of these revenue sources makes

the financial condition of self-regulatory organizations highly dependent

on trading volume.

Total share volume of securities

traded on all national securities exchanges and over-the-counter increased 37 percent between calendar

year 1977 and 1978, bringing 1978

share volume to 12.6 billion. As a result of this increased trading activity,

combined self-regulatory organization

revenue increased to $261 million, up

$24 million from the 1977 total.

Changes in major revenue components between 1977 and 1978 were as

follows:

Revenue from transaction fees increased to $52 million, from $37 million;

Revenue from communication

fees decreased $1 million to $41 mil.

lion;

Revenue from listing fees increased $800,000 to $43 million; and

Revenue from depository fees increased $8.7 million, to $47 million.

The expenses of the self-regulatory

organizations are concentrated in two

areas, employee costs and communications and data processing costs.

These costs accounted for 74 percent

of the $232 million in self-regulatory

organization expenditures for 1978.

The individual organizations are

quite different in their dependence on

particular sources of revenue. Some

sources of revenue, such as transaction, clearing and depository fees

change directly with changes in share

volume. Others are relatively fixed,

such as listing fees and membership

90

dues. The substantial growth in trading

volume during 1978 provides an opportunity to examine how changes in

volume affect each organization's financial results. The revenue increase

which accompanied the growth in

share volume was not as dramatic-l0

percent above 1977. Since operating

costs are largely fixed, however, the

growth in revenue yielded dramatically

improved pre-tax income. In 1978 the

net income of self-regulatory organizations was nearly $30 million, more

than the net income of the previous

two years combined.

The New York Stock Exchange

(NYSE) derived 44 percent of its revenue from its volume-related transaction

and depository fees in 1978. Relatively

fixed sources of revenue, such as listing

fees paid by corporations and communications fees and memberships dues

paid by brokers, generated another 42

percent of revenue, and miscellaneous

sources accounted for the remaining 14

percent. Pre-tax income in 1978, at

$18.8 million, was 75 percent higher

than in 1977.

The American Stock Exchange

(AMEX) generated only 23 percent of its

1978 revenue from volume-related

transaction fees. Its listing and communication fees and memberships

dues, however, each generated revenue

at a higher annual rate in 1978 than

1977. Pre-tax income for 1978 was

more than twice the 1977 figure.

Over-the-counter trading of listed

and unlisted issues in 1978 was 36 percent above the 1977 level. NASD revenue, however, is derived from sources

which do not vary with trading volume.

Registration, corporate finance and

listing fees, together with membership

dues, provided 87 percent of revenue.

Revenue in 1978, consequently, was

only three percent above 1977 annual

revenue, and pre-tax income slipped

55 percent.

The Midwest Stock Exchange's 1978

•

•

•

•
revenue was substantially reduced as

a result of the discontinuance of the

exchange's broker service bureau.

Nearly 72 percent of revenue, however,

is still volume-related, and the combined effects of the discontinued

losses and the growth in trading volume resulted in pre-tax income of

$720 thousand in 1978. Pre-tax losses

were over $1 million in 1977.

...,The Pacific, Philadelphia and Boston

Exchanges also depend on volume-related fees for most of their revenue.

Sixty-five percent of Pacific's, 81 percent of Philadelphia's and 80 percent

of Boston's revenue comes from such

sources. The record trading volume in

1978 raised Pacific's 1978 pre-tax income to a level nearly 12 times as high

as the 1977 figure. Philadelphia experienced a seven-fold increase, and Boston's pre-tax income figure in 1978 was

10 times higher than in 1977.

The Chicago Board Options Exchange, which is also highly dependent

on volume-related sources of revenue,

had a pre-tax profit of nearly $2.6 million in 1978, compared with a pre-tax

loss of $500 thousand in 1977. The

Cincinnati Exchange, which began an

electronic trading experiment in 1978,

now receives less in floor usage revenue and more in communications fees.

While its 1978 revenues were higher

than the previous year, 1978 operating

losses were $7 thousand, versus $20

thousand in pre-tax income in 1977.

The MSRB income of $590,960 during fiscal year 1979 (See Table 12) was

derived primarily from three fees established by rules adopted under the

Exchange Act. Municipal securities

brokers and municipal securities dealers are assessed (1) an initial fee of

$100, (2) an underwriting assessment

fee equal to .001 percent of the face

value of all municipal securities they

purchase from an issuer as part of a

new issue which has a final stated maturity of not less than two years from

the date of the securities, and (3) an

annual fee of $100 which, for this fiscal

year, it continued to be possible to offset by underwriting fees paid within the

calendar year. The underwriting assessment fee accounted for 70 percent

of the MSRB income during the fiscal

year 1979. The balance of MSRB income was from other fees and interest

income .

During fiscal year 1979, the MSRB

had total expenses of $866,323. The

major expense items were staff salaries

and employee benefits, including

MSRB contribution to an employee retirement plan established in 1978 (41

percent); meetings and travel (26.8

percent); and mailing list, rule manual,

postage and other printing (14.9 percent). Expenses exceeded income by

$275,363, due, in part, to a significant

reduction in assessment fees received.

As of September 3D, 1979, the MSRB

has a surplus of $632,823.

Aggregate clearing agency revenues

increased approximately $16 million

in 1978 to approximately $119 million.

Aggregate clearing agency expenses

increased approximately $12 million

in 1978 to approximately $112 million.

The 1978 increases in aggregate

clearing agency revenues and expenses of 16 percent and 12 percent

respectively represent a significant net

improvement over 1977 when the respective increases were 10 percent and

12 percent. The 37 percent increase in

trading volume for 1978 over 1977

discussed supra is the fundamental

reason for clearing agency revenues increasing at a greater rate than expenses. The 1978 aggregate revenue

increase of 16 percent is net of refunds, discounted fees or rebates

(collectively, refunds) of unneeded revenue made by some clearing agencies

to their participants. These refunds,

which have the effect of reducing fees

charged, totaled approximately $12

91
million in 1978 as compared to approximately $6 million in 1977.

The 1978 net excess of revenues

over expenses provided some clearing

agencies with an opportunity to replenish their retained earnings which had

92

declined during the previous several

years when expenses increased at a

greater rate than revenues. Expenses

exceeded revenues for only one clearing agency in 1978 compared with five

in 1977.
00

LncnClO_OOcn __ ~_,....C) ('o.j

OOl=o_....,OO('o.jCOLn..,.,....C'.!OO ...... O_C'oI"",,,,,_"'''''e-.lC_'''''

~;;~~..,;~~<.D~==...:~

~;~~~~~:=~~;;f!!~ it~gg~::f=~=Iri.. ...

Lnr-....,._(")OOcnlD

~~~g~~~~ ...., ;;t~....,OO--~~~ en

...

_cnOO _<D_CTJ ..,.

ClOC".l cn_O...., ..,. cn,......,. I:=> 00.,., .....

~~Nu-i..;..;~=

N

93

~ ~

~ ~ ~

~
+C'.l I I I l""'t'O") I I I~ ::; onLnI_ ..... I+('O')

('9") I I I I g;<.O I I

_<DonN

.....,..., ...... ...,

~~:::~~~:~ ; @ "....; N

a>(¥),....QO-.:rC'.lc¥)"'"

d'; ..0 ..... .........: ....:...... j" N

1;~~~~I: ::

00

m~~

~O~

_~m

~.n~

I I l~~:;;~ J~

N or>

~;;;J~~;~~""'~I~ N

94

~

...... J ~ ~

~~~~~~~~ ~ -

~

~
I :: I I I-~~I I I + I +~ ::: .;....

00 r-.n...,. __ tD

+00 I I I I ~-+ I I

r-(7)l''''')_O I <D~ClO_ I _OOOOO.n OO~ C~ i~ <¥ltD ......coon ClOOO_OO 0 ~~=: .....~onC'.I ___

~- '"' 0

'"'

00 <DC7> .... l""')CO I

........... _- I 00

......__ '""-_<=>

l""')a>(¥)COC'.l <D C""1<D 00C7><9')0:-..I00

C'.IOo:-..! - O'>l""') .......-C'.I 00 ::g N .....; ui N

l""')OCT><DCI'>C'o.!..., +~ I C'.INO>("o,I_<D C~ OOr-C'.I ..... ,......., ..... U"J r-r.,tl""')

z:

on .n<"')00>

0 .nl""') C'.l_C'.I O~

Q . ~...;...;.,.; N

'" '"' .n

Z

C OOOO""l""').nr-C'.tlrl<Dl""') 00 O'>N .......... e-s r-; <.lI 00 I

"" _U"JC".ICO.,..,...., .....cr>0000 a;: O..,.<"')r..lOOO

_a>OO<Docn_oo C".I CO..o_<DC'.ll""')

Q .....; N""';""';"n"': N .n 05 -: N

>-

""s

= ~~OO I I

<D.n ...........I cno.nOOa>...., ....... O~

<.lI OO~~ ::g .rJ..n C".la'> .nOClOtDC'.Il""') ~- ... ~O~ lDl9J<Dr.I _0">_""_0'> 0

"" ~~eO ~...;...;.

'" ~..,.- r.i"': ~...- :;; 05

il ...

en j >-

.. z

:! :z: 0 0>00 <DCO ..................... <DO ce e-,

8 00 OO~~ I I I

c NonO ...... :g CT>N..n

ClO<D_l""')C7>_

00 ......<D -~-~ '1 ... '0 :;; gr-i.....;o::i" ~OO...;_-N...; ~eO

"" -l!I

en

.. en i :a ... .8 ... en I::. OO~

.... z: I I I I I I I I I I g: ... 0 ~-~00_

OO~

.... cDr...;...; 05 .n 05 K

...

Q <=>

z:

c

en 00 I~ I I I 1"""""0.0 I 00 I I I ... 0 l~

= ~- z: N :f"":N' "':r.i ~...; N

...

,..

...

""Q

... ...,cn<Dr-C'.I I

l""')_o.t")oo I 00 0 ... ~i~~E~~~ c~ t"?...,.t")<NOO

0

00 0

a t"?('o,Il4")...., OO~_

,.....; ...;r.i - ... ....:

Q

'" 00 eo 0>..,. 1""')0 I

OOC'.l .,., I C'.lOQOOC'.lU")a'> 0 ocnOO<D ...... :!:~~~ ......cn<DC"?C'.IU") ~E cnc.DC'.l __

00 t""')OOl""')a>....,C'.I

N rr)~ '"' -: _-e-i :j ~g

~.z;

.g~

CI?<;;..eu

:~; g~~

!1~! :G c; :: ='

un :G E~~ ~.g-g£:

ftiOn;lftl

:; -E _- c;

:G .... Q. Q:: c; ~<=dO""

~.... i~~li~lji_ ....1ii-g-gSc~~

~~~~g~~8! gg~~~

i¥HHi~i~3g 1;'005 ;,~~i~0 g"g G> ! j E ~~t:;

l;i~ E:: c.~~ IEur;:Te~"Q8

%B5~~i~<V5 .. ~~~E~ :I~~8C3c!~c !I.UOI.Ua... cC «

..

E :f5~z~

95

~

~~ ~ ~~ ~~~ ~

~~~

~ ~ ~~~ ~ ~~ ~

~ ~

~ ~ ~~~~ ~~

~ ~ ~~ ~ ~ ....

..... ~ ~ ~~ ~~ ~ ~~ ~

....... ~ ~ ~ ___ _ ~ ~~ ~ ~ ~ ......... ~~ ~~ ~

~ ~~

~ ~ ~~~~ ~ ~ ~~ ~ ~

~ ~ ~ ~~ ~~ ~ ~ ~ ~~

~~~ ~~ ~ ~~~ ~ ~ ~ ~ ~~~ ~ ~ ~ ~

~

~ ~

~ ~~~~~~ ~~

~~ ~~ ~~ ~~~ ~~ ~ ~~

~

~ ~~~ ~~~ ~~ ~~~~ ~~ ~ ~ ~

~ __ ...... ~ ~~ ~~ ~ ...... ~ ~~ ~~ ~~

..... ~ ~~~~ ~~ ~ ~ ~~ ~ ~

~-

~~

~~~~ ~

~~~~

~ ~

~ ~

~ ~

~
96

.....COC)OO.C'.I 0<.0 00..,._ '""0 ...,(7'>-

--<.0<.0 _<DO-><=:> ...,.

C1">C'.I ..... <Den ...... ~....,<T)_-.<D

cr> __ cn .........,.

N U":IC7'>_

....... ClOcn~ ..... ~~=:!~~

cnCOcnU")('O")-

0'>_('0")<.0<.0 <Dc:n_CT> 0

_('T)<DN ......N ...., <Ql;"-.I...,

___ -<.0<.0

;;~~~-~-:::

C7'>u-.o_u:>_

0_....,00...,.0

--- -....... -

0000 0> 00 _<D_ U":I a>CJ'> N_

....;..;oo-=~::::

<Q 0 <D __

..., <Dt"'.lOI.t'l

...,. .n<D 00 <.0

~~~~~:;j

1 I I I I I

C'.IM<.o<D ..... <,D

......<Do.n<D..,.l"') .n..,.<DC'.Ilno_

....:....: .......

O<.O_OO.nOO

<DC7'>C7'>C7'><'O ..... C'.IOOO'>o.nC'.l_

"":r.,jfVJ

<.000

OOC'.l_<:=»O"lOO

c:nO.nNOLl")

~::~~~~

I I I I I I

.r.o ............ .r>...,.oo <DC'.I("'")<D...,.<=:> C'..l_..,. ......OOa>

_"';"';"':"';C".I

+ .....+ +--

I I I

ocn....,U") .......-- <.00 .....<.000 ....,-OO ......lrl_ N_<D..o~

......N_OO ......

000<.00'><,0"'" N_....,...,...,. ......

....,C'.I<,O ....0 ..,.....,00

C"")c:>U")

....;N_-eDu:5~

e::::~~::e;::~

s

_0'>C7'><D C7'> ......_C>.,., O ..,...,._ ...... 0:-..1_

~::C;;;-g~:;j

........r>C'l_OOOO =...., ..... ..... 01'> U")U")OOcn C1'>C1'>

....,OOOOC'.lOC'.l

...,....,000 ......0'>

""'0'>..00'-''''''

~~~;;;~~

,U":I-- ...... 00<.0_<.0

.......,., ......<.00>

_-NNNNI I I I I I

mNOQOO ..... o.n 1.t'l_C1'>O'>NC) OONOc:n

..,."..,.- _".n .n.n

t~~~~;::~ u.. 0'>C7'>CT>C7'>C7'>C7'>

~------

,;;

.::;

<DN ...... o.n....,OO r-N_C")cn..,.

""OOO>('9')NN

~g~~~-;

I I I I I I

I I_~~

I I Ien;:::

_....,<") ......1;'.,1...., U")_OOC'.l

_OOI.OC7'>C7'>CT>

oo .....~=:i:!

III I I I

..... ~"<1"l;',Ir-"<1" <,OU")r-O'>U")oo

r- U")"<1"00""" (',l

.,..)~.,..)~"<1"-

I I I I I I

I I OO<,O~~

(',1<=)<=)<=) ..... (',1 <,0 "<1"..... moo ......oom<,OU")

I I I I I I

o

igg~~

(',IO ......U")<,O...... <=)......U")oooom o.Do_ ......oo~

~g~;oci=f

I I I I I I

o,> ...... ......r-..., OOU")OOU")(',IOO

o.D(',I ..... (',I ......O

NNNN(',I"";

......(',I~O'> .....

o<=) ......~U")oo oU")o~U")<.O

~Nrvi....;(',IN

~::ri~~ I I

00"":000'>

"<1"0'> o.D0 0 ..... ......(',I_OOo.r:>o.D ..... <.0<.0 ..... 0

....;....;N~~C"1

I I I I I I

I I I I

I I , I I I

......ooo.D<.OO(',l

C)O'>~_ ......oo_U")U")o......

- - - - .

~~8co I I

(',I-"";N.,..)

I I I I I I

CO'-'-""'=""'..n v_....,..no.D..n

00"""""" 0 O<=)

"";NN<'"'i

-c- ec ce ea ec ea o m"" 0'> 0'>_ o.D......c..... ........... a>

~~~~;;;::;;

I I I I I

........... mooooc:;:> m .....0'> m...". ..... ..... c.....mooo,>_

...........mm...".-

I I I I I I

I I I I I I

I I I I I I

I I I I I I

,!\

~m_""<D""'oo

.... ...... --=: OO'>O'>O'>O'>C7'>O'> ...... ...... .....

!

~~~~~~

_ _ f

_

...... ...... = = -

...... __ ......

...... _ .......

_

~~~~~~

...... r

...... .....

.....

~ t

.....

...... ......

_

_

......

...... ..... _ __

~ ~ -

~~~~~~~ _ _ -

~
~~~ffi~~

_l,QI:'.lr- __

_Gr-oO"r-

! 0l,Qr-_C7'J00 r-r-~l,Q_r- r-l,Q .. r-I:'.I~

~=::f~~.n ~~~~.f;f~ ;J~i;;~

I I I~-~r-r-00~00" 1+ +- +- _____ 1:'.1

..

I I I I I I C7'Jor-OI:'.lr- 1:'.I:::::"01:'.lU"J OO_l,QOO"l.O ..... _oo~~oo U"J_OOO"OOo" e 1:'.1_00

~01:'.l"0"'" 00U"J"..n_~ ~~~~~5; 0.n .. ~~C'W') U"J00 ..... ~~r- __ l,QU"Jocn

OO~OOl,Q-

"- NN";".~~ Ntw?NN";ori ci -- N

I I I I I I oo<.Doo~C7'Jo" 0l"l.n ..... l,QC7'J U"J<.D_Or-~ ..... ...,0"01"0" _ooO'>_cn~ ...,00 O".n r- .....

>-

z ~~:!::~g ori o->::~~

00

.... I I I I I I

oocn..., .....

;::::Go~o- ....,U"J_O~ .. aol.O-c:n_ClO

.;, O...., ..... cn-~ ~r-....,O"O"ClO

.... z :i:::-~::::i:j ---:-:.--

W

=z: _r-r-~ClO .nr- ..... ClO

... ~~~::;~~ O"~<.DOr-ClO_ ...... ,.. '"

cn~ o~r-r-ClO_ cnr-~ .....

... "':060->::::::- .:,...,..;c-,iN";

Ill: .. z:

.", C>

.. I iii: I I I I I I _.n....,<,Dl.Do" _C'W')_~""'"",

8 ~~~C'.IN~c: c:

c.ll

Ill:

C> i

>- !! .. Ill: :;; e __ ~Oo"O

.n~00U"J~r-

... '-' U"JOOO"U"IOO" ~:;;~~~E l- S

=c.ll

...

Ill:

S I I I I I ~5~;~E Gi:il<.Da>Sr-

... __ ooO"oo.n

en -:Nt""i.:.: e~:-:.e~ ...

0

en

...

...

Ill: r-_l,Ql.D00C'W') ~r-.,., r- l,Q-l.D0_1:'.I

= 0.,.,,....<D0r-

<.D__ <D.no .,.,-.,.,.,.,....,~ 0 a>

l,Q0000_

ClOOOOOO'>ClOO ~- en

1:1 I I I ~-~ _~_ClOOr- GiDO"ClO<"CI~ .,.,~~_oo~

cn __ o"""'"

-~_<D<.D~

<,D0 __ NClO

";NNNM': -::::. ""';-:N

!~~~~;:::~

<5

97

~~

~

~

~

~~ -

~ __

~

~

~~ __ __

___ _

'" ~ ~ ~ ~

~

~ ~

~ ~

~~ __ __

~ ~

~~~

~

~

~~~~~~~

~
98

~~~ E

~;;~

- ~eD~..r~-

~-~ ~-~ --~gf~-~

~ ~~~~~ ~ ~

==
y.bIt 12

REVENUE AND EXPENSES OF MUNICIPAL SECURITIES RULEMAKING BOARD

Vea, ended September 30

1979 1978

...Assessment - fees. $413,841 $ 513,708

Annuollees 95,554 96,301

Inlballees 17.600 16,800

Inlefesl,n<:ome 62.328 51.667

Other 1,637

590,960 678.476

Satanes and employee benelrls 355,721 376,839

MeebnlS and travel 232,738 212.467

MIlIonl lost, Board manual and o!Iler pnnbnl and postale 129,667 132.870

Rent telephone and other occupancy costs 65.939 62.385

Prof.... o.. 1and otIler sennces. 42.436 32.886

Payroillaxes 17.620 18,163

Depreciation and amortlzabon 13,669 13,624

Other 8,533 5,469

866.323 854.703

Excess of expenses over revenues (275,363) (176,221)

Fund balance, betmnrnl of yea, 908,186 1,084.413

Fund balance, end of year $632,823 S 908,186

EXEMPTIONS

Section 12(h) Exemptions

Section 12(h) of the Exchange Act

authorizes the Commission to grant a

complete or partial exemption from

the registration provisions of Section

12(g) or from other disclosure and insider trading provisions of the act

when such granting is not contrary to

the public interest or the protection of

investors.

For the year beginning October 1,

1978, 43 applications were still pending and 176 applications were filed

during the year. Of these 219 applications, 156 were granted, 9 were withdrawn and 2 were denied. Fifty-two applications were pending at the close of

the year, of which 26 had been published for notice.

On September 17, 1979 the Commission adopted Rule 12h-4 which automatically suspends an issuer's duty

to file Section 13(a) reports as to a

class of securities pursuant to Section

15(d) of the Exchange Act for the

balance of the issuer's fiscal year if the

registration of such securities is terminated under Section 12(d) or

12(g)(4) of the Exchange Act.i At the

start of the next and each succeeding

fiscal year, if the class of securities is

held by less than 300 shareholders of

record, this suspension of the duty to

file would continue under Section

15(d). The resulting reduction in 12(h)

applications from issuers who terminate under Section 12(d) or 12 (g)(4) is

expected to reduce the processing

time for other 12(h) applications.

Exemptions for Foreign Private

Issuers

Rule 12g3-2 provides various exemptions from the registration provisions of Section 12(g) of the Exchange

Act for the securities of foreign private

issuers. Perhaps the most important of

these is that contained in subparagraph (b) thereof which provides an exemption for certain foreign issuers

which submit on a current basis material specified in the rule. Such ma-

'Securtties Exchange Act Release No.

16211 (September 17. 1979), 18 SEC

Docket 413.

99

~
terial includes that information about

which investors ought reasonably to be

informed and which the issuer: (1) has

made public pursuant to the law of the

country of domicile or in which it is Incorporated or organized; (2) has filed

with a foreign stock exchange on

which its securities are traded and

which was made public by such exchange, and/or (3) has distributed to

Its security holders. Perlodically, the

Commission publishes a list of those

foreign issuers which appear to be current under the exemptive provision.

The most current list is as of August

31, 1979 and contains a total of 161

foreign Issuers?

Other Exemptions

The Commission received and

granted two requests for exemption

from the broker-dealer registration requirernent of Section 15(a) of the Exchange Act. Exemptions were granted

to the the National Association of Investment Clubs In connection with Its

stock purchase program and to Mortex

Inc. In connection with Its automated

mortgage tradinq facility. The Comrnissron determined In each case that

an exemption would be consistent with

the pubhc interest and the protection

of Investors.

Exchange Act Rule 10b.6 imposes

certain prohibitions upon trading in secunties by persons interested in a distribution of such securitres. During the

fiscal year, the Commission granted

approximately 600 exemptions pursuant to paragraph (f) of Rule lOb-6

under circumstances indicating that

proposed purchase transactions did

2Securlties Exchange Act Release No

16212 (September 21, 1979), 18 SEC

Docket 462

100

not appear to constitute manipulative

or deceptive devices or contrivances

comprehended within the purposes of

the rule. In addition, Rule 1Ob-13under

the Exchange Act prohibits purchases

of certain securities by persons making

a tender offer or exchange offer from

the time the offer is publicly announced until the termination of the

offer. One exemption from Rule lOb13 was granted to permit an issuer to

effect concurrent tender and exchange

offers inasmuch as the transaction did

not appear to constitute a manipulative or deceptive device or contrivance

comprehended within the purposes of

the rule.

The Commission also granted to one

individual a temporary waiver of the

requirement in MSRB rule G-3 that a

person acting as a financral and operations principal take and pass the

MSRB Financial Operations Principal

Qualification Examination.

FINANCIAL INSTITUTIONS

Stock Transactions of Selected

Financial Institutions

During 1978, prrva te noninsured

pension funds, open-end investment

companies, life insurance companies,

and property-liability insurance companies purchased $47.7 billion of common stock and sold $42.7 billion, resulting in net purchases of $5.0 billion.

In 1977 purchases were $36.9 billion,

sales $34.5 billion, and net purchases

$2.4 billion. Their 1978 common stock

activity rate was 26.2 percent as compared to 20.6 percent one year earlier.
~""'<,Dc;:lI t"') ::::cn -co::=::-- cn.n.cn C'ooI 00 r... 000

:;'~~~N ,..,W")C"o.lt"') O-r-U) <DOOOO_ GOlD-cD ~O~

OC!.-.c.D_ ~:-CC'ol :-~~~ ~~~C'ooI

O~~

~~U') ~~:: g~N

-~~...

O~~

~-- :~N

o

..

iii 51

=on -5~ -g~

~"5""'C1.~

~~~~J1

lG

s

E

8

101

.... ~~ ...

~

~~~

~~~

~~

~~~

~~
STOCKHOLDINGS OF

INSTITUTIONAL INVESTORS

AND OTHERS

At year-end 1978, the eleven institutional groups listed below held

$358.0 billion of total corporate stock

outstanding (both common and preferred). In comparison, they accounted

for $342.2 billion of the stock held a

year earlier. The resulting 4.6 percent

increase in the value of the stockholdings of these institutions was the same

as the 4.6 percent upswing in the aggregate market value of all stock outstanding. Thus, the share of total stock

outstanding that was held by these institutions was 34.4 percent at year-end

1978 the same as it was a year earlier.

During 1978, the shares held by other

domestic investors, which consist of

individuals, broker-dealers and institutions not listed, dropped to 59.4 percent from 60.0 percent. Foreign investors share of stockholdings increased

to 6.2 percent.

Table 14

MARKET VALUE OF STOCKHOlDlNGS OF INSTITUTIONAL INVESTORS AND OTHERS

(Billions .f 0011.1... End of Yur)

1971 1971 1973 1974 1975 1976 1977 1978

I Pnvate Nomnsured Pension Funds 887 1I52 905 633R 886 1097 1019 1079

2 Open End Investment Companies 526 580 433 303 387 430 362 341

3 Other Investment Compames 69 74 66 47 53 59 3~ ~R 27

4 life Insurance Companies 206 268 259 219 281 342 355

5 Property-liability Insurance Companies] 166 218 197 128 142 169 173R 197

6 Personal Trust Funds2 941 1I0 2 947 677 810 930 90 s: 931

7 Common Trust Funds1 58 74 66 43 59 78 NA NA 8 Mutual Saangs Banks 35 45 42 37 44 44 48 48

9 State and local Retirement Funds 154 222 202 203 243 301 300 333

10 Foundations 250 285 245 184 227 271 261 270

1I Educatronal Endowments 90 107 96 67 88 104 98 102

12 Subtotal 3382 4127 3458 2541R 3220 3825 3527R 3683

13 Less Institutional Holdings of Investment

CompanyShares 58 65 67 65 86 100 105 103

14 Total lnstrtuuunal Investors 3324 4062 3391 2476R 3134 372 5 3422R 3580 15 ForeIgn Investors3 329 413 370 284 526 639 601 647

16 Other DomesticInvestors' 6384 6906 5253 3657R 4835 6233 5930 6186

!7 TotalStockOutstanding' 10037 1I38 I 9014 6417 8495 10597 9953R 10413

R ... reused

'Excludes holdings of insurance company stock

'Data for years through 1976 exclude common trust fund holdings which were separately available Common trust data were not separately available after 1976

and personal trust fund data therefore Include assets held In these cormngled funds

Jlncludes estimate of stock held as dnect Investment

lComputed as tesrdual (line 16 =17 -14 -15) lnctudes both mdmduals and institutional groups not listed above

51ncludes both common and preferred stock Excludes Investment company shares but Includes foreign Issues outstanding In the U S

102
Table 15

COMPANIES REGISTERED UNDER tHE INVESTMENT COMPANY ACT OF 1940 AS OF SEPTEMBER 30, 1979

Number of Registered Campa",es ApprOlumate

Market Value

Inactive!

01 Assets of Act". Total Active Companies

(Millions)

M.naeement open-end eMutu.1 Funds') 833 53 886 83.67. Funds haYln&no load 276 16 292 32.839 V.nable .nnurty.separate accounts 52 2 54 1.561 Caprtal levera&e companIeS 1 0 2 28 All other load funds 503 35 538 49.148

M.na&ement closed-end 165 56 221 7.855 Sm.1l business Investment companies 36 6 42 270 Capital levera&e companIeS 7 0 7 330 All other closelHnd companoes 121 50 172 7.255

UnIt Investment trust 368 23 391 17.oo8b

Vanable annuIty-separate accounts 69 I 70 1.067 All other unit mvestment trusts 299 22 311 15941

Faee-amount certificate companies 33

Tot.1 1.371 136 1.507 108.572

'In.ellve relers to re&lstered companies which as 01 September 30. 1979. were 10 the process of being IIquld.ted or merged, or h.ve Illed en apphcatron

pursuant to Section 8(f) of the Act fOf dereglsuabon, or which have otherwise gone out of enstence and remam registered only until such time as the CommiSSIon

ISSUesorder under Seenon 8(n termln.t,ng the" reglstrahon

b Includes .bout 3 6 billIOn of assets of trusts which ,nvest 10 secunties 01 other mvestment companies subst.ntlllly.1l 01 them mutu.1 funds

Table 16

COMPANIES REGISTERED UNDER tHE INVESTMENT COMPANY ACT OF 1940

ApprOXimate

market value

Frscal year ended Registered Registered Registration Registered 01 assets September 30 at begmnlng durmg teennated at end 01 01 active of year year dunng year year CQrnpanles

(millions)

1941 0 450 14 436 1.500 1941 436 17 46 407 2.400 1943 407 14 31 390 1.300 1944 390 18 27 371 1.200 1945 371 14 19 366 3250 1946 366 13 18 361 3,750

1947 361 11 21 351 3.600 1948 351 18 11 359 3,815

1949 359 12 13 358 3,700 1950 358 26 18 366 4,700

1951 366 11 10 368 5.600 1952 368 13 14 367 6800 1953 367 17 15 369 7000

1954 369 20 5 384 8700 1955 384 37 34 387 11.000 1956 387 46 34 399 14.000 1957 399 49 16 431 15.000 1958 432 42 21 453 17,000

1959 453 70 11 512 10.000 1960 512 67 9 570 13.500 1961 570 118 25 663 19,000

1962 663 97 33 727 17.300 1963 717 48 48 717 36.000 1964 717 52 48 731 41600

1965 731 50 54 727 44.600 1966 717 78 30 775 49800 1967 755 108 41 842 58.197 1968 841 167 41 967 69,731

1969 967 222 12 1.167 71,465

1970 1.167 187 16 1.318 56.337

1971 1.318 111 98 1.351 78.109 1972 1.351 91 108 1.334 80,816

1973 1.334 91 64 1.361 73.149

1974 1.361 106 90 1.377 61287

1975 1.377 88 66 1.399 74.191

1976 1.399 63 86 1,376 80,564

1977' 1.403 91 57 1.437 76.904

1978 1.437 98 64 1471 93921

1979 1.471 83 47 1.507 108572

, Began Fiscal Year Endmg September 30. 1977

103
Table 17

NEW INVESTMENT COMPANY REIGSTRATIONS

1979

Management open-end

No-loads

Vanable anmnties

All others

Sub-total

Management closed-end SBIC's

All others

Sub-total

Unit mvestment trust

Variable annumes

All others

Sub-total

Face amount certificates

Total Registered

Management open-end

No-loads

Vanable anmntres

All others

Sub-total

Management closed-end

SBIC's

All others

Sub-total

Unit mvestment trust

Vanable annuities

All others

Sub-total

Face amount cernncates

Total terminated

Table 18

INVESTMENT COMPANY REGISTRATIONS TERMINATED

7

1

42

50

1

12

13

4

16

20

83

1979

5

1

30

36

47

Private Noninsured Pension

Funds: Assets

The assets of private noninsured

pension funds totaled $202.2 billion at

book value and $201.5 billion at market value on December 31, 1978. A

year earlier their comparable asset totals were $181.5 billion and $181.6 bil104

lion. The book value of common stock

holdings increased to $100.4 billion at

year-end 1978 from $97.0 billion the

previous year. Valued at market, those

holdings also increased to $106.7 blllion, or 53.0 percent of total assets, at

the end of 1978 from $100.9 billion, or

55.6 percent of total assets, one year

earlier.
Table 19A

ASSETS OF PRIVATE NON INSURED PENSION FUNDS

Book Value, End of Year

(Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIt, 1641 1857 2,336 4,286 2962 2199 3721 8110 US Government Secunties 2732 3,689 4404 5533 10764 14713 20138 19695 Corporate and Other Bonds 29013 28207 30,334 35029 37809 39,070 45580 53824 Preferred Stock 1,767 1481 1258 1129 1 188 1250 1168 1274 Common Stock 62780 74585 80,593 79319 83654 93359 96984 100 424 Own Company 3,608 3868 4,098 4588 5075 NA NA NA

Other Compames 59172 70717 76495 74,731 78,579 NA NA NA

Mortgages 3,660 2,728 2377 2,372 2383 2,369 2497 2789 Other Assets 4826 4,933 5,229 6063 6406 7454 11 421 16121

Total Assets 106419 117 530 126531 133731 145166 160414 181509 202237

N A Not AVailable

Note Includes deferred profit shanng funds and pension funds of cotporatrons umons rnuttremplerer groups and nonprotrt ergamzations

Table 19B

ASSETS OF PRIVATE NON INSURED PENSION FUNDS

Markel Value, End of Year

(Millions of Dollars)

1971 1972 1973 1974 1975 1976 1977 1978

Ca,h and DePOSIts 1,641 1,857 2,336 4286 2962 2199 3721 8110 U S Government Securities 2772 3700 4474 5582 11 097 14,918 20017 18767 Corporate and Other Bonds 26,111 26,232 27,664 30815 34519 37858 41,754 48633 Preferred Stock 2014 1,869 985 703 892 1212 1009 1162

Common Stock 86636 113 369 89,538 62582 87669 108483 100863 106732

Own Company 7691 8750 6947 5230 6,958 NA NA NA

Other Iompames 78,945 104,619 82591 57352 80711 NA NA NA

Mortgages 3184 2427 2108 2063 2139 2160 2362 2554

Other Assets 4560 4,908 5,140 5681 6341 7073 10,838 15585

Total Asset' 126,921 154,363 132 247 111,724 145622 173,906 181,564 201545

N A Not AVailable

Note Includes deferred profit sharing funds and pension funds of corporations omens muttremployer groups, and nonproflt organtzahcns

SECURITIES ON EXCHANGES

Exchange Volume

Dollar volume of all equity securities

transactions on registered exchanges

totaled $268.5 billion in 1978. Of this

total, $249.3 billion or 92.8 percent

represented stock trading, $18.9 billion or 7.0 percent, option trading, and

the balance, trading in rights and warrants. The value of New York Stock

Exchange transactions was $210.6 billion in 1978. NYSE share volume increased 35.7 percent from the 1977 to.

tal. On the American Stock Exchange,

value of shares traded increased 78.2

percent to $15.2 billion. The AMEX

315-805 0 - 80 - 9

volume of 922.2 million shares was up

41.5 percent from the 1977 figure.

Share volume on regional exchanges

increased 30.9 percent from the 1977

figure to 992.2 million shares, valued

at $23.6 billion.

The Chicago Board Options Exchange contract volume for 1978 was

33.7 million, up 35.9 percent from

24.8 million in 1977. The value was

$13.7 billion, an increase of 71.6 percent from $8.0 billion in 1977. The

American Stock Exchange Option volume was 17.6 million contracts in

1978, an increase of 74.3 percent from

the 10.1 million contracts in 1978, an

increase of 74.3 percent from the 10.1

105
million contracts in 1977. The value of

AMEX options trading in 1978 was

$3.5 billion. Philadelphia Stock Exchange option volume was 2.9 million

in 1978 up 43.9 percent from the 1977

volume with a value of $472 million in

1978. Pacific Stock Exchange contract

volume in 1978 was 3.1 million with a

value of $766 million. The Midwest

Stock Exchange contract volume was

2.3 million contracts with a value of

$419 million in 1978.

Table 20

MARKET VAWE AND VOWME OF SALES ON REGISTERED AND EXEMPTED SECURmES EXCHANGES'

(All data are In thousands)

Total Stocks' Options} Warrants Rlihts

Market Market Number Market Number Market Humber Market Number

Value Value of Value of Value of Value of

(Dollars) (Dollars) Shares (Dollars) Contracts (Dollars) Units (Dollars) Units

All Reilstered E,changes for past SIX years

Calendar Year

1973 187.158.618 177.879.464 5723.424 448.498 1.119 973.076 124,740 11.082 51.515 1974 125.285.044 118434721 4.846492 1,660222 5.683 389.251 67.174 4.301 37.167

1975 166.901.078 157.260586 6.231.516 6.423.469 14.428 285.859 97225 9024 52.928

1976 206959.037 194.969.057 7035,755 11,734.222 31.425 248.124 53.603 7.634 35.843 1977 198.292.217 187.202.855 7.023.165 10.899.135 39.622 184.435 67.841 5,792 43.940

1978 268.508724 249.257.272 9482.710 18.953204 59847 343,723 68.064 2.323 13.889

Breakdown of 1978 Data by RegIStered [,chanie

All RegIStered Exchanies -American Stock Exchange 18.943.355 15.204.973 992.179 3.525.010 17.619 212966 35.468 407 568

'Boston Stock E,change 1,535923 1.535.839 57.665 0 0 81 43 2 235

.Cmcmnatl Stock Exchange 433.287 433.287 15.127 0 0 0 0 0 0

Midwest Stock E,change 10.880.316 10.461,239 343.185 419.077 2.288 0 0 0 0

'New York Stock Exchange 210550436 210426.412 7.617.958 0 0 122.589 28.988 1,435 12,796

PaCIfic Stock Exchange 7.872.090 7.099.249 297.904 766.462 3.063 5,900 3,018 479 289

'Ph,ladelph" Stock Exchanie 4,560,103 4.085.804 142,687 519.910 3166 2,189 547 0 0

Intermountam Stock Exchange 815 815 2.281 0 0 0 0 0 0

Spokane Stock E,change 9.655 9,655 13.723 0 0 0 0 0 0

'Chicago Board Options 13722,745 0 0 13,722,745 33712 0 0 0 0

All Exempted Exchanges for past SIX years

Calendar Year 1973 1,899 1.897 260 0 0 0 0

1974 1174 1.174 149 0 0 0 0

1975 524 524 69 0 0 0 0

1976 383 383 94 0 0 0 0

1977 298 298 64 0 0 0 0

1978 0 0 0 0 0 0 0

-Reports of those exchanges marked WIth an asterisk cover transactions cleared durmg the calender month, clearances occur for the most part on the fifth day

after that on which the trade actually was effected Reports for other e,changes cover transactions effected on trade dates of calendar month

'Data on the value and volume of secunhes sales are reported In connection With fees pard under Section 31 of the Secunnes Exchange Act of 1934 They

mclude all secuntres sales effected on exchanges except sales of bonds of the UnIted States Government ehrch are not subject to the fee The data cover oddJot as well as round-lot transacnons

llncludes voting trust certifIcates, cernfrcates of depoSIt for stocks, and Amencan Deposltary Receipts for stocks but excludes rights and warrants

lExerclses are not mcluded In these totals.

NASDAQ Volume

NASDAQ share volume and price information for over-the-counter trading

has been reported on a daily basis

since November 1, 1971. At the end of

1978, there were 2,582 issues in the

NASDAQ system, an increase of 0.3

percent from 2,575 in 1977. Volume

for 1978 was 2.8 billion shares, up 47.0

percent from 1.9 billion in 1977. This

106

trading volume reflects the number

of shares bought and sold by market

makers plus their net inventory

changes.

Share and Dollar Volume by

Exchange

Share volume of all stocks, rights

and warrents totaled 9.6 billion, a 34.1

percent increase from 7.1 billion in
Market Value Of Securities Traded On

All (I.S. Stock Exchanges Dollars Billions

280

Ejh"Stocks. R,ghts

....:); & Warrants

OptIons

, ~,. 160 f e .J' ';-:.

'p' , .i . :.. /" )...... ....

" ,.",

240

200

120

80

o "

::r .. .... '9"

, ,

18.9

1968 69 70 71 72 73 74 75 76 77 1978

107

"

' ~~ "

~ " " " "'

"

/
1978. New York Stock Exchange ac- and warrants was $249.6 billion, a 33.2

counted for 80.08 percent of all share J percent increase from $187.4 billion in

volume; American Stock Exchange, 1978. New York Stock Exchange dom10.75 percent; and Midwest and Pa- inated the dollar volume accounting

cific Stock Exchanges, 3.59 and 3.15 for 84.35 percent of the total. Ameripercent, respectively. can and Midwest Stock Exchanges had

Dollar volume of all stocks, rights 6.18 and 4.19 percent of the total.

Table 21A

SHARE VOLUME BY EXCHANGES'

Total Share In Percentage

Year Volume

(thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE Other

1935 68t 97t 7313 1242 191 269 110 096 003 776 1940 377 897 7544 1310 211 278 133 119 008 387 1945 769,018 6587 2131 177 298 106 066 005 630 1950 893320 7632 1354 216 311 097 065 009 316 1955 1.311401 6885 1919 209 308 085 048 005 541 1960 1428552 6908 2246 222 314 089 039 004 141 1961 2121050 6565 2584 224 345 080 030 004 133 1962 1699346 7t 84 2026 236 297 087 031 004 095 1963 1,874,718 7317 1889 233 283 083 029 004 110 1964 2118326 72 81 1942 243 265 093 029 003 086 1965 1663495 7010 2259 263 234 082 026 005 064 1966 3,306386 6954 2289 257 268 086 040 005 051 1967 4,641215 6468 2845 236 246 087 043 002 057 1968 5406582 6200 2974 263 265 089 078 001 095 1969 5,133498 6317 2761 284 347 122 051 000 100 1970 4835222 7t 27 1901 316 368 163 051 002 057 197t 6,172,668 7t 34 1842 352 372 191 043 003 0« 1972 6518132 7047 1821 371 413 221 059 003 045 1973 5899678 7492 1375 409 368 219 07t 004 039 1974 4950,833 7847 1027 439 348 182 086 004 044 1975 6371545 8105 897 406 310 154 085 013 015 1976 7125201 8003 935 387 393 141 078 044 017 1977 7,134882 7954 973 395 37t 149 066 064 028 1978 9364,763 8008 1075 359 315 150 061 016 016

'Share Volume for exchanges rncludes Stocks Rights and Warrants

"Others rnclude all exchanges not listed above

Table 21B

DOLLAR VOLUME BY EXCHANGES'

Total Dollar In Percentage

Year Volume

(thousands) NYSE AMEX MIDW PSE PHIE BOSE CNSE Other'

1935 15396139 8664 783 132 139 088 134 004 056 1940 8419772 8517 768 207 152 III 191 009 045

1945 16284552 8275 1081 200 178 096 116 006 048

1950 21 808284 8591 685 235 219 103 112 011 044

1955 38039107 8631 698 244 190 103 078 009 047

1960 45276616 8386 935 272 195 104 060 007 003

1961 64,032,924 8248 10 71 275 199 103 049 007 005

1962 54823 153 8637 681 275 200 105 046 007 004

1963 64403991 8523 752 272 239 106 042 006 004

1964 72415297 8354 846 315 248 114 042 006 004

1965 89498711 8182 991 344 243 112 042 008 003

1966 123643475 7981 11 84 314 285 110 056 007 002

1967 162136,387 77 31 1448 308 279 113 067 003 003

1968 197061776 7357 1800 312 266 113 104 001 008

1969 176,343 146 7350 17 60 339 312 143 067 001 012

1970 131707946 7844 1111 376 381 199 067 003 004

197t 186375 130 7907 998 400 379 229 058 005 003

1972 205956263 7777 1037 429 394 256 075 005 005

1973 178863621 8207 606 454 355 245 100 006 001

1974 118828272 8362 439 489 350 202 123 006 001

1975 157555360 8504 366 482 325 172 I 18 017 000

1976 195,224 815 8435 388 476 383 169 094 053 000

1977 187393082 8396 460 479 353 162 074 075 001

1918 249603320 84 35 618 419 285 164 062 017 000

IDollar Volume for exchanges mcludes Stocks RIghts and Warrants

lOt hers Include all exchanges not listed above

108

Z
Special Block Distributions

In 1978, the total number of special

block distributions decreased by 31.7

percent. The value of these distributions increased 117.0 percent to

$610.0 million from $280.9 billion in

1977.

Secondary distributions accounted

for 86.0 percent of the total number of

special block distributions in 1978 and

93.4 percent of the total value of these

distributions.

The special offering method wasemployed 3 times, accounting for 7.0 percent of the total number of special

block distributions in 1978, but, with

an aggregate value of $36.2 million,

these offerings accounted for only 5.9

percent of the value of all special block

distributions.

The exchange distribution method

was employed 3 times in 1978. The

value of exchange distributions was

$4.3 million, representing less than 1

percent of the value of all special block

distributions.

Table 22

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary dtstnbuhons Exchange drstnbuuons Special offerings

Year Number Shares Value Number Shares Value Number Shares Value

sold sold sold

1942 116 2397454 82840 0 0 0 79 812390 22694

1943 81 4270580 127462 0 0 0 80 1097338 31054

1944 94 4097298 13\ 760 0 0 0 87 1053667 32454

1945 115 9457358 191961 0 0 0 79 947231 29878

1946 100 6481 291 232398 0 0 0 23 308134 11002

1947 73 3961572 124671 0 0 0 14 31417U 9133

1948 95 7302,410 17\ 991 0 0 0 21 238879 5466

1949 86 3737249 104061 0 0 0 31 500211 10 956

1950 77 4180681 88743 0 0 0 10 150308 4940

1951 88 5193756 146459 0 0 0 17 313 013 10751

1951 76 4123158 149117 0 0 0 11 357897 9931

1953 68 6906017 108119 0 0 0 17 380680 10486 1954 84 s 738 359 218490 \7 705781 24664 14 189772 6670

1955 116 6756767 344871 19 258348 10111 9 161850 7123

1956 146 II 696 174 510966 17 156481 4645 8 131755 4557

1957 99 9314599 339062 33 390831 15855 5 63408 1845

1958 111 9508505 361886 38 610876 19454 5 88151 3186

19\9 148 17330941 811336 18 545038 16491 3 33500 3730

1960 91 11439065 414688 20 441644 11 108 3 63663 5439

1961 130 19910013 926514 33 1126266 58071 2 35000 1504

1961 \9 11143656 658780 41 1345076 65459 1 48100 588

1963 100 18937935 814984 71 1891233 107498 0 0 0

1964 110 19462343 909811 68 2553237 97711 0 0 0

1965 141 31 153319 1603107 57 2334177 86479 0 0 0

1966 126 29045038 1523373 \2 3042 \99 118349 0 0 0

1967 143 30783604 1 154479 51 3452856 115404 0 0 0

1968 174 36110489 1571600 35 1669938 93518 1 33\1 63

1969 141 38114799 1144186 31 1706571 51198 0 0 0

1970 71 17,830008 504561 35 1066590 48118 0 0 0

1971 104 71801,143 1007517 30 1595 104 65765 0 0 0

1971 119 82365749 3116116 16 1469666 30156 0 0 0

1973 120 30825890 1 151087 19 802311 9140 91 6661111 79889

1974 45 7511200 133838 4 82100 6836 33 1911755 16805

1975 51 34149069 1409933 14 483846 8300 14 1251915 11511

1976 57 24089636 581560 16 751600 13 613 11 1475841 18459

1977 39 9848986 261157 6 295264 5241 18 1074190 14519

1978 37 15233141 \69478 3 79000 4321 3 130675 36209

109
Value and Number of Securities

Listed on Exchanges

The market value of stocks and

bonds listed on U.S. Stock Exchanges

at year-end 1978 was $1,335 billion, an

increase 3.4 percent from the previous

year-end figure of $1,291 billion. The

total was composed of $865 billion in

stocks and $470 billion in bonds. The

value of listed stocks increased 5.8

percent in 1978 and the value of listed

bonds decreased less than 1 percent.

Stocks with primary listing on the New

York Stock Exchange were valued at

$823 billion and represented 95.1 percent of the common and preferred

stock listed on all U.S. exchanges. The

value of NYSE listed stocks increased

from their 1977 year-end total by $46

billion or 5.9 percent. Stocks with primary listing on the AMEX accounted

for 4.5 percent of the total and were

valued at $39 billion. The value of

AMEX stocks increased $2 billion or

4.3 percent in 1978. Stocks with primary listing on all other exchanges

were valued at $2.9 billion, a decrease

of 12.1 percent from the 1977 total.

The net number of stocks and bonds

listed on exchanges increased 176 issues or 21.4 percent in 1978. The New

York and Pacific Stock Exchanges

listed 291 and 4 additional securities,

respectively. Spokane showed no

change while all other exchanges

showed a drop in the number of listings. Honolulu Stock Exchange ceased

operations December 31, 1977.

Table 23

SECURITIES LISTED ON EXCHANGESI

December 31. 1978

Common Preferred Bonds Total Secunties

Market Market Market Market Number Value Number Value Number Value Number Value (Million) (Million) (Million) (Million)

Registered Amencan 964 $ 37097 100 $ 2145 193 $ 3,886 Boston I,m $ 43,128

Cincinnati 64 247 2 1 1 1 67 249

Midwest 6 31 3 8 5 42 14 81

New York

16 256 5 58 0 0 21 314

Pacific

1,552 798,764 642 23,971 2,895 464,895 5,089 1,287,630

Philadelphia

39 861 9 180 24 540 72 1581

Intermountain

21 122 91 1.072 20 1,124 132 2318

Spokane

27 50 0 0 0 0 27 50

24 6 0 0 0 0 24 6

Total 2,713 $837,434 852 $27,435 3.138 $470,488 6,703 $1,335,357

Includes the following

foreign stocks.

Registered

New York 36 $ 23,117 1 81 169 $ 8,061

American

206 31,259

Pacific

66 13,521 0 0 8 NA. 74 13,521

3 $ 139 0 0 0 $ 0 3 139

Total 105 s 36,777 81 I77 $ 8,061 283 «,919

~x:~f~ss:'~r~lesh which w~ suspended from trading at the end of the year. and secunnes which because of maetrvrty had no available quotes

U U DC xc ange eea operations on December 31 1977 +less than 05 million, but greater than zero

110
Table 24

VALUE OF STOCKS LISTED ON EXCHANGES

(Oollars m billions)

Nl!W York American ExclusIvely

Dec 31 Stock Stock On Other Total Exchange Exchange Exchanges

1936 599 148 747

1937 389 101 491 1938 475 108 583 1939 465 101 566 1940 419 86 505 1941 358 74 431 1941 388 78 466 1943 476 99 575 19« 555 111 667 1945 738 144 881 1946 686 131 818 1947 683 111 804 1948 670 119 30 819 1949 763 111 31 916 1950 938 139 33 1110 1951 1095 165 31 1191 1951 1105 169 31 1405

1953 1173 153 18 1354 1954 1691 111 36 1948 1955 1077 171 40 1388 1956 2192 310 38 1540 1957 1956 255 31 1142

1958 1767 317 43 3117

1959 3077 154 41 3373 1960 3070 142 41 3353 1961 3878 330 53 4261

1962 3458 144 40 3741 1963 411 3 261 43 4417 1964 4743 282 43 5068

1965 5375 309 47 5731 1966 4315 179 40 5144 1967 6058 430 39 6517 1968 6923 612 60 7595

1969 6295 477 54 6816 1970 6364 395 48 6807

1971 7418 491 47 7956

1971 8715 556 56 9327 1973 721 0 387 41 7638

1974 511 1 233 29 5373

1975 6851 193 43 718 7 1976 8583 360 41 8985 1977 776 7 376 41 8185 1978 8117 391 19 8648

Securities on Exchanges

As of September 30, 1979, a total of

6,783 securities, representing 3,129 issuers, were admitted to trading on securities exchanges in the United

States. This compares with 6,777 issues, involving 3,179 issuers, a year

earlier. Over 5,000 issues were listed

and registered on the New York Stock

Exchange, accounting for 60.5 percent

of the stock issues and 90.2 percent of

the bond issues Data below on "Securities Traded on Exchanges" involves some duplication since it includes both solely and dually listed

securities.

111
Table 25

SECURITIES TRADED ON EXCHAJIGES

Issuers Stocks Bondsl

TemJlonm~ Reflstered exempted Unlisted Total

AmerICan 1,049 1,0« (3 1,088 209

Boston 805 133 715 8(8 15 ChICago Board of OptIOns 1 1 1 Chicago Board of Trade 3 1 2 3 Cincinnati 3(0 « 309 353 15 Intermountain (8 (] 1 (8

Midwest 590 3(0 318 659 28 New York 1,910 2,223 2,225 2,803 Pacific Coast 808 797 166 9M 115 PBS 908 337 731 1068 77 Spobne 35 J( ( 38

'Issues exempted under Section 3(.XI2) of the Act, such as oblrgatlons of US GoYemment, the states, .nd cmes, are not Included In thIS table

Table 26

UNDUPUCATED COUNT OF SECURITIES ON EXCHANGES

(September 30, 1979)

RegiSlered exch.nges

Registered and listed

Temporarily exempted from registration

Admitted to unlisted trading Jln~leges

Tot.1

Stocks Bonds Tota' Inwlved

3,638 3,090 6.728

3 2 5

36 !( 50

3,677 3,106 6.783

3,099

2

28

3.129

1933 ACT REGISTRATIONS

Effective Registration

Statements Filed

During the fiscal year ending September 30, 1979, 3,112 registration

statements valued at $77 billion became effective. The number of effective registrations in fiscal 1979 rose

2.5 percent from fiscal 1978. The value

of registration statements increased

18.5 percent in 1979 from $65 billion

in fiscal 1978. With the adoption of

112

Rule 24f-2 (l7CFR270.24f-2) effective

November 3, 1977, the dollar value of

investment company registrations are

no longer available.

Among the registration statements

effective, there were 684 first-time registrants in fiscal 1979 as compared

with 647 in fiscal 1978.

The number of registration statements filed rose 0.8 percent to 3,229

in fiscal 1979 from 3,204 in the previous fiscal year.
Table 27

EFFECTIVE REGISTRATIONS

(DoIIIrslftll,U-J

Tot.1 Cash Sale for Account of Issuers

Fiscal year Number Bonds of V.lue Common Debentures Preferred Ictal St.tements Stock and Notes Stock

Fiscal Year ended June 30

19351 284 913 168 490 28 686

1936 689 4,835 531 3,153 252 3,936

1937 840 4,851 802 2,426 406 3,634

1938 412 2,101 474 666 209 1349

1939 344 2,579 318 1,593 109 2,020

1940 306 1,787 210 1,112 110 1,432

1941 313 2,611 196 1721 164 2081

1942 193 2,003 263 1,041 162 1466

1943 123 659 137 316 32 485

1944 221 1,760 272 732 343 1,347

1945 340 3,225 456 1351 407 2714

1946 651 7,073 1,331 3,102 991 5424

1947 493 6,732 1,150 2,937 787 4,874

1948 435 6,405 1,678 2,817 537 5,032

1949 429 5,333 1,083 2795 326 4,204

1950 487 5,307 1,786 2,127 468 4381

1951 487 6,459 1,904 2,838 427 5,169

1952 635 9,500 3,332 3346 851 7,529

1953 593 7,507 2,808 3,093 424 6,325

1954 631 9,174 2,610 4,240 531 7,381

1955 779 10,960 3,864 3951 462 8277

1956 906 13,096 4,544 4,123 539 9,206

1957 876 14,624 5,858 5,689 472 12,019

1958 813 16,490 5,998 6,857 427 13282

1959 1,070 15,657 6,387 5,265 443 12,095

1960 1,426 14,367 7,260 4,224 253 11,737

1961 1,550 19,070 9,850 6162 248 16260

1962 1,844 19,547 11,521 4,512 253 16236

1963 1,157 14790 7,227 4372 270 11,869

1964 1,121 16,860 10,006 4554 224 14,784

1965 1,266 19,437 10,638 3,710 307 14,655

1966 1,523 30,109 18,218 7,061 444 25723

1967 1,649 34,218 15,083 12309 558 27,950

1968 2,417 54,076 22092 14036 1,140 37,268

1969 3,645 86,810 39,614 11,674 751 52039

1970 3,389 59,137 28,939 18,436 823 48,193

1971 2,989 69,562 27,455 27,637 3,360 58452

1972 3,712 62,487 26,518 20,127 3,237 49,882

1973 3,285 59,310 26,615 14,841 2,578 44,034

1974 2,890 56,924 19,811 20,997 2,274 43,082

1975 2,780 77 457 30 502 37557 2201 70260

1976 2,813 87,733 37,115 29,373 3013 69501

Jransrtmn Qu.rter July-September 1976 639 15,010 6,767 5,066 413 12246

Frscal year ended September 30

1977(r) 2,915 92580 47,116 28,026 2,426 77,568

1978 3,037 65,043' 25330' 23,251 2,128 50,709

1979 3,112 77,375 22697 28,894 1,714 53305

Cumul.t"e Iotal 62,519 $1,193,543 $498,534 $395,100 $38,522 $932,156

r revised 'For 10 months ended June 30 1935 'The adoption of Rule 24f.2 (17 CFR270 24f 2) effeel"e November 3, 1977 made rt Impossible to report the dollar value of secunnes registered b, ,"vestment

companies

Note The Total Cash Sale differs from earlier presentations due to changes," rounding procedures

113

=

Purpose of Registration

Effective registrations for cash sale

for the account of corporate issuers

amounted to $34 billion! in fiscal 1979

as compared to $29 billion in fiscal

1978. With respect to distribution of

these registrations between equity and

debt offerings, equity offerings increased from $10.0 billion in fiscal

1978 to $10.1 billion-a 1 percent increase. Corporate debt offerings increased from $19.0 billion to $24.2 billion-a 27.4 percent increase.

Among the securities registered for

cash sale in fiscal 1979, nearly all debt

issues were for immediate offerings,

whereas 41.2 percent of the equity

!The adoption of Rule 24f-2 (17 CFR

270.24f.2) effective November 3, 1977.

made it impossible to report the dollar

valueof securitiesregistered.

registrations were for immediate offerings. Registrations of extended offerings totaled $14.3 billion with employee plan offerings accounting for

$10.8 billion.

Securities registered for the account

of the issuer for other than cash sale

totaled $23.0 billion, $14.7 billion of

which was common stock. The bulk

of these registrations were common

stock issues relating to exchange offers, mergers and consolidations. In

fiscal 1979 common stock effectively

registered for this purpose totaled $9.8

billion, an increase of 58.1 percent

from fiscal 1978.

Registrations for the purpose of secondary offerings (proceeds going to

selling security holders) typically concern sales of common stock. In fiscal

1979 these registrations amounted to

$1.1 billion, or a 7.7 percent decline

from fiscal 1978.

Table 28

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY: FISCAL YEAR: 1979

(Doll... In lIo1loan.1

Type of secUrity

Purpose of registratIOns

Bond, Preferred

Total debentures Stock

and notes

All reglstratoons (estimated value) $77.375 $33,135 $5,784

For account of Issuer for cash sale 53,303 18,894 1,711

Immediate offermg 38,963 18,894 1,661

Corporate 34,167 14,198 1,661

Offered to Genefal Public 33,411 14,169 1,659

SecUrity Holders 856 19 3 Foreign Governments 4,696 4696 0 Extended cash sale and other ISSUes 14339 0 50

For account of Issuer for other than cash sale 13,011 4138 4,057

Secundary Offerings 1,061 3 15

Cash Sale 457 0 4

Other 605 3 11

Common

Stock

$38456

11697

8408

8,408

7,584

814o 14,189

14,715

1044

453

591

115
Effective Registrations

Cash Sale For Account Of Issuers

1935-1979 Dollars. BillIon,,"

50

I

,1

,1

,I

d

,I

J I

, l , I

70 75

*79

I

I

II

II

65

Common Stock

55 60

(F,sca'Vears)

Preferr~d Stock ...: •••••••••• :.' ••••••

.. ...........................................

40 45 50

o

1935

10

30

40

20

116 *BEGINNING IN 1977. FISCAL YEARS END IN SEPTEllBER RATHER THAN JUNE.

~
Regulation A Offerings

During fiscal year 1979, 347 notifications were filed for proposed offerings under Regulation A. Issues between $500,000-$1,500,000 in size

predominated. It should be noted, that

the ceiling for Regulation A was raised

to $1.5 million on September II,

1978.

Table 29

OFFERINGS UNDER REGULATION A

Frscal Fiscal Fiscal

1979 1978 1977

SIZe $100,000 or less 10 23 17

$100,00D-$200,000 33 33 30 $200,000-$300,000 27 36 30 $300,000-$400,000 30 25 24 $400000-$500,000 44 120 117 $500,000-$1,500,000 203 5 0

Total 347 242 218

Underwriters

Used 98 55 52

Not Used 249 187 166

Total 347 242 218

OfferOfs

ISSUIng Companies 331 223 205

Stockholders 3 5 7

Issuers and Stockholders 10lntly 13 14 6

Total 347 242 218

ENFORCEMENT

Types of Proceedings

As the table below reflects, the securities laws provide for a wide range

of enforcement actions by the Commission. The most common types of

actions are injunctive proceedings instituted in the Federal district courts to

enjoin continued or threatened securities law VIolators, and administrative

proceedings pertaining to brokerdealer firms and/or individuals associated with such firms which may lead to

various remedial sanctions as required

in the public interest. When an injunction is entered by a court, violation of

the court's decree is a basis for criminal contempt action against the violator.

117
Table 30

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Ionsnrutmg and Basrs for Enforcement ActIOn

Broker dealer I muftlcrpJI securrtles

dealer, Investment achlser or ISSO<Ilted pe_

Willful nolatmn of secunhes acts prnnsmn or rule aldmg or abetting such

notetron failure reasonably to SUpervise others Willful misstatement or onus.

von en filing With the Iomrnrssron conviction of or injunction against certain

cnmes or conduct

Repered securrbes ISSOCIItKM'l

Organization or rules not conforming to statutory requirements

ViolatIOn of Of mabllity to comply With the 1934 Act rules thereunder or Its

own rules unjustrfred tenure to enforce compliance WIth the foregomg or

WIth rules of the Muntclpal Securities Rutemaung Board by a member or

person associated With a member

Member of revstered secUrities association, Of assoaated penon

Being subject to Iammrssren order pursuant to 1934 Act S 15{b) Willful

Violation of or effecting transaction for other person With reason to believe

that person was VIOlating secunnes acts pronsions rules thereunder or rules

of Municipal Secuntres Rulemaung Board

NatlOMl secuntles exchange

OrganIZatIOn or rules not conferrrung to statutory requirements

VIOlatIOn of or inability to comply WIth 1934 Act rules thereunder or ItS own

rules umustmed failure to enforce compliance With the foregOing by a mem

ber or person associated WIth a member

Member of natKMIal securrtIes

ezchlnrt. 01 iSSOClated persons

Being subject to tomnussron order pursuant to 1934 Act S 15(b) Willful

VIOlation of or effecting trensacnen for other person With reason to behese

that person was Violating secuntres acts pronnens or rules thereunder

RellSlered cI.. nnr 'rene,

VIOlatIOn of or inabIlity to comply With 1934 Act rules thereunder or ItS own

rules failure to enforce compliance With ItS own rules by partie.pants

PJrttclpant In rfllStered dunna

'IeftCJ

Being subject to tommrsson order pursuant to 1934 Act 15(bX4) Willful

VIolation of or effecting transaction for other person WIth reason to believe

that person was Violating pronsons of clearing agency rules

Secuntles .nfonnlt .... proc .....

VlOlatton of or mabillty to comply With pronnons of 1934 Act or rules thereunder

Transfer_t

Willful nolatron of or mabllity 10 comply With 1934 Act 17 or 17A or

regulations thereunder

-., penon

Willful VIOlation of secunttes act prtmnon or rule aiding or abetting such

Vlolatton WIllful misstatement In filing With Iommrsson

Sanction

Censure or umrtanon on actmttes revocation suspension or denral of regrstratron bar or suspension from assccranon (1934 Act 15B(cX1)-{4)

15(bX4)-{6) Ad"sers Act 1D3(e)-{nJ

Suspension of registration or limitation of actmnes functions or operauons

(1934 Act 19(hXl))

Suspennen or revocation of registration censure or limitation of actmnes

Iuncncns or operations (1934 Act 19(hXl))

Suspension or expulsion from the association bar or suspension from assocranon With member ot assocratron (1934 Act s~19(hX1)-{3))

Suspension of regtstrahcn or limitation of actmties functions or operanons

(1934 Act 19(hXl))

Suspension or revocation of registration censure or hrrntanon of actmnes

tunctmns or operations (1934 Act 19(hX1l)

Suspension or erpulsron from exchange bar or suspension from assooation

With member (1934 Act 19(hX1)-{3))

Suspension or revocatIOn of registration censure or nmnanon of actmtres

functions or operations (1934 Act 19(hXl))

Suspension or expulsron from cleanng agency (1934 Act 19(hX1))

censure or operanenal hrmtations suspension or revocation of regrstratton

(1934 Act llA(bX6))

Censure or limitation of actmues demal suspension or revocation of reg

tstratmn (1934 Act 17A(cX3))

Temporary or permanent prohrbmon from serving 10 certam capactres for

registered Investment company (Investment Company Act 9(b))

'Statutory references' are as follows '1933 Act the Secunties Act of 1933 '1934 Act' the Securmes Exchange Act of 1934 "tnsestrnent Company Act

the Investment Company Act of 1940 'Ad"sers Act the Investment Ad"sers Act of 1940 "Hotdlng Compan, Act' the Publrc Utility Holding Company Act

of 1935 "lrust tndeature Act the Trust Indenture Act of 1939 and SIPA the Secuenes Investor Protection Act of 1970

118

~~

~~ •

~

~

~

~

~~

~

~ ~

~

~~

~

~
Table 3D-Continued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting

and BaSIS for. Enforcement ActIOn

Officer Of dlrec'" .f self. .........,Ofpn_

Willful nolatron of 1934 Act, rules thereunder. or the orgamzanon's own rules

Willful abuse of authority or unjustified failure to enforce compliance

PrIncIpal .1 _._

Engagmg In busmess as a broker dealer after appointment of 51PC trustee

1933 Act revstratlDll slItemont

Statement materially maccurate or Incomplete

Investment company has not attained $100,000 net worth 90 days after state

ment became effective

P...... sub/Kl t.s.a- 12, 13

OfI5(dl of tile 1934Aet.

Material noncompliance With such provIsions

SeaJnlles ISSUe

Noncompliance by Issuer With 1934 Act or rules thereunder

Public Interest requires tradmg suspension

Ilet1stered ,"westmont compan,

Failure to file Investment Company Act registration statement OJ requtred

report, fllmg matenally Incomplete or misleading statement of report

Company has not attained $100000 net worth 90 days after 1933 Act regIstration statement became effective

Rttomey, lecountant, Of ather pm ..... n•• r .. pert

lack of reqursrte qualifications to represent others lackmg In character or

integrity, unethical or Improper pnfesnonal conduct. Willful VIOlation of secunties laws or rules or aiding and abetting such Violation

Altom., suspended Of dISbarred bJ aJIIIt, .. pert's hc..... r..... d Of

suspended; co ... t\IDII of a I...., or mlSdemeanar ImoI"nl moral turpitude

Permanent injunctIOn agamst or finding of secunnss nolatron In CommlSSlonmstrtuted action fmdlng of secunties VIOlation by tornnussen In adrmnrstrative proceedings

Ilember .f Il.noclpal Sec.nlles

Ral.... kln' BoIrd

Willful VIOlation of secunties laws rules thereunder or rules of the Board

Sanction

Removal from offICe or censure (1934 Act. 19(hX4))

Bar or suspension from bema or bemg associated wtth a broker dealer (SIPA

IlJ(b))

Stop order suspending ettectneness (1933 Act 8(d))

Stop order (Investment Company Act 14{a))

Order directing compliance (1934 Act 15(cX4))

Denial, suspension of effective date suspension or revocation of regrstratmn

on natienal secunties exchange (1934 Act 11(f))

Summary suspension of over the-counter or exchange trading (1934 Act.

11(k)

RevocatIOn of regIstratIOn (Investment Company Act 8(e))

Resocatron or suspension of regrstratron (Investment Company Act 14(a))

Permanent or temporary demal of pnnlege to appear or practice before the

Commission (17 Cf R !i 1012(eXl)

Automatic suspension from appearance or practice before the Commission (17

C f R 1011(eX1))

Temporary suspensron from appearance or practice before tomrmsson (17

C f R 1011(eX3)

Censure or removal from otnce (1934 Act !i 156(cX811

An, person

CIVIL PROCEEDINGS IN fEDERAL DISTRICT COURTS

Persons Subject to Acts Constltutmg

and BaSISfor Enforcement Action

Sanction

Engaging m or about to engage In acts or practices VIolating secunties acts

rules or orders thereunder (including rules of a registered self regulatory

organizatIOn)

Noncompliance With prcunons of law, rule, or regulation under 1933 1934

or Holding Company Acts order Issued by CommISSIOn rules of a registered

self regulatory crgamzation or undertaking 10 a registratIon statement

tnrunctron agarnst acts or practices which constrtute or would constitute VIolations (plus other eqUitable relief under court's general equIty powers) (1933

Act Sec 11J(b), 1934 Act Sec 11(d) 1935 Act Sec 18(0 Investment Company Act 41(e) Ad",elS Act. 109(e) Trust Indenture Act 311)

Writ of mandamus InjunctIOn or order directing compliance (1933 Act

1IJ(c), 1934 Act 11(e), Holdmg Company Act 18(g»)

119

~

~

~

~

~

~

~

~

~

~

~

~ ~ ~

~ ~ ~
Table 311-Continued

TYPES OF PROCEEOINGS

CIVil PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject 10 Acts Icnstttuttng and Basts for Enforcement Action

Secuntles Innstor ProtecttOfl

CorporltlOfl

Refusal to commit funds or act for the pretecnon of customers

IbtMIRII securrtle5 exchange or

recrstered $Kuntle! ISSOClabon

Noncompliance by Its members and persons associated with Its members with

the 1934 Act rules and orders thereunder or rules of the exchange or association

Noncompliance by Its partropants with Its own rules

Issut!' subject to reporting

requirements

Failure 10 IIIe reports requned under 15(d) of 1934 Act

Re(lSlered IOmtment compon, affilllt.

Name of company or of sectlflty rssued by It deceptive or rmsleading

Officer director, member of

odmo" board, admor, depo$ltor,

or underwriter of Investment company

Engage In act or practice consntutmg breach of fidUCIary duty ,"wiVing personal misconduct

An, penon hmng hdu",,, duty

"'Pectlnl rOC01ptof compenslt'D11

from Inmlmenl compln,

Sanction

Order directing discharge of oblIgatIOns or other appropriate relief (SIPA,

lIb)~

Wrrt of mandamus mrunctron or order directing such exchange or assocration

to enlorce comphance (1934 Act 21(e))

Writ of mandamus mgmcnen or order dlrectmg cteanng agency to enforce

comphance (1934 Act 21(e»)

Forterture at $100 per d,y (1934 Act 32(b)

lnjuoctmn agamst use of name (Investment Company Act 35(d))

lmuncten against acting In certam capacities for Investment company and

other approprtate rehef (Investment Company Act 93&(,))

Breach of fidUCiary duty Inlunct,on (Investmenl Comp.ny Act 3&(,)

RHfRRAl 10 ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIS for Enforcement Action Sanction or Rehef

Willful violation of securities acts or rules thereunder or Willful misstatement

In any document required to be flied by secuntres laws and rules or by self

regulatory erganrzation m connection wIth an application for membership

pertrcrpaton or to become associated WIth a member thereof

MaXimum penalties $10,000 tme and 5 years Imprisonment an exchange

m,y be frned up to $500 ODD a pubhc-utrhtr holding compamupto $200.000

(1933 Act Sees 2Il(b). 24 1934 Act Sets 21(d) 32(,) 1935 Act Sees 18(0

29. 1939 Act Sec 325 Investment Co Act Sees 42(e) 49, Ad"sers Act

Secs 209(e) 211)

REFERRAL TO ATTORNEV GENERAL FOR CRIMINAL PROSECUTION

Persons Subject to Acts Constituting

and BaSIS for Enforcement Action

Willful Violation of secunnes acts or rules thereunder or Willful misstatement

In any document required to be filed by secuntres laws and rules or by self

regulatory organization In connection WIth an application for membership

pernopatmn Of to become associated With a member thereof

An, 1SSlIfr "tllch ~oflt .. SectIOfl lOA/.! of

ltIe 1934 Act.

Any officer or dlrettor of In 1SSUff, or any

shdholder KlInl on behlll of such ISSUer,

who WIllfUlly .... It.. Sect10n 3OA/.! of

the 1934 Act

Any ,,"pi.,.. or 'IOnl (subJect to th.

IUnsd'etIOfI 01 the Unrted Slit'" 01

., ....., found 10 hm .... .,ed SectIOfl 3O.I(.!

01 the 1934 Act, "ho Wlltfu'ly "med out

the oct or proch" constrtUlJnl such IlOl_

120

Sanction

MaXimum penalties $10000 Ime and 5 years Imprisonment an exchange

m,y be lined upto $500000 a puhhc-utrhty holdrng company up to $200 000

(1933 Act Sees 31l(b) 24.1934 Act Secs 21(d) 32(.) Holdrng Company Act

Sees 18(0 29. 1939 Act Sec 325 Investment Company Act Sees 42(e)

49 Advisers Act Sees 209(e) 211)

M'Xlmum pen,lty $1000000 hne (1934 Act Sec 32(eXI))

M'Xlmum penalty $10000 frne and 5 years impnsonment (1934 Act Sec

32(CX2))

MaXImum pen,lJr $10 000 frne and 5 years impnsonment (1934 Act Set

32(CX3»)

l

~

~

~

~ ~

"

~

~
Table 3D-Continued

TYPES OF PROCEEDINGS

REFERRAL TO ATIORNEY GENERAL fOR CRIMINAL PROSECUTION

~yperson

Persons Subject to Acts Constituting

and BaSIS for Enforcement ActIon

Sanction

Willful VIolation of securities acts or rules thereunder or WIllful misstatement

If! any document required to be filed by secunnes laws and rules 01 by selfregulatory organization In connection WIth an apphcetmn for mernbersfup

participation or to become associated With a member thereof

~y ISSU.. wh'ch at.. Sed ... 30A(.) 01

U1e 1934 Act (1 111 corrupt pract,ces)

Any officer 01 duector of an ISSUer, or In, stockholder .cllng on b.h.11 01 such 1SSUOf,

who wlilfull, .... at.. Sectoon 30A(.) 01

U1e 1934 Act

~, employee .. ogent (sub,ect to the ,unsdlcl ... 01 the Un,ted Stat.. ) .f .. ISSuerlound to h....... at.d Sedoon 30A(.) of the 1934 Act, who w,lIlully earned out the act Of prKtlCe constrtubng such

.Dlat ...

Maximum penalties SIO 000 fine and 5 years unpnsonrnent an exchange

may be fined up to $500 000 a pubnc utJllty holding company up to

$200000 (1933 Acl Sees 21J(b) 24 1934 Act Sees 21(d) 32(,) Holding

Company Act Sees 18{O 29 1939 Act Sec 325 Investment Company Act

Secs 42(e) 49 Ad"sers Act Sees 209(e) 217)

MaXimum penalty $1000 000 nne (1934 Act Sec 32\CX1H

MaXimum penalty $10 000 fine and 5 years rrnpnsonment 11934 Act Sec

311CX111

MaXimum penalty $10 000 fme and 5 years rmpnsonment (1934 Act Sec

321CX311

Table 31

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS ADMINISTERED BY THE COMMISSION

Pending September 30 1978

Opened

Total for llrstnbutmn

Closed

Pending September 30 1979

1356

296

1651

481

1171

During the fiscal year ending September 30, 1979, 157 formal orders

were issued by the Commission upon

recommendation of the DIvision of Enforcement.

Table 32

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR ENDING SEPTEMBER 30, 1979

Broker Dealer Proceedings

Investment AdVIser Proceedings

Stop Order Reg A Suspension and Other Disclosure Cases

315-805 a - 80 - 10

42

25

14

121
Injunctive Actions 1978-1979

During fiscal 1979, 108 suits for injunctions and 28 miscellaneous actions were Instituted in the United

States district courts by the Commissron, and 37 district court proceedings

were brought against the Commission.

During that year this office handled 11

appellate cases involving petitions for

review of Cornrnissron decisions, 3 appeals In reorqanizatron matters and 42

appeals in injunction and miscellaneous cases. SEC participated and

filed 15 amicus curiae briefs in 15

cases.

During fiscal 1979, the General

Counsel referred to the Department of

Justice 45 criminal reference reports.

(This figure Includes 4 criminal contempt actions.)

Table 33

INJUNCTIVE ACTIONS

Cases In/unctions Defendants

FIscal Year Instituted Ordered EnJomed

1970 III 97 448 1971 140 114 495 1972 119 113 511 1973 178 145 654 1974 148 289 613 1975 174 453 749 1976 158 435 722 1977 166 336 715 1978 135 289 607 1979 108 253 511

Criminal Proceedings

During the past fiscal year 45 cases

were referred or access was granted to

the Department of Justice. (This figure

includes 4 criminal contempt actions.)

As a result of these actions and those

prior referrals, 42 indictments were returned against 112 defendants during

the fiscal year. There were also 87 convictions in 56 cases. Convictions were

affirmed in 3 cases that had been appealed, and appeals were still pending

in 8 other criminal cases at the close

of the fiscal year. Of 20 defendants in

14 criminal contempt cases handled

during the fiscal year, 10 defendants

were convicted, prosecution was declined as to 5 defendants, and 7 defendants in 7 cases are still pending.

Three cases are pending in a Suspense

Cateqory.

Table 34

CRIMINAL CASES

Number of cases

FIscal referred/access Number of Defendants Convictions

year Justice Dept Indictments Indrcted

1970 35 36 102 55 1971 22 16 83 89 1972 38 28 67 75

1973 49 40 178 83 1974 67 40 169 81 1975 88 53 199 116 1976 116 23 118 97

1977 100 68 230 135 1978 109 50 144 174

1979 45 42 112 87

122
Trading Suspensions

During fiscal 1979, the Commission

suspended trading in the securities of

23 companies, a decrease of 73 percent from the 86 securities suspended

in fiscal 1978 and a 79 percent decrease from the 111 securities suspended in fiscaI 1977. Of the 23 companies whose securities were the

subject of trading suspensions in fiscal

1979, 10 were suspended because of

delinquency in filing required reports

with the Commission. In most other in.

stances, the trading suspension was

ordered either because of substantial

questions as to the adequacy, accuracy

or availability of public information

concerning the company's financial

condition or business operations, or

because transactions in the company's

securities suggested possible manipulation or other violations.

Foreign Restricted List

The Commission maintains and publishes a Foreign Restricted List which

is designed to put broker-dealers, financial institutions, investors and others on notice of unlawful distribution

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 violation of the registration requirements

of Section 5 of the 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 for

him. While most broker-dealers refuse

to effect transactions in securities issued by companies on the Foreign Restricted List, this does not necessarily

prevent promoters from illegally offering such securities directly to investors

in the United States by mail, by telephone, and sometimes by personal solicitation. During the past fiscal year,

there were no new corporations added

to the Foreign Restricted List. The total

number of corporations on the list is

101.

The complete list of all foreign corporations and other foreign entities on

the Foreign Restricted List on September 30, 1978, is as follows:

Aguacate Consolidated Mines, Incorporated (Costa Rica)

Alan MacTavish, Ltd. (England)

Allegheny Mining and Exploration

Company, Ltd. (Canada)

Allied Fund for Capital Appreciation

(AFCA, S.A.) (Panama)

Amalgamated Rare Earth Mines, Ltd.

(Canada)

American Industrial Research S.A.,

also known as Investigacion Industrial Americana, S.A. (Mexico)

American International Mining (Bahamas)

American Mobile Telephone and Tape

Co., Ltd. (Canada)

Antel International Corporation, Ltd.

(Canada)

Antoine Silver Mines, Ltd. (Canada)

ASCA Enterprises Limited (Hong

Kong)

Atholl Brose (Exports) Ltd. (England)

Atholl Brose, Ltd. (England)

Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

Banco de Guadalajara (Mexico)

Bank of Sark (United Kingdom)

Briar Court Mines, Ltd. (Canada)

British Overseas Mutual Fund Corporation Ltd. (Canada)

California & Caracas Mining Corp.,

Ltd. (Canada)

123
Canterra Development Corporation,

Ltd. (Canada)

Cardwell Oil Corporation, Ltd. (Canada)

Caribbean Empire Company, Ltd.

(British Honduras)

Caye Chapel Club, Ltd. (British Honduras)

Central and Southern Industries Corp.

(panama)

Cerro Azul Coffee Plantation (panama)

Cia. RIOBanana, S A (Costa Rica)

City Bank A.S. (Denmark)

Claw Lake Molybdenum Mines, Ltd.

(Canada)

Claravella Corporation (Costa Rica)

Compressed Air Corporation, Limited

(Bahamas)

Continental and Southern Industries,

S.A. (Panama)

Credito Mineroy Mercantil (Mexico)

Crossroads Corporation, S.A. (Panama)

Darren Exploration Company, S.A.

(Panama)

Derkglen, Ltd. (England)

De Veers Consolidated Minmg Corporation, S.A. (Panama)

Doncannon Spirits, Ltd. (Bahamas)

Durman, Ltd., formerly known as

Bankers International Investment

Corporation (Bahamas)

Empresia Minera Caudalosa de Panama, S.A. (Panama)

Ethel Copper Mines, Ltd. (Canada)

Euroforeign Banking Corporation, Ltd.

(Panama)

Financiera Comermex (Mexico)

Financiera de Eomento Industrial

(Mexico)

Financiera Metropolitana (MexICo)

Finansbanken a/s (Denmark)

First Liberty Fund, Ltd. (Bahamas)

Global Explorations, Inc. (Panama)

Global Insurance Company, Limited

(British West Indies)

Globus Anlaqe-Verrnlttlunqsqesellschaft MBH (Germany)

Golden Age Mines, Ltd. (Canada)

124

Hebilla Mining Corporation (Costa

Rica)

Hemisphere Land Corporation Limited

(Bahamas)

Henry Ost & Son, Ltd. (England)

International Communications Corporation (British West Indies)

International Trade Development of

Costa Rica, S.A.

Ironco Mining & Smelting Company

Ltd. (Canada)

James G. Allan & Sons (Scotland)

J.P. Morgan & Company, Ltd., of London, England (not to be confused

with J.P. Morgan & Co., lncorporated, New York)

Jupiter Explorations, Ltd. (Canada)

Kenilworth Mines, Ltd. (Canada)

Klondike Yukon Mming Company

(Canada)

Kokanee Moly Mines, Ltd. (Canada)

Land Sales Corporation (Canada)

Los Dos Hermanos, S.A. (Spain)

Lynbar Mining Corp., Ltd. (Canada)

Mercantile Bank & Trust Company,

Limited

Norart Minerals Limited (Canada)

Normandie Trust Company, S.A. (Panama)

Northern Survey (Canada)

Northern Trust Company, S.A.

(Switzerland)

Northland Minerals, Ltd. (Canada)

Obsco Corporation, Ltd. (Canada)

Pacific Northwest Developments, Ltd.

(Canada)

Panamerican Bank & Trust Company

(Panama)

Paulpic Gold Mines, Ltd. (Canada)

Pyrotex Mining and Exploration Co.,

Ltd. (Canada)

Radio Hill Mines Co., Ltd. (Canada)

Rodney Gold Mines Limited (Canada)

Royal Greyhound and Turf Holdings

Limited (South Africa)

S.A. Valles & Co., Inc. (Phillipines)

San Salvador Savings & Loan Co., Ltd.

(Bahamas)

-
Santack Mines Limited (Canada)

Security Capital Fiscal & Guaranty

Corporation, S.A. (Panama)

Silver Stack Mines, Ltd. (Canada)

Societe Anonyme de Refinancement

(Switzerland)

Strathmore Distillery Company, Ltd.

(Scotland)

Strathross Blending Company Limited

(England)

Swiss Caribbean Development & Finance Corporation (Switzerland)

PUBLIC UTILITY HOLDING

COMPANIES

System Companies

At fiscal year 1979, there were 14

holding companies registered under

the Act of which 13 are "active". In the

14 registered systems, there were 60

electric and/or gas utility subsidiaries,

90 non-utility subsidiaries, and 20 inactive companies, or a total of 168 system companies including the top parent and subholding companies. The

following table lists the active systems.

Table 35

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Allegheny Power System (APS)

smencan Etectnc Power Company (AEP)

Central and South West Corporation (CSW) "'Colonlal Gas Energy System (CGES)

Columbia Gas System (CGS)

Consolidated Natural Gas Company (eNG)

Eastern Utllrtles ASSOCiates(fUAl

General Pubhc UtilIties (GPU)

M.ddle South lltthtres (MSUI

National Fuel Gas Company (NfG)

New England Etectuc System (NEES)

Northeast lltthtres (NEUI

Philadelphia Electnc Power Co (PEP)

Southern Company (SCI

Total Companies

Solely

Registered

Hntdmg

Cornpanies

13

Regrstered

Holding

Operating

Companies Electnc and/or Gaslltthty Substdrartes

o

12

3

2

8

5

3

4

7

1

4

5

I

5

60

Nonutility

Subsidiaries

4

10

4

t2

10

6

I

5

2

3

2

8

o

3

70

Inactive

Companies

20

Tot,l

Compames Other

8 3

28 3'

JO Ib

17

19

12

7 4c

10 jb 13

5

7 4c

10 4c

3

9

168

a Beach Bottom Power Co Inc

-50'1. APS

50'1. AEP

OhIO Valley Elee Corp & Subs

tndana Kentucky Elec Corp

-electnc utrutr

-378'1. AEP

115'1. APS

49 7% B other cornpames

bArklahoma Corp

-32'1. CSW

34'1. MSU

34% Oklahoma Gas & £Iec

cYankee AtomIC Electric Co 30% NEES 31 5~ NEU

45'1. tuA

Connecticut Yankee AtomIC Power Co 15% NEES 44%

NEU 45'1. EUA

Vermont Yankee Nuclear Power Corp 20% NEES 12%

NEU 25'1. EUA

Mame Yankee Atorruc Power Co 20% NEES 15% NEU

4'1. fUA

-Statutory utility subsidranes

125
Table 36

KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY HOLDING COMPANY SYSTEMS

As of June 30 1979 (000 ormttedj Name of Company

Allegheny Power System (APS)

American Hectnc Power Company Inc (AEPl

Central and South West Corporation (C&SWj

Colomal Gas Energy System (CGES)'

Columbra Gas System Inc The (CGS)

Consolidated Natural Gas Company (CNG)

Eastern Utilities Associates (EUA)

General Public Utllittes Corporation (GPU)

Middle South lltrhttes Inc (MSUI

Natronaf Fuel Gas Company (NFG)

New England Electric System (NEES)

Northeast Utrhtres (NEU)

Phrladelptna Electric Power Co (PEPI Southern Company The (SCI

'Asof July 31 1979

'As01December 31 1978

126

Total Assets

s 2754956

8345337

3312473

100918

3467108

2374954

329962

4894928

6056223

599272

1883844

3063662 60789 10281 747

$47526 173

Operating ReYenues

$ 933886

2624968

1374618 44443

2560385

1745798

163997

1385832

1669778

580114

818531

968683 6829

2980889

$17858751
Table 37

PUBLIC FINANCING OF HOLDING COMPANY SYSTEMS

(Fisc.11979J

In Millions of Dollars

long term Pollution Stock Short Notes and-or Control Term

Bonds Debentures Fmancmgs Preferred Common Debt

Allegheny Power System Inc I I 800 700 Monogahela Power Co 450 150 500 Potomac Edison Power Co 480 West Penn PONer Co 840 American Electric Power Co 1360 1650 Appalachian Power Co 1050 500 400 1000 Indiana MIchigan Hectuc Co 800 100 400 1500 Kentucky Power Co 350 Ohio Power Co 400 1500 OhIO Valley E'ectnc Co 1010 Central & South West Corp 550 1500 Central PONel & LIght Co 500 1000 Pubhc Semce of Oklahoma 750 900 Southwestern Erectnc Po ....er Co 750 West Texas Utll!tlesCo 150 350 Central & South West Services 10 Celcrnal Gas Energy Co 55 Lowell Gas Co 69 Cape Cod Gas el1 41 Columbia Gas System 1750 450 1700 Consolidated Natural Gas Co 750 100 Eastern UlllltresAssocrates 115 150 Blackstone Valley Etectuc 150 Eastern Edison 475

General Pubht Utilities 1500 Jersey Central Power & LIght Co 500 700 1400 MetropolItan Edison Co 970 Pennsylvania Hectnc Co 500 1160 Middle South utumes 1415 1750 Arkansas MIssouri Power Co 66 Arkansas Power & light Co 600 400 lOUISIana Power & Light Co 600 83 950 1300 Middle South Energy 4000

MISSISSiPPi Power & LIght Co 100 New Orleans Pubhc Service 150 National Fuel Gas Co 400 345 New England Electric System 600 150 Gramte State Electric 10 Massachusetts Electric 150 Narragansett Etectnc 170 New England Power Co 780

Northeast Utilities 400 150 Connecticut ught & Power Co 1500

Hartford Electnt light Co 350 Holyoke Water Power Co 60 Northeast Utilities Service Co 30 Western Massachusetts Electric Co 100 400

Philadelphia Hectnc Power Co 43 SUSQuehanna Power Co 40

Southern Company The 1340 1000

Alabama Power Co 1500 Georgia Power Co 1150 44 800 500

Gulf Power Co 300 100 930 MISSISSiPPi Power Co 100

Connecticut Yankee AtomIC Power 150

Yankee AtomiC Hectnc Co 160

Total $1181 I $3369 11913 13305 1717 5 $3513 9

Total 164811 million

Fuel Programs

During fiscal year 1979, the Commission authorized $460.6 million of

fuel exploration and development capital expenditures for the holding company systems. These expenditures

cover annual fuel programs subject to

requlation under the Holding Company

Act defrned on geographIcal and functional terms. The following table hsts

the authorization by holding company

system for each fuel program.

127

=
Holdmg Company Systems

American Electnc Power Co

Central & South West Co,p

Columbia Gas System Inc

tonsendeteo Natural Gas Co

Middle South Uuhnes

New England Hectnc System Northeast Utilities

Southern Company

Table 38

REGULATED EXPENDITURES OF HOLDING COMPANY SYSTEMS

(Flsc,11979)

(In Millions of Dollars)

Coal lignite Fuel

Gas and/or Exploration & lhamum Nuclear Fuel Co,I Transportation all Exploration Development Exptoratron Procurement Gasification &Stolage

s $1150 $ $ 780 s 5 266 91 13 658

185

40 174 33 69 427

250 300 156

$690 $1274 $82 $1507 $225 $828

Iotal $4606 rrnluon

FUEL PROGRAMS

DUring fiscal year 1979 the Commission autbonzec $460 6 million of fuel explotatrons and development capital expenditures for the holding company systems Of

thrs amount $1964 million was for fossIl fuel exptoratrcn and development llranurrn exploration and teasing of nuclear fuel amounted to $158 9 million Approxl

mately S82 million of fuel transportancn and storage was for coal hopper cars and mamtenance equipment These expenditures cover annual fuel programs subject to

regulanon under the Hotdrng Company Act defined on geographical and functional terms

CORPORATE REORGANIZA nONS

In the fiscal year, the Commission

entered three new Chapter X proceedings involving companies with aggre.

gate stated assets of approximately

$69.9 million and aggregate indebt.

edness of approximately $93.6 million.

Including the new proceedings, the

Commission was a party in a total of

97 reorganization proceedings during

128

the fiscal year. The stated assets of the

companies involved in these proceedings totaled approximately $4.9 billion

and their indebtedness about $4.5 billion.

During the fiscal year, nine proceedings were closed, leaving 88 in which

the Commission was a party at year

end.

=
Table 39

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

(Fa 'ur 1979)

SEC Notice ot Debtor Dlstnct PetitIon Appearance

Court Filed Filed

Aldersgate Foundation, Inc M 0 Fla Sept 12 1974 Oct 3 1974 Amencan Associated Systems, Inc EO Ky Dec 24 1970 Feb 26 1971 Amentan land Corp 3 SO OhiO Aug 8, 1973 Sept 25, 1973 Amencan Mortgage & Investment Co n S C Dec 13 1974 Feb 6 1975 Arlan's Dept Stores Inc] SON Y March 8 1974 March 8 1974

Bankers Trust] SO Ind Oct 1966 No, 1 1966 Bankers Trust Co 3 SO MISS Oec 16 1976 April 5 1977 Beck Industnes, Inc SON Y May 27 1971 July 30, 1971 Bermec Corp , SON Y Apnl 16 1971 Apnl 19 1971 Beverly Hills Bancorp CO Cal Apol 11 1974 May 14, 1974

Brethren's Home, The SO OhiO No' 23 1977 Dec 27 1977 Bubble Up Delaware, Inc CO Cal Aug 31 1970 Oct 19, 1970 BXP Construction Corp SON Y Jan 15 1974 June 10 1974 CIPCorp' SO OhiO May 23 1975 June 26 1975 Carolma Caribbean Corp WO N C Feb 2B 1975 Apnl 17 1975

CItizens Mortgage Investment Trust! o Mass Oct 5 197B No, 1, 1978 Coast Investors, Inc 3 WO Wash Apnl 1 1964 June 10, 1964

Combmed Metals ReductIOn Co ONe, Sept 30 1970 Sept 7, 1972

Commonwealth Corp NO Fla June 28 1974 July 17 1974 Commonwealth FlOanclal Corp] EO Pa Dec 4 1967 Dec 13, 1967

Conhnentallnvestment Corp o Mass Oct 31 1978 Oct 31 1978 Conlmental Mortgage In,estors o Mass Oct 11 1976 Oct 11 1976 Contmental Vendmg Machme Corp 3 EON Y July 10 1963 Aug 7 1963 Davenport Hotel, Inc] EO Wash Dec 10, 1972 Jan 26 1973 Detroit Port Development Corp 3 EO MlCh Sept 14 1976 No' 17, 1976

DIversified EqUity Corp SO Ind Jan 24 1977 Feb 17, 1977 Dlverslfled Mountaineer Corp 1 SOW Va Feb 8, 1974 Apnl 24 1974

Dumont Airplane & Manne SON Y Oct 22 1958 No' 10, 1958

Duplan Corp SON Y Oct 5 1976 Oct 5 1976 ET & T leasmg Inc J e Md Oec 20, 1974 June 5, 1975

Farnngton Manufacturing Co 3 EO Va Oec 22, 1970 Jan 14 1971 First Baptist Church, Inc of Margate, Fla SOFia Sept 10 1973 Oct I 1973

FIrst Home Investment Corp of Kansas, Inc l o Kan Apnl 24 1973 Apnl 24, 1973

First Research Corp J SOFia March 2, 1970 April 14, 1970

Fort Cobb, Okla Irngatlon Fuel Authonty WO Okla Apfll 20 1979 July 16, 1979

GACCorp SOFIa May 19 1976 June 14 1976 GEBCO msestment Corp W 0 Pa Feb 8, 1977 March 24 1977

Wm Gluckm Co , ltd SON Y Feb 22, 1973 March 6 1973 Gro-Plant Industries, Inc 2 NO Fla Aug 30 1972 Sept 13 1972 Gualanty Trust Co WO Okla Apnl 9 1979 Apnl 9 1979

Gullco lnrestment Corp WO Okla March 12, 1974 March 28 1974

Gult llmon Corp M 0 La Aug 19 1974 No, 5 1974

Harmony loan Inc EO Ky Jan 31 1973 Jan 31 1973

HawaII Corp D Hawan March 17 1977 March 17, 1977

Hawkeye Land, ltd' SO Iowa Oec 19 1973 Jan 21 1974

Home-Stake Producllon Co NO Okla Sept 20 1973 Oct 1973 Houston Educational Foundatmn Inc 1 SO Texas Feb 16 1971 March 1971

Impeflal-Amencan Resources Fund Inc o Colo Feb 15 1971 March 1972 lmpenal '400 National, Inc 2 n N J Feb 18 1966 Feb 23 1966 lnduna BUSiness & Investment Trust2 SO Ind Oct 10 1966 No, 4, 1966

Interstate Stores, Inc' SON Y June 13, 1974 June 13 1974

Investors Associated Inc l W 0 Wash March 3 1965 March 17 1965

Investors Fundmg Corp of New York SON Y Oct 21 1974 Oct 21 1974

J 0 Jewell, Inc J NO Ga Oct 20 1971 No, 7 1972 King Resources Co l o Colo Aug 16 197I Oct 19, 1971

Lake Wmnebago Development Co Inc WO Mo Oct 14 1970 Oct 16 1970

lusk Corp o Am Oct 28 1965 No, 15 1965

Dolly Madison Industries Inc l EO Pa June 13 1970 July 6 1970

Mid-City Baptist Church' EO La July 30 1968 Oct 23 1968

Mount Everest Corp l EO Pa May 19 1974 June 18 1974

See footnotes at end 01 table

129
Table 39--eontinued

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

(rlSCll Yu, 19791

SEC Nottce of Debtor District Petmen of Appearance

Court Filed Filed

NatlOnal Telephone Co. Inc Conn July 10 1975 May 17 1976 Nevada Industrial Guaranty Co o Nev May 7 1963 July 1 1963 North Amencan Acceptance Corp NO Ga March 5 1974 March 18 1974 North Western Mortgage Investors Corp 3 W 0 Wash Dec 111973 Dec 11 1973 Omega-Alpha Inc 3 NO Texas Jan 10 1975 Jan 10 1975

Pactflc Homes CD Cal Dec 9 1977 Feb 1, 1978 Pan Amencan hnencral Corp D Hawau Oct 2 1972 Jan 9, 1973 Parkvlew Gem Inc W 0 Mo Dec 18 1973 Dec 18 1973 Pocono Downs Inc M 0 Pa Aug 10 1975 Aug 10, 1975 John Rich Enterprises Inc 1 o Utah Jan 16 1970 Feb 6 1970

Reliance lndustnes Inc o Hawau May 14 1976 Aug 10 1976 RIker Delaware Corp o N J April 11 1967 May 13 1967 Royal Inns of Amenca Inc SO Cal April 14 1975 June 14 1975 Scranton Corp 1 M 0 Pa April 3 1959 April 15 1959 Sierra Iradmg Corp J o Colo July 7 1970 July 11 1970

Sound Mortgage Co Inc j W 0 Wash July 17 1965 Aug 31. 1965 Southern land TItle Corp [0 La Dec 7 1966 Dec 31 1966 Stanndco Developers Inc WON Y Feb 5 1974 March 7, 1974 Stirling Harner Corp WON Y July 11. 1972 July 14 1971 Sunset lnternatrona! Petroleum Corp3 NO Texas May 17 1970 June 10 1970

1MT Trailer Ferry Inc 3 SOria June 17 1957 Nov 11, 1957 Thermo-Dyne Inc] W 0 Okla Feb 14 1978 June 5 1978 Iilco Inc o Kans reb 7 1973 reb 11, 1973 Tower Eredrt Corp] M 0 Fla April 13 1966 Sept 6, 1966 Tfaders Compress Co .I WO Okla May 11 1971 June 6 1972

Irens-tntematrona! Computer Investment? NO Cal March 11 1971 July 16 1971 Inmty Baptist Church of Jacksonvrue. Inc NO Fla June 24 1977 Oct 3, 1977 "U" Drstnct BUIldmg Corp W 0 Wash Dec 9 1974 Dec 9, 1974

US Fmancral Inc SO Cal Sept 13 1975 Nov 3 1975

UniversIty Baptist Church of Jacksonnne Honda Inc M 0 Fla May 13 1977 Oct 3 1977

Virgin Island Properties Inc 1 o V I Oct 11 1971 April 11 1971

Washington Group Inc M 0 N C June 10 1977 July 15 1977

Webb & Knapp Inc 1 SON Y May 7 1965 May 11. 1965

Western Growth Capital Corp o Am reb 10 1967 May 16 1968

Westgate tehforma Corp SO Cal Feb 16 1974 March 8 1974

Wonderbowl Inc CO Cal March 10 1967 June 7 1967 Yale Express System Inc' SON Y May 14 1965 May 18 1965

'Comrmssron filed notices of appearance 10 fiscal year 1979

2ReorgaOlzatlOn proceedrngs closed during fiscal year 1979

'Plan has been substantially consummated but no final decree has been entered because of pendrng matters

130

j

j
SEC OPERAnONS

The Commission collects fees for

the registration of securities, securities

transactions on national securities exchanges, and miscellaneous filings, reports and applications. In fiscal year

1979, the Commission collected a record $33 million dollars in fees, representing approximately 47 percent of

the total funds appropriated by the

Congress for Commission operations.

These figures are up from $26 million,

representing 42 percent of funds appropriated in fiscal year 1978. Nearly

$4 million of the increase in collections was attributed to Securities Act

registration fees resulting from both

higher volumes and larger offerings,

while higher stock exchange volumes

accounted for $2.3 million of the increase.

131
Appropriated Funds vs Fees Collected Dollars Millions

70

60

50

40

30

20

10

o

1971

....!I Es umoced

132

72 73 74 75 76
::::g

N- IN N

o

'"

000

ggg

000

O~~

O~~

IN

NIN N+N N N

o

'"

000

000

000

~o~

om~

~-=::

o

<5 o

z

<

_Nc:n.n_ __ NNc:n __ -"

NI-=+..... N

m

:: ~ii

HI

~o~

us

B ~g

c t- er: <a g

hHifi1Hil ..... «< < <cr;:V"l

133

U. S. GOVERNMENT PRINTING OFFICE 1980 0 315-805

~ ~

~~~ ~~~~~- ~

~

~

~ ~~

~ ~~

-=

~~~ '" ~~

-