SECURITIES AND

r.x(n".~:~~C COr 1'.'1iS.~ION

LIBH1\RY

For sale by the Supenntendent of Dccurnents, U S Government Pnntmg Office

Washmgton, D C 20402
OFFICE OF

THE CH~rRMAN

UN ITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. 0 C 20549

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March 2, 1987

The Honorable George Bush

President of the Senate

Washington, D.C. 20510

Gentlemen:

The Honorable Jim Wright

Speaker of the House

Washington, D.C. 20515

In fiscal 1986 the Securities and Exchange Commission increased investor pro.

tections and reduced unnecessary paperwork and other expenses, ultimately borne

by investors. Highlights include:

Record results or the highest levels in years were achieved by all Divisions (see

table on page 2). Over the past five years, through automation, paperwork reduction and other staff and Commission initiatives, the increase in the Commission's

results has compared favorably with the growth in the marketplace. For example,

since fiscal 1981:

• Enforcement actions have been increased 61 %.

• Full disclosure filings by issuers have increased 35%. SEC reviews of these filings have increased 71 % .

• The number of registered broker-dealers has increased 57%. SEC broker-dealer

oversight examinations have increased 73% and Self-Regulatory Organization

inspections 83%.

• The number of registered investment companies and advisers has increased

86%. SEC inspections have increased 155% .

• Targeting problem areas has improved the quality of reviews, examinations,

inspections and enforcement actions.

• The number of shares traded on the New York Stock Exchange has increased

186 %, but the number of transactions has Increased only 53 % because of the

growth of large transactions by institutions and others. The number of investors has increased 46%.

• Complaints to the SEC have increased 55 %. Since 1982 all are reviewed. Most

involve brokerage back office matters. They are referred to the firms' compliance departments for investigation and written response, and are tracked by

the SEC through resolution. Others are referred to the SEC Enforcement Division. the Justice Department, Self-Requlatory Organizations (SROs) or state securities commissions for investigation and prosecution if warranted.

1
Fiscal Years Ended September 30th

1981-86

1981 1982 1983 1984 1985 1986 Change

Lrtrqation'[ 121 141 161 176 153 179* +48%

Enforcement Actions 191 254 261 299 269 312* +61%

Frlmqs Reviewed 6,153 6,239 6,987 7,237 9,571 10,526* +71%

Broker-Dealer

Oversight Exams 278 249 324 389 447 481* +73%

SRO Inspections 12 19 18 20 21 22* +83%

Investment Co. and

Adviser Inspections 748 1,065 1,085 1,334 1,606 1,906* + 155%

Authorized Posrnons 2.021 2,021 2,021 2,021 2,046 2,080* +3%

Staff Yearst 1,982 1,881 1,921 1,885 1,940 1,898 -4%

Budget (000,000) $802 $833 $897 $94.0 $106.4 $106.3+ +33%

Fees as a Percentage

of the SEC's Budget 81% 94% 110% 129% 135% 203%*

* A record or the highest level in years.

'!' Cases litigated by the Office of the General Counsel, amicus positions, civil subpoena

responses and bankruptcy appearances.

t Authonzed Positions and actual Staff Years. The differences are due primarily to budge.

tary constraints and also to government-private sector wage disparities

+ After a $4.8 million reduction from the $111.1 million appropriated due to Gramm-RudmanHollings, which was restored at the request of the President in fiscal 1987.

Budget: In fiscal 1986 the budget was reduced from the $111.1 million appropriated to $106.3 million ($4.8 million or 4.3%) due to the Gramm-Rudman-Hollings

Balanced Budget and Emergency Deficit Control Act. At the request of the President the Commission's fiscal 1987 budget restored the Gramm-Rudman-Hollinqs

reduction plus $3.4 million. Since 1981, the Commission's budget has been increased 43 % to $114.5 million in fiscal 1987. In each of the last four fiscal years

registration, transfer and other fees have significantly exceeded the Commission's

budget, which has happened only once before in the past 52 years. In fiscal 1986,

fees exceeded the budget by 203 % or $109 million. The President has requested

a $31 million (27 %) increase in the Commission's fiscal 1988 budget to $145 million, which is presently pending before Congress. The increase is principally to

cover start-up costs of the operational electronic disclosure system ("Edgar") and

a 9% increase in authorized positions from 2,086 to 2,267 for enforcement and

related activities. The President requests and Congress legislates the Commission's

budget, personnel and fees. Fees and fines are remitted to the Treasury as received.

Enforcement: Enforcement actions increased 16% to 312 cases from 269 in

1985. They included 114 broker-dealer and other regulated entity cases, 69 securities offering violation cases, 49 false and misleading financial disclosure cases

and a record 34 insider trading cases. In fiscal 1986, court orders required violators to disgorge a record $38 million of illicit profits and to pay $4 million in fines.

On November 14,1986, a record $100 million consent judgement was obtained

against Ivan Boesky. He was also barred from the securities industry, became a

2
cooperating witness in ongoing investigations by the SEC and the Justice Department and consented to a felony count which may result in up to five years imprisonment and $250,000 in fines.

While insider trading cases have received a great deal of publicity, they have only

amounted to 10% or less of enforcement actions in recent years; however, they

have increased significantly over prior years. During the past five years, 125 insider trading cases have been brought, as compared with 77 during the preceding

47 years. The large increase is due principally to the increase in corporate takeovers

and to improved surveillance and enforcement systems and techniques by the Enforcement Division. With the support of the business and financial community,

the investing public, the Administration and Congress, the SEC's ability to expose

and prosecute securities frauds has been significantly enhanced by electronic market surveillance systems, transaction audit trails, heavy fines and growing cooperation from abroad (see International Accords below).

The Ivan Boesky and many other cases demonstrate that it has become increasingly difficult for inside traders to hide - at home or abroad - and that those

who engage in such activities are assuming significant risks of imprisonment, heavy

fines and civil suits, disbarment from the legal profession and the securities industry - and public disgrace. Insider trading has not been eradicated, but it has

been inhibited and multimillions of dollars of profits that Boesky and others have

been siphoning off the markets are now flowing through to legitimate investors

and traders.

International Accords: Starting with the Swiss Accord in 1982, the Commission has implemented additional cooperation agreements on enforcement matters with Canadian, Japanese and United Kingdom authorities. Others are in

prospect. The logical extension of these bilateral agreements will be multilateral

agreements with virtually all major markets.

At the Commission's initiative in 1986, the 30-nation International Organization

of Securities Commissions formed multinational committees to accelerate: cooperation on enforcement matters; the clearance and settlement of international securities transactions; access to each others' markets; and the growth of less developed

countries' markets.

The Corporation Finance Division is preparing for the Commission's consideration a proposal to permit so-called "world class" corporations to do investment

grade debt, exchange and rights offerings in certain participating countries under

prospectuses that comply with their domestic requirements, subject to certain minimum provisions.

International Unkages: Upon the recommendation of the Market Regulation

Division, the Commission approved linkage of the Midwest and Toronto stock exchanges, and the first transatlantic exchange of stock quotations by the National

Association of Securities Dealers and the London Stock Exchange. The Commission has previously approved linkages of the American and Toronto stock exchanges and the Boston and Montreal stock exchanges.

About 500 companies' shares are now actively trading in more than one country.

By the early 19905 we may well witness over a fivefold increase in the number

3
of companies with shares trading around the clock and the world through a gric

of international linkages of major markets and brokerage networks.

Program Trading: By telescoping into minutes and hours transactions previously executed over days and weeks, computerized hedging and arbitrage has increased market volatility in dollars, but not in percentage changes of the averages.

Stock index options and futures enable investors, underwriters and others to hedge

market risks at a fraction of the prior costs. Computerized arbitrage brings the

prices of options and futures into line with those of the underlying securities, which

increases the efficiency and liquidity of the markets.

To dampen the volatility on quarterly settlement dates when options and futures

expire, the Commission proposed that certain order imbalances be displayed on

the ticker tape during the last half hour of trading. The results have been encouraging. The Commission also encouraged and endorsed the Chicago Mercantile Exchange's and the Chicago Board Option Exchange's proposals to settle certain

stock index futures and options at opening instead of closing prices, and the CME's

proposal to increase its margin requirements. The Market Regulation Division is

monitoring these efforts and considering others to dampen interim and settlement

volatility.

Tender Offers: To address discriminatory tender offers, the "all holders, best

price" rule was adopted. It requires that tender offers be made to all holders of

a class of securities and that the best price paid to any be paid to all. The minimum offering period of issuer tender offers was conformed to that of third party

offers and withdrawal rights were extended throughout all offers. Legislation was

proposed to reduce from ten to two days the 13D disclosure of the acquisition

of a 5% interest in a company. The Corporation Finance Division is analyzing extensive responses received to a concept release on "unconventional" tender offers,

"poison pills" and companies "opting out" of certain tender offer rules upon share.

holder approval.

One-Share One- Vote: Public hearings were held on December 16 and 17, 1986

concerning the New York Stock Exchange's proposal to permit listed companies

to issue classes of common stock with different voting rights upon approval by

a majority of their independent directors and public shareholders. The Market Regu.

lation Division is analyzing the comments and alternatives.

Electronic Disclosures: The Commission's pilot electronic disclosure system

(known as "Edgar" for Electronic Data Gathering, Analysis and Retrieval) success.

fully completed its second full year of operation. Over 1,000 issuers have filed

over 15,000 documents on Edgar. The primary purpose of Edgar is to increase

the efficiency and fairness of the markets for the benefit of investors, issuers and

the economy by reducing from days and weeks to minutes and hours the public

dissemination of tirne-sensitive corporate information. This will increase the utili.

ty of such information to investors, accelerate issuers' access to the market and

increase their financing flexibility. Edgar will also assist the Corporation Finance

and Investment Management Divisions in improving the efficiency, breadth and

quality of their filing reviews and the Enforcement Division in its investigations.

Offers for the operational Edgar system have been received and are being evaluated. Comments on an advance rulemaking proposal for electronic disclosures

are under review.

4
Shareholder Communications: To facilitate issuers' communications with

their investors, under rules adopted by the Commission, broker-dealers began making available to issuers on January 1, 1986 the identity of their non-objecting shareholders. The Commission has issued similar rules for commercial banks under

the Shareholder Communications Act of 1985.

Certificate Immobilization: The Commission is encouraging voluntary immobilization of debt security certificates through the greater use of electronic bookentry systems and central depositories, which will save multimillions of dollars

of expenses ultimately borne by investors and reduce paperwork and other

problems. Ford Motor Credit Corporation successfully consummated the first public

offering of conventional corporate debt on a book-entry basis on October 21, 1986.

Also, with the Commission's support, the Government National Mortgage Association announced in December 1986, its intention to begin issuing securities on

a book-entry basis through the MBS Clearing Corporation by the third quarter of

1987. Upon the recommendation of the Market Regulation Division, the Commission approved the registration of the MBSCC as a clearing agency through July

1988. GNMA's initiative will accelerate the clearance and settlement of transactions and reduce GNMA fail rates, which have been running in excess of 30%.

Proxies: Proxies were improved and the costs reduced for the benefit of investors through the integration of disclosures, simplification of compensation plan

information and greater new registrant disclosures of accountant changes.

Economic Research: The Office of the Chief Economist released economic

studies concerning the adverse impact on share prices upon announcement of companies' intentions to adopt "poison pills"; the use of noninvestment grade debt

to provide 14% of tender offer financings during the first half of 1985; and the

negligible impact on stock prices of SEC enforcement of the ceiling test for those

oil and gas companies which use "full cost" accounting. The OCE and the Directorate of Economic and Policy Analysis also published studies finding that multiple listing reduces the cost of transactions in both listed and OTC stock options.

Investment Advisers/Financial Planners: Upon the recommendation of

the Investment Management Division, the Commission endorsed the National Association of Securities Dealers' proposed pilot inspection program for the investment advisers of its members and their affiliates, which account for 43% of

registered investment advisers.

Litigation: In litigation involving the Office of the General Counsel, the Commission's positions were upheld in 86% of 81 decisions, including the insider trading misappropriation theory in U.S. v. Carpenter (cert. granted); the Commission's

authority to administratively discipline accountants in Davy v. SEC; antifraud provision applicability to government securities repurchase transactions in SEC v.

Drysdale Securities Corporation; the materiality of ongoing merger negotiations

prior to an agreement in principle in Levinson v. Basic; the applicability of Securities Act disclosure requirements to predecessor entities in SEC v. American Board

of Trade; and that tax offset rules do not mitigate tax shelter investors' rescissionary damages in Randall v. Loftsgaarden.

Functional Regulation: The Commission testified in support of the Bush Task

Group recommendation to consolidate within the SEC the securities reporting re5
quirements of 700 publicly owned banks and thrifts. This would permit more uniform disclosures and enforcement at lower cost. The 12,000 other publicly owned

companies, including 1,000 banks and thrift holding companies, presently file with

the SEC.

Small Business: In compliance with the Small Business Investment Incentive

Act's requirement to reduce state and federal regulatory burdens on small businesses, the Commission adopted and the North American Securities Administrators Association recommended to the states a uniform notification form for certain

financings exempt from registration under Regulation D. Also, the asset threshold

requiring registration of issuers' securities was raised from $3 to $5 million.

Annual Reports: The Corporation Finance Division approved a General Motors proposal to improve issuers' communications with their shareholders by provlding more readable annual reports at lower cost, without reducing the information

provided shareholders.

Government Securities: A study prepared in consultation with the Treasury

Department and the Federal Reserve Board formed a basis for the Government

Securities Act of 1986. The Act requires previously unregulated government securities dealers to register with the Commission. The Commission and the federal

bank regulators share inspection and enforcement responsibilities.

Accounting: Upon the recommendation of the Office of the Chief Accountant,

the Commission requested the Financial Accounting Standards Board to address

issues related to market value changes in financial instruments, off-balance-sheet

financing and risk transfer instruments. Guidance was also provided public companies on reportinq the effects of the Tax Reform Act of 1986

Roundtables: Eight open roundtable discussions of the Commission and senior

staff were held with leading business, academic and other authorities on major

issues concerning the role of investment advisers and financial planners, index

arbitrage, takeover developments, disclosure of merger negotiations, surveillance

and enforcement programs, independent auditors and other matters.

Legislation: Commission representatives testified at 12 Congressional hearings

concerning civil RICO reform, tender offer regulation, SEC appropriations, SEC

oversight, bank accounting and financial reporting, disclosure of foreign investments, investment advisers and financial planners, insider trading, financial report.

ing and the role of the independent auditor, regulation of financial services and

other matters. The staff also assisted Congressional committees in drafting legislation and provided studies and other information in response to Congressional

requests.

The past year's results are a product of the ability and dedication of the staff

and Commissioners. The Commission also received excellent cooperation and sup.

port from the business and financial community, the investing public, the Justice

Department, the Self-Regulatory Organizations, the state securities commissions,

the Administration and Congress.

s;nce~

John Shad

Chairman

6
Table of Contents

Chairman's Letter of Transmittal. . . . . . . . . . . . . . . . . . . . . . . . 1

Enforcement Program 7

Key 1986 Results 7

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Program Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Corporate Reporting and Accounting . . . . . . . . . . . . . . . . . . 9

Insider Trading 10

Regulated Entities and Associated Persons 12

Securities Offering Violations . . . . . . . . . . . . . . . . . . . . . . . . 14

Market Manipulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Changes in Corporate Control 15

Other Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Transnational Securities Issues. . . . . . . . . . . . . . . . . . . . . . . 15

Sources for Further Inquiry. . . . . . . . . . . . . . . . . . . . . . . . . . 16

Full Disclosure System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Key 1986 Results -. . . . . . . . . . . . . . . . . . . . . . . . . 17

Rulemaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Operational Edgar System 18

Tender Offers 18

Shareholder Communications. . . . . . . . . . . . . . . . . . . . . . . . 18

Filing Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Pricing Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Classification of Issuers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Filings for Exempt Private Offerings 19

The Proxy Review Program. . . . . . . . . . . . . . . . . . . . . . . . . . 19

Interpretations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Conferences 20

Accounting and Auditing Matters. . . . . . . . . . . . . . . . . . . . . . . . 20

Accounting-Related Rules and Interpretations . . . . . . . . . . . . . 21

Oversight of Private Sector Standards-Setting. . . . . . . . . . . . . 22

FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Pensions 23

Cash Flow Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Income Taxes 23

Financial Reporting and Changing Prices. . . . . . . . . . . . . . . 23

Other Projects , . . 23

Timely Financial Reporting Guidance. . . . . . . . . . . . . . . . . . 23

Oversight of the Accounting Profession's Initiatives . . . . . . . . 24

SEC Practice Section 24

Special Investigations Committee. . . . . . . . . . . . . . . . . . . . . 24
The Edgar Project " . . . . . . . . . . . . . . . . . . . . . 27

Regulation of the Securities .Markets . . . . . . . . . . . . . . . . . . . . . 30

Key 1986 Results 30

Securities Markets, Facilities, and Trading 31

The National Market System. . . . . . . . . . . . . . . . . . . . . . . . . 31

National System for the Clearance and

Settlement of Securities Transactions. . . . . . . . . . . . . . . . 31

Securities Immobilization . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Internationalization .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Options ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Issuer Tender Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Regulation of Brokers, Dealers, Municipal

Securities Dealers, and Transfer Agents. . . . . . . . . . . . . . . . 34

Broker-Dealer and Transfer Agent Examinations. . . . . . . . . 34

Rule 10b-6 and Shelf Distributions. . . . . . . . . . . . . . . . . . . . 35

Rule 10b-6 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Financial Responsibility Rules. . . . . . . . . . . . . . . . . . . . . . . . 35

Uniform Net Capital Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Interpretations of the Net Capital Rule. . . . . . . . . . . . . . . . . 36

Transfer Agent Registration Forms. . . . . . . . . . . . . . . . . . . . 36

Bank Securities Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Extension of Credit by Broker-Dealers

of Direct Participation Programs. . . . . . . . . . . . . . . . . . . . 36

Interpretive Release Concerning the Scope of

Section 28(e) of the Securities Exchange Act. . . . . . . . . . 37

Lost and Stolen Securities 37

Transfer Agent Regulation 37

Oversight of Self-Regulatory OrganIzations . . . . . . . . . . . . . . . 38

National Securities Exchanges . . . . . . . . . . . . . . . . . . . . . . . 38

National Association of Securities Dealers, Inc. d • • • • • • • • • 38

Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . 38

Clearing Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

SRO Surveillance and Regulatory Compliance Inspections . . . 39

SRO Final Disciplinary Actions. . . . . . . . . . . . . . . . . . . . . . . 40

Status Report as of September 1986 . . . . . . . . . . . . 40

Applications for Re-entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Investment Companies and Advisers . . . . . . . . . . . . . . . . . . . . . 44

Key 1986 Results «

Disclosure Requirements "...................... 45

Edgar 46

Regulatory Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Investment Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Insurance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Public Utility Holding Companies. . . . . . . . . . . . . . . . . . . . . . . 47

Holding Company Financings . . . . . . . . . . . . . . . . . . . . . . . . 48

Subsidiary Service Companies ....................•.. 48

ii
Significant Applications and Interpretations 48

Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Holding Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Institutional Disclosure Program. . . . . . . . . . . . . . . . . . . . . . 50

Other Litigation and Legal Activities. . . . . . . . . . . . . . . . . . . . . 51

Key 1986 Results 51

Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Appeals in Commission Enforcement Actions . . . . . . . . . . . 52

Petitions to Review Commission Orders. . . . . . . . . . . . . . . . 54

Commission Participation in Private Litigation 55

Trading on Material Non-Publlc Information 57

Tender Offer Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Commission Action Under Rule 2(e). . . . . . . . . . . . . . . . . . . 59

Litigation Involving Requests for Access

to Commission Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Litigation Against the Commission and Its Staff " . . . . . . . 62

Significant Legislative Developments. . . . . . . . . . . . . . . . . . . . 63

Regulation of Financial Services. . . . . . . . . . . . . . . . . . . . . . 63

Regulation of Investment Advisers and Financial Planners . 63

Racketeer Influenced and Corrupt Organizations Act. . . . . . 64

Foreign Corrupt Practices Act of 1977 . . . . . . . . . . . . . . . . . 64

Bank Accounting and Financial Reporting . . . . . . . . . . . . . . 64

Financial Reporting and the Role

of the Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . 64

Regulation of the Government Securities Markets . . . . . . . . 65

Corporate Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Estate Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Plans of Reorganization/Disclosure Statements 68

Compliance with the Registration Requirements

of the Securities Act .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Stockbroker Liquidation Proceedings. . . . . . . . . . . . . . . . . . 70

Economic Researchand Analysis . . . . . . . . . . . . . . . . . . . . . . . . 71

Management and Program Support 73

Key 1986 Management and Program Developments. . . . . . . . 73

Information Systems Management . . . . . . . . . . . . . . . . . . . . . . 73

Financial Management. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 73

Facilities Management .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Personnel Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Public Affairs 75

Consumer Affairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Equal Employment Opportunity. . . . . . . . . . . . . . . . . . . . . . . . 77

Commissioners and Principal Staff Officers 78

iii
Biographies of Commissioners . . . . . . . . . . . . . . . . . . . . . . . . . . 80

John Shad. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Charles C. Cox 80

Aulana L. Peters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Joseph A. Grundfest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Edward H. Fleischman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Regional and Branch Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Footnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Appendices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

APPENDIX TABLES

1 Unconsolidated Financial Information for Broker-Dealers. . 107

2 Unconsolidated Annual Revenues and Expenses for

Broker-Dealers Doing a Public Business 108

3 Unconsolidated Balance Sheet for Broker-Dealers Doing a

Public Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 109

4 Securities Industry Dollar in 1985 for Carrying/Clearing

Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

5 Unconsolidated Revenues and Expenses for Broker-Dealers

(Carrying/Clearing) 112

6 Unconsolidated Balance Sheet for Broker-Dealers

(Carrying/Clearing) 113

7 Broker-Dealers and Branch Offices 114

8 Brokers and Dealers Registered under the Securities

Exchange Act of 1934 115

9 Applications and Registrations of Brokers and Dealers

and Investment Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

10 Applications and Registrations of Municipal Securities

Dealers and Transfer Agents 117

11 Consolidated Financial Information of Self-Regulatory

Organizations 120

12 Self-Regulatory Organizations - Clearing Agencies

1985 Revenue and Expenses 121

13 Municipal Securities Rulemaking Board Statements of

Revenues and Expenses and Change in Fund Balance. . . . 122

14 Companies Registered Under the Investment Company Act

of 1940 as of September 30, 1986. . . . . . . . . . . . . . . . . . . . 124

15 Companies Registered Under the Investment Company Act

of 1940 _ 125

16 New Investment Company Registrations 126

17 Investment Company Registrations Terminated. . . . . . . . . . 126

18 Market Value and Volume of Equity/Option Sales on

Registered Securities Exchanges 128

18B Volume of Equity/Options Sales on U.S. Securities

Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Iv
18C Market Value of Equity/Options Sales on U.S. Exchanges 130

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

Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

19 Market Value of Securities Traded on All U.S. Stock

Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

20 Share Volume by Exchanges. . . . . . . . . . . . . . . . . . . . . . . . 134

21 Dollar Volume by Exchanges. . . . . . . . . . . . . . . . . . . . . . . . 134

22 Special Block Distributions Reported by Exchanges. . . . . . 135

23 Securities Listed on Exchanges . . . . . . . . . . . . . . . . . . . . . . 136

24 Value of Stocks Listed on Exchanges 137

25 Securities Traded on Exchanges 138

26 Unduplicated Count of Securities on Exchanges 138

27 Immobilization Trends 139

28 Effective Registrations 140

29 Securities Effectively Registered with S.E.C. 141

30 Securities Effectively Registered with S.E.C. 142

31 Effective Registrations by Purpose and Type of

Security: Fiscal Year 1986P .. . . . . . . . . . . . . . . . . . . . . . . . 144

32 Effective Registrations by Purpose and Type of

Security: Fiscal Year 1985R 144

33 Effective Registrations Cash Sale for Account of

Issuers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

34 Offerings Under Regulation A (Cleared) . . . . . . . . . . . . . . . . 146

35 Types of Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

36 Nationwide Enforcement Program Enforcement Cases

Initiated by the Commission During Fiscal 1985 in

Various Program Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

37 Investigations of Possible Violations of the Acts

Administered by the Commission 152

38 Administrative Proceedings Instituted During

Fiscal Year Ending September 30, 1985 .. " " . . 152

39 Injunctive Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152

40 Public Utility Holding Company Systems. . . . . . . . . . . . . . . 156

41 Key Financial Statistics of Registered Public Utility

Holding Company Systems. . . . . . . . . . . . . . . . . . . . . . . . . . 157

42 Reorganization Proceedings Under Chapter 11 of the

Bankruptcy Code in Which Commission Entered

Appearance : . . . . . . . . . . . . . . . . . . . 158

43 Appropriated Funds vs Fees Collected. . . . . . . . . . . . . . . . . 162

44 Budget Estimates and Appropriations . . . . . . . . . . . . . . . . . 163

Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

v
Enforcement Program

Key 1986 Results

The Commission brought 312 enforcement actions during fiscal year

1986, as compared with 269 in 1985. There were 30 cases in which insider

trading was the primary violation alleged, and an additional 4 cases where

insider trading was alleged in addition to other primary violations. The 34

actions represent the highest number of insider trading cases brought by

the Commission in a single year. There was also a substantial increase over

the preceding two years in the number of civil and criminal contempt actions. The enforcement program continued to be comprehensive, with actions involving false and misleading financial disclosure, fraudulent

securities offerings, and violations by broker-dealers and other regulated

entities comprising the majority of the cases.

Total Actions Initiated

%

FY '81 FY '82 FY '83 FY '84 FY '85 FY '86 Change

191 254 261 299 269 312 61%

114 136 151 179 143 162 42.1%

N.A. 418 416 508 385 477

72 106 94 114 122 136 89%

N.A. 287 189 221 199 202

Total

Civil Injunctive Actions

Defendants Named

Administrative Proceedings

Respondents in Proceedings

Civil and Crirrunal Contempt

Proceedings

Defendants

Reports of Investigation

N.A.

N.A.

N.A.

9

16

3

14

19

2

~

8

2

3

6

1

14

18

o

In 1986 the Commission obtained court orders requiring defendants to

return illicit profits amounting to more than $38.2 million, either as disgorgement or restitution to defrauded investors. Disgorgement orders in

insider trading cases amounted to $29.7 million, compared to $2.1 million in 1985. The Commission also recovered $3.7 million during fiscal year

1986 in civil penalties under the Insider Trading Sanctions Act of 1984

(ITSA).

The Comrnissron referred or granted access to its files to the Department

of Justice or state prosecutorial authorities in 142 cases, as compared with

145 in 1985. There were 72 criminal indictments or informations obtained

during fiscal 1986 in Commission related cases, compared to 59 in 1985.

There were 71 criminal convictions in Commission related cases during fiscal year 1986, compared to 93 in 1985.

Introduction

The Commission's enforcement program seeks to preserve the integrity, efficiency and fairness of the securities markets by enforcing the Federal securities laws. These laws provide civil and administrative remedies

designed to rectify past violations and prevent future violations.

7
Most Commission enforcement actions are preceded by a private inve,

tigation to determine whether a violation of the securities laws has occurre

or is about to occur. Where necessary, the Commission may order a foi

mal investigation and thereby authorize the staff to issue subpoenas com

pelling testimony and the production of documents.

Depending on the results of an investigation, the Commission may autho

rize the staff to commence a civil action in a United States District Court

institute an administrative proceeding, or refer the matter to the Depart.

ment of Justice for criminal prosecution. Matters may also be referred to

state or local authorities or self-regulatory organizations for appropriate

action.

The Commission's primary civil remedy is a Federal court injunction

which directs the subject to comply with the law in the future. If it is violated, contempt of court proceedings may result in imprisonment or the imposition of fines. Courts may also issue orders providing other equitable

relief such as restitution, disgorgement of illicit profits, and other appropriate remedies.

The Commission is authorized to bring administrative proceedings

against regulated entities such as broker-dealers, investment companies,

or investment advisers, as well as persons associated with such entities.

Where the Commission finds that a regulated entity has willfully violated

the securities laws, it may impose remedial sanctions ranging from a censure to a revocation of the registration required for the entity to conduct

business. The Commission also may censure or limit the activities of associated persons, or suspend or bar such persons from association.

Issuers of securities are subject to administrative proceedings ifthey fail

to comply with the disclosure, proxy and tender offer provisions of the Exchange Act. Individuals causing such failures may also be named as respondents in such proceedings. Respondents may be ordered to comply with

applicable provisions upon specified terms and conditions, or to take steps

to effect compliance. Issuers may also be named as respondents in certain

proceedings authorized by the Securities Act. In addition, the Commission

may publish reports of investigation under Section 21(a) of the Exchange

Act.

Criminal sanctions for Federal securities law violations include fines and

imprisonment for up to five years for each violation. The Commission has

developed close working relationships with the Department of Justice and

U.S. Attorneys' offices to assist the investigation and prosecution of such

cases. The Commission also cooperates closely with state securities regulators and self-regulatory organizations, including the National Association

of Securities Dealers (NASD) and the various national securities exchanges.

Program Areas

The Commission investigates and brings enforcement actions to remedy a broad range of violations. Classified by primary violation, enforcement

activity during fiscal year 1986 included cases concerning corporate reporting and accounting; 1 insider trading;2 violations by regulated entities and

8
associated persons:" market manlpulation:" securities offerinqs:" changes

in corporate control:" related party transactlons:? civil and criminal contempt actions:" and delinquent filing cases against both issuers and individuals.?

Corporate Reporting and Accounting-Financial disclosure cases continued to be a high priority in fiscal year 1986. The Commission brought

35 cases containing significant allegations of financial disclosure violations

against issuers or their employees, compared with 42 such cases in 1985

and 33 in 1984. The Commission also brought 15 cases alleging misconduct on the part of accounting firms or their partners or employees in fiscal year 1986, including one of the issuer disclosure cases set forth above. 10

There were 14 enforcement actions against accountants or accounting firms

in 1985 and 18 in 1984.

Typical financial disclosure cases involve the improper valuation of assets or liabilities; the improper recognition of revenue or income; the failure

to establish sufficient provisions for bad debts or other contingencies; or

the failure to provide adequate disclosure concerning the issuer's true financial position. Many of these cases also involve violations of the accounting

provisions of the Foreign Corrupt Practices Act. Financial disclosure cases

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

but effective prosecution of them is essential to preserving the integrity of

the disclosure system.

In one financial disclosure case, SEC v. Carter, II the Commission obtained

injunctive relief against three executive officers who allegedly caused an

issuer to overstate its net income by $44 million as a result of failing to

implement write-offs and reserve increases as recommended by the financial management of its subsidiaries. An action based on the same facts had

previously been brought against the issuer during 1985.12 The issuer, which

had restated its financial statements prior to the Commission's action, consented to the entry of a permanent injunction and agreed to maintain an

audit committee of its board of directors.

In an administrative proceeding, In the Matter of American Express Co., 13

the Commission found that the manner in which an issuer had accounted

for two reinsurance transactions engaged in by a wholly owned subsidiary

was not in accordance with generally accepted accounting principles. The

Commission accepted the issuer's offer of settlement in which it agreed,

among other things, to comply with the reporting provisions of the Exchange Act.

Financial disclosure cases are sometimes accompanied by allegations

of insider trading. In one injunctive action, 14 for example, the Commission

alleged that an issuer had failed to disclose substantial losses of trade credit

and had failed to write down its interest in a refinery. The Commission filed

a separate injunctive action against an officer of the issuer alleging that

he had sold stock while in possession of material, nonpubJic information

concerning the issuer's financial problems. IS

Financial disclosure cases may also involve misconduct on the part of

the independent accountants who examine and issue an opinion on the issuer's financial statements. One example is In the Matter of Seidman and

9
Seidman, 16 an administrative proceeding brought pursuant to Rule 2(e) of

the Commission's Rules of Practice against a national accounting firm. The

Commission concluded, in its Order, that the firm had failed to comply with

generally accepted auditing standards in connection with its examination

of an issuer's financial statements. The firm was censured and ordered to

comply with its undertakings to implement new procedures and policies

designed to prevent a recurrence of the practices found to be deficient.

In addition to financial disclosure cases, the Commission brought six

cases involving the misrepresentation or failure to disclose information concerning related party transactions, the compensation of officers, or other

matters during fiscal 1986. The Commission also brought 18 delinquent

filing actions against issuers during the fiscal year, compared with 19 in

1985 and 15 in 1984.

Insider Trading-Individuals who purchase or sell securities while in possession of material, nonpublic information relating to such securities, in

violation of a fiduciary duty or other relationship of trust and confidence,

undermine the expectation of fairness and honesty that is the basis of investor confidence in the nation's securities markets. The trading of standardized options contracts, coupled with tender offers and other

acquisitions, has increased opportunities for those with material nonpublie information to reap large profits.

The Commission's insider trading enforcement program achieved record

results in fiscal year 1986. The 30 cases brought during the year represented an increase of 50 percent over 1985, and included several of the most

significant insider trading cases ever brought by the Cornrnlssion.!" The

Commission obtained court orders requiring defendants to disgorge over

$29.7 million, compared to $2.1 million in 1985, with the amount recovered in four separate cases exceeding the highest amount recovered in

an insider trading case prior to fiscal year 1986. The Commission also obtained $3.7 million during fiscal year 1986 in civil penalties under lTSA.

In SEC v. Levine,I8 the Commission brought its largest insider trading

case up to September 30, 1986 against Dennis Levine, an investment

banker, two Panamanian companies allegedly under his control, and a Swiss

citizen who acted as a broker for Levine's trades through a Bahamian sub.

sidiary of a Swiss bank. The Commission alleged, among other things, that

Levine made $12.6 million by trading in the securities of at least 54 issuers

while in possession of material, nonpublic information about actual or proposed tender offers, mergers, and other business combinations.

Levine agreed to disgorge at least $11.6 million, including $10.6 million in his Bahamian bank account. Levine also consented to a permanent

injunction against future violations of the Federal securities laws, and to

the issuance of an administrative order barring him from the securities business. In a related criminal proceeding, Levine pleaded guilty to one count

of securities fraud, two counts of income tax evasion, and one count of

perjury.

Over the following five months, the Commission's continuing investigation of Levine's activities led to a series of cases against four individuals

who were participants in the scheme.'? Those individuals collectively were

10
ordered to pay $3.7 million in disgorgement and $875,000 in civil penal.

ties. The consent judgement of $100 million against Ivan F. Boesky was

filed after the close of fiscal 1986, on November 14, 1986 and is not in.

c1uded in the foregoing data.

In SEC v. The First Boston Corp., 20 the Commission alleged that a securities firm had engaged in unlawful trading, for its own account, while in possession of material, nonpublic information received from an investment

banking client. First Boston's corporate finance department allegedly

received confidential information from a corporation concerning a forthcoming announcement of a $1.2 billion addition to the corporation's

property-casualty loss reserves. The corporate finance department allegedly

conveyed this information to a First Boston insurance analyst, who thereafter communicated the information to persons in its trading department.

Although the securities of the corporation were placed on the firm's restricted list, a First Boston trader sold stock for the firm's account.

Besides consenting to the entry of a permanent injunction against future

violations, First Boston agreed to disgorge profits of $132,138 derived from

the alleged trading violations, to pay a $264,276 penalty under ITSA, and

to review and modify its restricted list and "Chinese Wall" procedures.

The Commission obtained the largest civil penalty paid to date under

ITSA in SEC v. Keiz," a case in which it alleged that a financial analyst

conveyed nonpublic information concerning a proposed merger to his

father, who then shared that information with his broker and his father-inlaw. The father agreed to disgorge slightly over $1 million and pay a civil

penalty of $2.1 million. The Commission obtained an additional $1.3 million in disgorgement or penalties from the other three defendants in the

case.

The detection and prosecution of insider trading emanating from abroad

pose unique problems. The Commission's investigative subpoena power

is limited to persons and entities within the United States, and even when

foreign persons or firms are effectively served, foreign secrecy or blocking

laws may prohibit disclosure of the requested information.

Two cases initiated during 1981 and concluded during fiscal year 1986

illustrate differing approaches to transnational insider trading cases. In SEC

v. Bence Della Soizzera ltslisne, et al.,22 call options on the common stock

of St. Joe Minerals Corporation were purchased through the U.S. securities accounts of a Swiss bank, Banca Della Svizzera Italiana (BSI), on the

day before the announcement of a tender offer for all of the outstanding

shares of St. Joe. The Commission immediately filed an injunctive action

naming BSI and certain unknown purchasers as defendants, and obtained

a freeze of BSI assets at a New York bank. The Commission then sought

to determine the identities of the BSI customers who directed the trades.

When BSI declined to reveal its customers' identities, contending that such

disclosures would violate Swiss bank secrecy laws, the Commission obtained a U.S. court order compelling BSI to disclose its customers' identities.

On June 3, 1986, over four years after the Commission ascertained the

identity of the purchasers, the district court held that one of BSl's customers,

11
Giuseppe B. Tome, together with an Italian business associate, had engaged

in insider trading. The court ordered them to disgorge their insider trading

profits with interest. Tome, whose potential liability amounts to $5.8 million, was also held liable for the profits of his associate and certain still.

unknown investors who allegedly traded on his tips concerning the tender

offer.

InSEC v. Certain Unknown Purchasers of the Common Stock of, and Call

Options for the Common Stock of, Santa Fe International Corporation,23 initiated in October 1981, the Commission alleged that "unknown purchasers"

had unlawfully purchased the securities of Santa Fe International Corporation through Swiss bank accounts immediately prior to the announcement

of a merger. After filing the action against the unknown purchasers, the

Commission requested assistance under the 1977 Treaty on Mutual As.

sistance in Criminal Matters between the Swiss Confederation and the United States. The Commission received documents responsive to its request

three years after its original inquiry, following a prolonged process which

included a second request by the Commission and many appeals by the

defendants. During February 1986, all remaining defendants agreed to settle

the Commission's action and disgorge $7.8 mlllion in profits and interest.

Six of the eight defendants also consented to permanent injunctions against

future violations.

As the litigation in these cases progressed, Switzerland and the United

States entered into a Memorandum of Understanding (MOU) in 1982. The

MOU mandated the establishment of a private agreement among all members of the Swiss Bankers' Association to provide assistance to the Commission in cases involving insider trading prior to tender offers or mergers.

Where certain criteria are met, the signatory banks may freeze profits from

the alleged unlawful trading and disclose the identity of a customer and

other information to the Commission without violating Swiss law. The Commission successfully used the MOU in the investigation preceding the filing of the Katz case described above.

Regulated Entities and Associated Persons- The enforcement program

area that accounts for the largest number of cases involves regulated entities such as broker-dealers, investment companies, investment advisers and

transfer agents. As the securities markets grow and more individuals come

into contact with the financial services industry, it becomes increasingly

important to ensure that regulated entities conduct their business with integrity and fairness. The Commission commenced 114 enforcement

proceedings involving regulated entities during fiscal year 1986. Nineteen

cases involved securities offering violations by regulated entities. Of the

other cases, 61 were brought against broker-dealers or persons associated

with broker-dealers, 30 primarily involved investment advisers, two primari1y involved investment companies, and two concerned transfer agents.

The broker-dealer cases involved, among other things, fraudulent sales

practices, violations of the net capital and customer reserve provisions, and

books and records violations. Among the cases brought by the Commission in this area was an administrative proceeding, In the Matter of Kidder

Peabody & Company,24 in which the Commission found that a broker-dealer

12
firm had wrongfully used customers' fully paid securities as collateral for

bank loans and government securities repurchase agreements. The Commission censured the firm, and ordered it to comply with its undertakings

to implement and maintain procedures designed to prevent a recurrence

of the violations.

In another administrative proceeding, In the Matter of Prudential Bache

Securities, Inc.,25 the Commission found that a broker-dealer had failed to

define adequately and implement firm-wide procedures for supervision and

compliance, thereby contributing to fraudulent sales practices by registered

representatives in two branch offices. As part of the settlement of the case,

the firm retained an independent consultant to review its supervisory and

compliance procedures and make recommendations to the firm. Separate

administrative proceedings were brought against individuals associated with

the firm.26

The Commission also brought an injunctive action against E. F. Hutton

Group, lnc., and two administrative proceedings against its broker-dealer

subsidlary.P ln the injunctive action, the Commission charged that annual

reports filed by the parent company were inaccurate because they failed

to disclose changes in net interest income resulting from bank overdrafting practices engaged in by the broker-dealer subsidiary. In one of the two

administrative proceedings, the Commission censured the firm and ordered

it to comply with its undertakings: (1) to engage an independent consultant to review its policies and procedures regarding customer securities and

money, (2) to adopt the recommendations of the consultant unless otherwise directed by the Commission, and (3) to refrain from opening any new

retail brokerage offices until the later of 120 days from the date of the Commission's Order or the date on which the consultant's recommendations

are adopted. In the second administrative proceeding, which addressed the

subsidiary's role as an investment adviser and distributor to registered investment companies, the Commission found that the firm had incorrectly

calculated distribution expenses and had failed to comply with dividend

calculation procedures set forth in its prospectus. The Commission ordered

the firm to pay the investment companies or their affected shareholders

$1 million, and to employ an independent consultant to review and make

recommendations relating to its administration and operation as an investment adviser.

In SEC v. The Spangler Group, Inc. and Mark Emerson Spangler, 28 the Commission alleged that, among other things, a Boston-based investment adviser made material misrepresentations to prospective clients and the

Commission concerning his educational background and employment history, exaggerated his investment performance results, and forged an auditor's opinion regarding the financial condition of his company in order to

secure new clients. The Commission obtained a temporary restraining order

enjoining further antifraud violations and denying defendants access to

client funds and securities. Thereafter, orders were entered, by consent,

freezing all assets of the defendants, appointing a receiver to take control

.of and account for approximately $30 million of investors' funds, and per13
manently enjoining the defendants from violating the antifraud provisions

of the Investment Advisers Act. In an administrative proceeding based upon

the same facts,29 the Commission barred the individual from acting as, or

associating with, an investment adviser, brokerage firm, or investment company. The Commission revoked the registration of The Spangler Group.

During fiscal year 1986, the Commission revoked the registration of seven

firms, suspended eight and censured 15. This compares with three revocations, seven suspensions, and 16 censures in fiscal 1984.

Also during the year 58 individuals were barred, 20 suspended, and 11

censured, as compared to 47 bars, 49 suspensions, and four censures in

1985.

Securities Offering Violations-Some issuers fail to register public offerings of their securities, although required to do so by the Securities Act.

Some purport to rely on exemptions to registration requirements which are

not available. Some violate antifraud provisions of the Federal securities

laws by making material misrepresentations or omissions in connection

with a securities offering.

There were 69 cases principally involving offering violations by issuers

and other persons brought during fiscal year 1986, 49 in 1985 and 48 in

1984. (These figures do not include 19 cases principally involving offering

violations on the part of regulated entities, which are discussed above under the caption "Regulated Entities and Associated Persons.")

In one securities offering case, SEC v. Doerring & Associates, Inc.,30 the

Commission alleged that the defendants had misrepresented or failed to

disclose material facts ln the offer and sale of interests in real estate partnerships, and had misappropriated at least $3 million from such partnerships for their own use. The Commission obtained a temporary restraining

order against further violations of the registration and antifraud provisions,

and an order freezing approximately $10 million of investor's funds pending an appropriate judicial resolution.

The Commission made a special effort during fiscal year 1986 to curb

abuses arising from "blank check" offerings, in which an issuer raises funds

without identifying the type of business to which the proceeds of the offering will be applied. In some instances, undisclosed promoters may use such

offerings as a vehicle to raise funds for prearranged mergers and other pur.

poses. The Commission brought 21 administrative proceedings during flscal year 1986 to suspend the effectiveness of registration statements filed

in connection with blank check offerings.

Market Manipulation-The Commission is charged with ensuring the integrity of trading on the national securities exchanges and in the over-thecounter markets. The Commission's staff, the exchanges and the NASD

engage in surveillance of these markets. The Commission brought 14 cases

involving market manipulation during fiscal year 1986, compared with

seven in 1985.

Among the cases brought by the Commission in this area was SEC v.

Worldwide Ventures COrp.,31 in which it alleged that the defendants had

manipulated the price of an issuer's common stock by issuing false statements about the issuer's financial condition and its business prospects, by

14
arranging transactions designed to artificially maintain or increase the price

of the stock, and by offering free stock to brokers as an inducement for

them to solicit customers to buy the issuer's stock. Allegedly as a result

of these activities, the price of the issuer's stock increased from 25 cents

per share to $3.50 per share, thereby allowing certain of the defendants

to sell their stock at a substantial profit.

Changes in Corporate Control-Sections 13 and 14 of the Exchange Act

govern proxy solicitations and the filing of reports by persons or groups

who make a tender offer or acquire beneficial ownership of more than five

percent of a class of equity securities registered with the Commission. These

requirements are intended to ensure that investors have the material information needed to make informed investment or voting decisions concerning potential changes in the control of a corporation. During fiscal year

1986, six enforcement actions were brought in this area, compared to five

in 1985 and 11 in 1984.

In one case, In the Matter of Revlon, Inc.,32 the Commission found that

a corporation which was the subject of a tender offer had failed to make

timely disclosure of negotiations to sell certain assets and to effect a leveraged buyout of the remaining assets. In another case, In the Matter of BF

Goodrich CO.,33 the Commission found that a proxy statement soliciting

shareholder approval of a provision designed to prevent "greenmail" payments was misleading in that it failed to disclose that the issuer had made

such a payment during the preceding year.

Other Developments

Transnational Securities Issues-As noted above in the discussion of insider trading cases: the Commission's ability to detect and prosecute transnational securities violations has been enhanced by agreements reached

with Switzerland concerning assistance in such cases.

During fiscal year 1986, the Commission continued to discuss issues relating to transnational securities violations with officials of other governments.

On September 23, 1986, the Commission announced the signing of a

Memorandum of Understanding under which the Commission, the Commodity Futures Trading Commission, and the United Kingdom's Department of Trade and Industry established procedures governing assistance

in market oversight and investigations. This is the first accord negotiated

by the Commission which provides assistance for a broad range of matters

relating to market conduct and the regulation of investment and brokerage businesses. It is contemplated that the agreement will terminate upon

negotiation of a Treaty between the two countries.

On May 23, 1986, the Commission entered into a Memorandum of Understanding with the Japanese Ministry of Finance under which the parties

agreed to facilitate requests for surveillance and investigatory information

on a case-by-case-basis.

Members of the Commission and its staff participated in the July 1986

conference of the International Association of Securities Commissions, at

which 58 countries were represented. A significant result of the meeting

15
was the establishment of a committee, to be chaired by the Commission,

to promote greater cooperation in information exchanges concerning securities law enforcement.

Sources for Fwther Inquiry- The Commission publishes in the SEC Docket

litigation releases which describe its civil injunctive actions and criminal

proceedings involving securities. related violations. Among other things,

these releases report the identity of the defendants, the nature of the alleged violative conduct, and the disposition or status of the case. Commission orders that institute administrative proceedings or provide remedial

relief also are published in the SEC Docket.

Each of the enforcement actions brought during fiscal 1985 is listed in

the Appendix to this report. Appropriate references are made to the litigation releases and Commission orders published in the SEC Docket.

16
Full Disclosure System

Key 1986 Results

The full disclosure system is administered by the Division of Corporation Finance. The disclosure system is designed to provide investors with

full and accurate material information, foster investor confidence, contribute to the maintenance of fair and orderly markets, facilitate capital formation, and inhibit fraud in the public trading, voting, purchase, and sale

of securities.

Full Disclosure Filings Given a Full Review

FY FY FY FY FY FY 1981-6

1981 1-982 1983 1984 1985 1986 Change

Total Filings 6,153 6,239 6,987 7,237 9,571 10,526 +71.1%

Securities Act

Registration

Statements 2,050 1,857 2,435 2,677 2,385 3,277 +59.8%

10.K Annual

Reports 325 1,245* 1,012* 1,283* 2,135* 1,741* +435.7%

Tender Offers

(14D-l) 205 116 92 121 148 146 -28.8%

Proxy Contests 66 68 60 60 86 68 +3%

Annual Meeting

Proxies 577 698 895 1,217 1,683 1,629 + 192.5%

* Includes reports reviewed in connection with other filings

In fiscal 1986, approximately 12,000 issuers made 76,708 full disclosure

filings with the Commission, an increase of 6.7 percent over fiscal 1985.

Of these, 1,688 were made by filers through the Edgar system. The number of registration statements filed under the Securities Act of 1933 (Securities Act) increased 29% to 7,356 from 5,696 filings in fiscal 1985. This

includes 2,181 and 1,587 filings, respectively, by issuers who had not previously offered securities to the public.

During the year, the staff fully reviewed financial statements of 3,818

different registrants. This included the review of 1,701 registration statements filed by new issuers, 1,340 registration statements filed by issuers

with existing public security holders, 236 registration statements relating

to mergers or acquisitions involving financial and business disclosures by

two or more companies (74 of which were filed by new issuers) and annual

reports of 1,741 issuers (17.1 percent of the reports filed). The staff also

fully reviewed annual meeting proxy statements of 1,629 issuers, 79 proxy

17
statements relating to going private transactions, 68 proxy contest filings

and 504 tender offer schedules.

Rulemaking

OperationalEdgar System- The Commission published for comment an

advance notice of proposed rulemaking on June 26, 1986 \0 assist it in

preparation of proposed rules for the operational Edgar system." The

release seeks comment on how to update the rules to take advantage of

the efficiencies of electronic filing and processing. It addresses several is.

sues including mandatory electronic filing, signatures, incorporation by

reference and exhibits.

Tender Offers-The Commission adopted amendments to its issuer and

third party tender offer rules on July 11, 1986.35 The amendments provide

that a tender offer must be open to all holders of the class of securities sub.

ject to the tender offer and that any security holder must be paid the highest

consideration paid to any other security holder during the tender offer. In

addition, the Commission amended existing rules concerning minimum

offering periods and withdrawal rights. A tender offer is now required to

remain open for at least ten business days upon the announcement of an

increase or decrease in the percentage of securities being sought or the

consideration offered. The amendments provide that withdrawal rights extend throughout the offering period and eliminate the extension of withdrawal rights upon commencement of a competing bid.

On July 31, 1986, the Commission issued a concept release relating to

corporate takeovers." seeking public comment on the effects of substantial acquisitions of securities effected during the pendency of, or immediately after the termination of, a tender offer and whether a regulatory

response is appropriate; establishing a security holder approval requirement

for the adoption of "poison pill" plans; and permitting issuers to "opt-out"

of the requirements imposed by tender offer rules through the adoption

of charter amendments by security holders. The Commission is reviewing

comments made in response to this release with a view to possible rulernaking or legislative proposals.

Shareholder Communications-On October 15, 1985, the Commission

amended its shareholder communications rules, which govern the process

by which registrants communicate with the beneficial owners of securities

registered in the name of a broker, dealer, or other nomineeY The amendments provide, among other things, that a registrant that wishes to obtain

a list of the beneficial owners of its securities must request information from

all brokers with customers who are beneficial owners; a broker must provide a list of non-objecting beneficial owners to registrants as often as they

request the information, rather than only once a year, and within five business days of the compilation date; a registrant may mail its annual report

directly to security holders if it notifies the broker at the time it requests

beneficial owner information; and a broker may employ an intermediary

to act as its designated agent in performing its shareholder communications obligations.

18
The Commission published for comment on May 29, 1986 proposals intended to implement provisions of the recently enacted Shareholder Communications Act of 1985.36 These proposals were adopted with

modifications on November 25, 1986. The proposals govern cornrnunications and proxy processing with respect to securities registered in the name

of a bank, association, or other entity that exercises fiduciary powers as

well as clarify the circumstances in which registrants need not deliver annual report and proxy or information statements to security holders. In addition, the Commission will consider in the near future, proposed

amendments concerning owners who purchased securities through an employee benefit plan.

Filing Fees-On January 9, 1986, the Commission amended the rules setting filing fees for certain Securities Exchange Act of 1934 (Exchange Act)

acquisition and business combination transactlons." The amendments follow legislation that requires payment to the Commission of a filing fee calculated on a percentage of the transaction's value for tender offers and proxy

and information statements involving an acquisition, merger, consolidation, sale or other disposition of substantially all the assets of a company.

Pricing Amendments-On October 27, 1986, the Commission published

for comment proposals intended to allow registrants, under specified conditions, to omit information on the public offering price, other matters dependent upon the public offering price, and the underwriting syndicate from

the form of prospectus filed as part of a registration statement that is

declared effective.v' The proposals would require that the omitted information be contained in the form of prospectus used in connection with the

public offering after the effective date of the registration statement. The

proposals also would amend the filing rules for prospectuses used after effectiveness to eliminate unnecessary filings, classify prospectuses according to the nature of the information being added or modified, and shorten

the filing period.

Classification of Issuers-On July 8, 1986, the Commission increased the

total asset threshold requirement for registration under the Exchange Act

from $3 million to $5 million. Corresponding changes also were made to

the Exchange Act rules governing termination of reporting requirements."

The Commission also requested public comment about other criteria to

govern application of the Exchange Act reporting systern.v

Filings for Exempt Private Offerings- On October 2, 1986, the Commission adopted revisions (proposed on June 5, 1986) to Form 0, the notice

required to be filed when a transaction is effectuated in reliance upon the

exemptions from the Securities Act registration requirements provided by

Section 4(6) or Regulation 0.43 The revisions permit a uniform filing format to satisfy both federal and state requirements and eliminate the requirement to provide certain statistical information about the issuer. In addition,

the revisions eliminate the six-month updating and final filing requirements

so that only an initial filing within 15 days of the first sale of securities is

necessary.v'

The Proxy Review Program-On November 4, 1986, the Commission de.

termined to adopt comprehensive proxy rule amendments. The amend.

19
ments bring to the proxy context the benefits of the integrated disclosure

system, simplify proxy disclosure concerning compensation plans, and require new registrants to provide disclosure concerning changes in accountants and related disagreements.

Interpretations

On September 23, 1986, the Commission issued an interpretive release

indicating that domestic branches and agencies of foreign banks will be

treated as "banks" for purposes of the Section 3(a)(2) exemption from the

Securities Act registration requirements. This interpretation is dependent,

in each case, on the existence of Federal and/or State banking regulation

of the branch or agency substantially equivalent to that applicable to Federal or State chartered domestic banks doing business in the same jurisdiction.

Conferences

SEC Govemment-Business Forum on Small Business Capital FormationThe fifth annual SEC Government-Business Forum on Small Business capital formation was held in Washington, D.C. on September 25-27, 1986.

Approximately 175 small business executives, accountants, attorneys, and

government officials met to devise methods to implement recommendations of previous Forums and the 1986 White House Conference on Small

Business and to discuss securities, financial services, liability insurance,

payroll costs, and ERISA issues.

SECINASAA Conference under Section 19(c) of the Securities Act of

1933-ln March 1986, approximately 35 senior staff officials of the Commission met with representatives of the North American Securities Administrators Association Inc, in Washington, D.C. to discuss methods of

effectuating greater uniformity in Federal-State securities matters.

Accounting and Auditing Matters

The Federal securities laws provide for the audit of financial statements

of publicly held corporations by independent accountants. Thus, those laws

have placed upon the accountant important responsibilities in facilitating

the capital formation process, and as a result, the economy as a whole.

Today, the accounting profession is subject to a unique combination of

public and private sector efforts designed to ensure that the profession

meets its public responsibilities. These efforts include peer review and other

membership requirements of the American Institute of Certified Public Accountants' (AICPA)Division for CPA Firms, private sector standards-setting,

the Commission's programs (including oversight of private sector initiatives), state licensing activities and private civil litigation against accounting firms. This framework has been built over time and is subject to

continued refinements and improvements.

The primary Commission programs for ensuring compliance with the accounting and financial disclosure aspects of Federal securities laws are:

20
• Rulemaking initiatives which supplement accounting standards, irnplement financial disclosures and establish independence criteria for accountants;

• The review and comment process which results in improvement of fiI.

ings, identification of emerging accounting issues (which can result in

rulemaking or private sector standards-setting), and identification of

problems warranting enforcement actions;

• The enforcement program, which imposes legal sanctions and serves

to deter irregularities by enhancing the care with which registrants and

their accountants analyze accounting issues; and

• Oversight of private sector efforts to establish accounting and audit.

ing standards and to improve the quality of audit practice.

The Commission's direct efforts are multiplied by initiatives of the Finan.

cial Accounting Standards Board (FASB), the AICPA and other activities

of the profession under Commission oversight. In addition to Commission

enforcement actions, significant numbers of actions are brought by private

litigants, many of which are a direct result of Commission actions.

The cumulative effect of the Commission's programs, private sector in.

itiatives and civil litigation comprises a comprehensive system under which

the integrity of financial reporting for public companies is constantly be.

ing challenged, modified and improved.

The Commission's review and comment process and enforcement programs are discussed elsewhere in this report. The remainder of this section summarizes the Commission's accounting-related rules and

interpretations and the oversight function.

Accounting-Related Rules and Interpretations

Regulation SoXprovides guidance as to the form and content of financial statements filed with the Commission. The Commission has also adopted various rules that specify disclosure of financial information outside of

the financial statements. For example, certain supplementary financial information, selected financial data and a management's discussion and anal.

ysis of the company's financial condition and results of operations are

required by Regulation S-K.

To address significant accounting issues, the Commission may issue interpretive releases and, when announcing rule changes, provide guidance

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

staff periodically issues Staff Accounting Bulletins (SABs) to inform the

financial community of its views on accounting and disclosure issues. For

example, in December 1985, a SAB was issued on accounting for and disclosure of financial guarantees.45 In December 1985 and June 1986, SABs

were issued on two issues relating to business combinations of financial

institutions. The first of these concerned goodwill amortizatlon;" and the

second, adjustment of loan loss allowances.v ln July 1986, a SAB was issued on discounting property-casualty insurance reserves." The staffs views

on accounting for research and development arrangements were published

in September 1986.49 An omnibus SAB covering several issues was issued

21
in early October. It discussed certain issues relating to preferred stock, cheap

stock, and the applicability of SABs.50

Recent rulemaking initiatives reflect the Commission's efforts to upgrade

financial and accounting disclosure and, at the same time, simplify that

disclosure. During the past year, the Commission finalized amendments

to Regulation SoX(a) to rescind obsolete or duplicative rules, 51(b) to clarify rules dealing with the presentation of consolidated financial statements

in Commission filings,52 and (c) to require, under certain circumstances,

disclosure of the nature and extent of a registrant's repurchase and reverse

repurchase transactions and the associated degree of risk. 53The Commission also published its views on the significance of certain oral guarantees

to the financial reporting process.>'

Oversight of Private Sector Standards-Setting

In addition to its direct action through rulemaking and other programs,

the Commission monitors the structure, activity, and decisions of the private sector standards-setting organizations.

FASB-Although the Commission has adopted Regulation SoX, promulgated other rules and disclosure requirements in the financial reporting area,

and has published interpretations and guidance where necessary, it has

generally refrained from prescribing the accounting methods to be followed

in the preparation of financial statements.

In lieu of specifying accounting principles, the Commission has presumed

financial statements to be misleading or inaccurate unless prepared in accordance with accounting principles which have substantial authoatatlve

support. Under this concept, the Commission looks to the FASB to provide the initiative in establishing and improving accounting principles. Oversight of the process involves not only Commission review of the standards

set, but also the direct participation of staff members and, in some instances,

the Commission itself in the initial setting of standards. Staff members monitor developments closely and are in frequent contact with the FASB, participate in meetings, public hearings, and task forces. The Commission

monitors the progress of FASB projects and meets periodically with the

FASB to discuss topical issues.

For example, the Commission believes that there are broad-based accounting measurement and recognition issues involved in the complex

financial instruments and fihancial transactions available in the marketplace. In fiscal 1985, recognizing that these issues affect SEC registrants

as well as other entities (including publicly held banks and savings and loans

that report to other government agencies), the Commission authorized the

Chief Accountant to send a letter to the FASB recommending that the FASB

add a project to its agenda to deal with the accounting issues involved in

the broad area of financial assets and transactions.

In fiscal 1986, the FASB added a major long-term project to its agenda

that will address financial instruments and off balance sheet financing

issues. The project is comprised of several parts, some of which will be de22
veloped simultaneously. Significant parts of the project include (a) disclosure about financial assets and transactions, (b) accounting for

risk-transfer instruments such as guarantees and interest rate hedging instruments, (c) off balance sheet financing arrangements, (d) the appropriate measurement basis for financial instruments, and (e) accounting for

securities with both debt and equity characteristics.

Pensions-In December 1985, the FASS issued two statements dealing

with the complex and controversial topic of pensions. 55 The first statement

addresses the accounting and disclosure for pension plans by employers.

The second statement dictates how gains and LOssesshould be recognized

upon termination of certain pension plans.

Cash Flow Reporting-In July 1986, the FASS issued a proposed statement which would require a statement of cash flows as part of a full set

of financial statements of all business enterprises, replacing the statement

of changes in financial position. A final statement is expected to be issued

in 1987.56

Income Taxes-In September 1986, a proposed statement on accounting for income taxes was issued by the FASS, which requires comprehensive inter-period tax allocation based on a liability approach. Public hearings

and a final statement are scheduled for 1987.57 The Commission also issued an interpretive release related to the proposed statement immediately after the Tax Reform Act of 1986 was enacted. The release specifies that

registrants may provide quantified disclosure of the impact of the tax legislation by pro forma application of the FASS's proposed statement. Further, the release indicates that registrants not providing quantified

disclosures should nonetheless discuss the impact of the Tax Reform Act

of 1986 on existing deferred tax amounts. All registrants should disclose

the potential effects of the tax legislation on future operations and liquidity, if material. 58

Financial Reporting and Changing Prices-In September 1986, the FASS

issued an exposure draft that would supersede earlier pronouncements on

reporting the effects of changing prices, making previously required disclosure voluntary. A final statement was issued before the end of calendar

1986. The specific disclosure previously required is voluntary for calendar

1986 annual reports, but general disclosure on the effects of inflation is

still required in Management's Discussion and Analysis pursuant to Regulation S_K.59

Other Projects-Other significant projects on the FASS's technical agenda

include accounting for investments in subsidiary and non-subsidiary entities, nonrefundable loan fees, stock compensation plans, and accounting

for the insurance and utility industries.

Timely Financial Reporting Guidance-Encouraged by the Commission,

the FASS has continued its efforts to provide more timely gUidance on

emerging issues. Several technical bulletins were issued in fiscal year 1986

by the FASS staff on specific issues. These included guidance on accounting for (a) leases.s" (b) purchase of life insurance;" (c) certain issues related to business cornblnattons." and (d) purchase of treasury shares in excess

23
of current market price (qreenmail)." Also, the Emerging Issues Task Force

(in which the Commission's Chief Accountant plays a significant role) has

discussed over 115 issues since its inception in 1984, covering a range of

specific issues on topics such as financial instruments and financial institutions, business combinations, and income taxes. A number of the issues

were introduced by or at the request of the SEC. On many issues, the group

reached a consensus that (a) a single method of accounting is called for

based on existing literature, (b) existing guidance is adequate, or (c) the

issue does not present a pervasive problem. Other issues have been referred

to the FASB or the AICPA for action or further consideration. The Commission expects the positions agreed upon at those meetings to be followed

by registrants; registrants that do not follow them will be asked to justify

departure from any consensus reached. Based on the work of the EITF in

the first two years, the Commission believes that the EITF is performing

a useful role in providing timely guidance to registrants and their accountants.

Oversight of the Accounting Profession's Initiatives

In addition to oversight of the private sector process for setting accounting standards, the Commission also oversees various activities of the accounting profession conducted primarily through the AICPA. These include

the Auditing Standards Board, which establishes generally accepted auditing standards; the Accounting Standards Executive Committee, which provides guidance on specific industry practices and prepares issues papers

on accounting topics for consideration by the FASB; and the SEC Practice

Section (SECPS) of the Division for CPA Firms, which seeks to improve

the quality of accounting firms through various membership requirements

including peer review.

The Auditing Standards Board has made progress in fiscal year 1986 on

a number of initiatives to improve the quality of independent audits. For

example, an auditing standard on reports on the application of accounting

principles was issued in July 1986, in response to concerns about "opinion

shopping."64 Other standards-setting projects, including projects relating

to auditor responsibilities for detection and reporting of fraud and evaluation and reporting on internal controls are progressing in development.

The AICPA, along with other organizations, sponsored the National Commission on Fraudulent Financial Reporting ("NCFFR"), which is an independent commission to study issues involved in the prevention and detection

of fraud in the context of financial reporting. The NCFFR expects to complete its work and issue a report in fiscal 1987.

In addition to the AICPA's initiatives, members of the accounting profession have developed proposals designed to improve the quality of independent audits. A position paper by Price Waterhouse ("PW") recommended

modified standards which would require an auditor (a) to review and evaluate a company's management controls, and (b) to identify circumstances

indicating a higher risk of management fraud and to perform additional

24
tests if necessary." PW further recommended formation of a statutory selfregulatory organization with mandatory membership for firms practicing

before the SEC, and a variety of initiatives to limit accountants' liability.

A second position paper by seven major accounting firms recommended,

among other things, (a) increased disclosure in SEC filings of risks and uncertainties and that such disclosure be audited. and (b) mandatory memo

bership in the SECPS for firms practicing before the SEC. 66

The Commission reviewed the merits of the initiatives described above,

as well as a bill introduced in Congress entitled, "The Financial Fraud De.

tection and Disclosure Act of 1986." In addition, the Commission held a

Roundtable to discuss these issues with representatives from academia, industry, the accounting profession and others. The Commission believes that

the results of the ASB and NCFFR projects should provide valuable insight

into the need for and nature of changes in the fraud detection and internal

control areas.

SEC Practice Section- The Commission oversees the activities of the

SECPS through frequent contact with the Public Oversight Board (POB)

and members of the executive and peer review committees of the SECPS.

In addition, the staff reviews POB files and selected working papers of the

peer reviewers. The Commission believes the peer review process contrlbutes significantly to improving the quality control systems of member firms

and thus should enhance the consistency and quality of practice before the

Commission. According to the POB's Annual Report as of June 30, 1986.

391 firms have voluntarily become members of the SECPS, including all

firms with 30 or more SEC reporting clients."?

In the past year, several professional groups have called for mandatory

peer review, or mandatory membership in an organization conducting peer

reviews, for auditors of all Commission registrants. As discussed above,

both Price Waterhouse and a group of seven major accounting firms issued

proposals in this area. In addition, a special committee of the AICPA reexamined the AICPA Code of Ethics and concluded that the accounting

profession should establish a mandatory program to monitor practice to

improve quality.t" Adoption of the Committee recommendation would effectively require that accounting firms which practice before the SEC (and

whose members belong to the AICPA) be members of the SECPS. The Commission is considering the feasibility of various methods of requiring peer

review for firms with SEC clients.

Other refinements have been made in 1986 to the SECPS and the peer

review process. Each SECPS member firm is required to adopt a Statement

of Philosophy covering the broad principles influencing the firm's quality

control and operating procedures. Each member firm must also establish

policies and procedures concerning the rendering of opinions on the application of generally accepted accounting principles to other than audit

clients. Compliance with the new requirements will be tested during peer

reviews. Peer reviewers will be required to refer in their peer review report

to a letter of comment, if such a letter is issued. A letter of comment contains a description of matters leading to a modified report and other recommendations on matters which were not so serious as to require a modified

25
peer review report. The Commission strongly encourages continuing refine.

ments in the program and its staff wiII continue to suggest modifications

where appropriate.

Special Investigations Committee- Activities of the Special Investigations

Committee (SIC) supplement peer review. The SIC determines whether allegations of failure in the conduct of an audit indicate need for improvements in, or compliance with, quality control systems of the reporting firms

and whether changes in professional standards are required. Ifspecific members of the firm's professional staff may have failed to follow established

policies and procedures, the SIC considers whether corrective action taken

by the firm is appropriate.

The POB monitors the activities of the SIC and has complete access to

the process and to SIC files. In its June 3D, 1986 Annual Report, the POB

concluded that the SIC is achieving its objectives by effectively complementing the peer review process and improving the quality of professional practice and literature."

During the past year, the SECPS has established procedures for limited

SEC access to certain information about the SIC's process to enable the

SEC to more effectively oversee this aspect of the profession's program.

After experimenting with this arrangement, the Commission staff concluded

that certain changes were necessary in order to achieve its oversight objective. In fiscal year 1986, the SIC conducted a review of its processes,

and a Task Force is considering refinements to the current process including (a) establishing specific guidelines to determine when a special peer

review of a firm will be performed, (b) further expanding the circumstances

in which member firms report cases to the SIC, and (c) making the results

of SIC inquiries available to subsequent peer review teams. During a meeting with the POB in July 1986, the Commission was informed that the

SECPS is also considering requiring additional steps to be taken in an SIC

inquiry. Recommendations in this regard are expected to be formulated

by early 1987.

The Commission is encouraged by the continuing efforts to improve the

SIC process. The ultimate test, however, is the extent to which the SECPS

is able to achieve sufficient public credibility in this area.

26
The Edgar Project

Introduction

The Commission's electronic disclosure system, Edgar, completed its second full year of pilot operations on September 24, 1986. When fully operational, Edgar will accelerate dramatically the filing, processing,

dissemination and analysis of time-sensitive corporate information filed with

the Commission. The primary purpose of Edgar is to increase the efficiency

and fairness of the securities markets for the benefit of investors, corporations and the economy. Under Edgar, as information is electronically filed

with the Commission, it will be accessible to investors, the media and others

on personal and business computer screens in minutes, instead of days and

weeks.

The pilot system has successfully demonstrated the feasibility of electronic filing. Over 15,000 electronic filings have been made and the Com.

mission is moving forward with a fully operational system.

Pilot System

The Pilot system began with a group of volunteer companies whose filings are processed by the Division of Corporation Finance. At the end of

fiscal 1986, 237 such companies (plus 135 investment companies) were

filing electronically. These filers range from major industrial companies to

those which made their initial public offerings on the system. While additional Pilot participation has been Iimifed as of August 31, 1986, other com.

panies may continue to take advantage of the test facilities of the Pilot

system.

During the year, filings processed by the Division of Investment Management were included in the Pilot system. In addition to filings made by 21

companies under the Public Utility Holding Company Act of 1935, which

were included in the Pilot in 1985, a volunteer group of 135 investment

companies in seven management investment company complexes and four

unit investment trust complexes with 16 registered investment companies

and over 1,500 individual series, began to file electronically. Further, all

management investment companies were invited to submit their semi.

annual reports on Form N-SAR electronically. To facilitate electronic flling of Form N-SAR, each complex was sent software on a pre-programmed

diskette which automatically prepares and formats the tagged answer sheet

for filing with Edgar. Four hundred forty-one companies have taken advantage of the opportunity to submit this form electronically.

In fiscal 1986, the major developmental work on the Pilot Edgar

system was completed. Enhancements were added to the system to make

electronic filing more convenient for filers and to test the potential for

productivity improvements in the operational system. These enhancements

27
included automatic notification to filers by electronic mail of acceptance

or rejection of filings and the ability to accept and process tender offer and

contested proxy material. Further, the utility of the intelligent workstations

used to examine filings was improved in several ways: (1) certain portions

of the selective review screening sheet are completed automatically; (2) examiners may request that a notification message automatically appears in

the workstation in-box when certain events occur; and (3) improvements

in the menu-driven software for the workstations reduce the time needed

to select and use various functions.

Further, an approach to data tagging is being tested. A voluntary schedule is being filed by participants whose filings are processed by the Division of Corporation Finance. The schedule uses a specified format and

standard captions to identify data for ratio calculation. Edgar performs the

calculations automatically at the time of filing acceptance. Initial results

have been encouraging.

Operational System

During the past year, significant progress was made toward the operational Edgar system. A revised Request for Proposals ("RFP") was issued

on May 6, 1986 with bids due and the contract to be awarded in 1987. Issuance of the RFP followed extensive comment from potential bidders, information vendors, users and filers. The RFP issued for the operational system

includes changes made in the system as a result of the comments. It reflects

an effort to balance, within legal requirements and budgetary contraints,

the needs of the Commission, the filing community, the contractor, and

users of Commission information. The RFP requires the contractor to support the following functions: receipt, internal processing, dissemination of

filings, systems development, facilities management, backup and recovery, training, security, and links to existing Commission automated systems.

The RFP requests that offerors propose phase-in schedules for both the

Divisions of Corporation Finance and Investment Management by criteria

such as company size, industry or dissemination market interest. The phase.

in schedule will be determined by the Commission after consultation with

the contractor and after notice and comment in a rulemaking proceeding.

One of the objectives of Edgar is one-stop filing for issuers of new and

public companies so that one filing on Edgar will meet the requirements

of the states and self-regulatory organizations. To this end, the staff has

worked closely with the North American Securities Administrators Associ.

atlon, the stock exchanges and the National Association of Securities Deal.

ers, The RFP recognizes the needs of the states and the self-regulatory

organizations.

Paralleling the procurement effort, steps have been taken with respect

to the rulemaking necessary for the operational system. The Divisions of

Corporation Finance and Investment Management formed task forces to

conduct a comprehensive review of existing rules and to develop proposed

rules for the operational system.

28
On June 26, 1986, the Commission issued an Advance Notice of Proposed Rulemaklnq.?" It sought comment on the rule changes necessary to

require electronic filing and to facilitate electronic filing by updating the

rules to take advantage of the efficiencies of electronic filing and processing by filers, as well as by the Commission. Specific areas discussed in the

release include mandatory electronic filing, signatures, exhibits, and amendments and supplements to filings.

Conclusion

In the coming year, work on the operational system will include evaluation of proposals, award of a contract, proposal and adoption of rules and

planning for the transition.

c,

<

:,

,

29 r

~
Regulation of the Securities M.arkets

Key 1986 Results

The Division of Market Regulation, with the assistance of the Regional

Offices, is charged with the responsibility of overseeing the operations of

the nation's securities markets and market professionals. In fiscal year 1986,

over 11,000 broker-dealers, and ten exchanges as well as the over-thecounter market were subject to the Commission's oversight.

Market Value of Equity Securities Transactions

in billions

FY '81 FY '82 FY '83 FY'84 FY '85 FY '86 81-86

%

Increase

$564 $534 $1,005 $1,025 $1,147 $1,735 208%

BID Oversight Examinations

FY '81 FY '82 FY '83 FY'84 FY '85 FY '86

278 249 324 389 447 481 73%

Surveillance and Regulatory Compliance Inspections of SRO's

FY '81

12

FY '82

19

FY '83

18

FY'84

20

FY '85

21

FY '86

22 83%

Matters referred by the SEC Regional Offices to SROs

FY'81 FY '82 FY'83 FY'84 FY'85 FY'86

N.A. N.A. 132 186 343 235

SRO Final Disciplinary Actions

FY'81

N.A.

FY'82

809

FY'83

802

FY'84

1,123

FY'85

971

FY'86

921

In fiscal 1986 the Commission's secondary market internationalization

program made significant progress. The Commission explored issues of

concern with securities markets and market participants, facilitated the development of international linkages between securities markets and clear30
ing agencies, and ensured that such linkages incorporate adequate market

surveillance and information sharing arrangements.

During the fiscal year, the Commission approved several new options

products, a new uniform margin system, and a simplified, more understandable, options disclosure document. The Commission also held a Roundtable on Index Arbitrage trading to develop a better understanding of the

benefits gained from stock index products in reducing costs to investors

and the price volatility occurring four times during the year when both options and futures expire on the same day.

Progress was made toward a certificate reduced trading environment, by

increased reliance on book-entry systems. As a result of efforts this year,

forty-six states now allow domiciliary insurance companies to use securities depositories.

In the inspection area, the Commission improved its productivity in the

broker-dealer regulatory program through the development of specialized

computer programs. These systems also monitor referrals to SROs pertaining to broker-dealer performance.

Securities Markets, Facilities and Trading

The National Market System-Rule 11Aa2 -1 under the Exchange Act reo

quires that transactions in national market system (NMS) securities be

reported on a real-time basis, increasing market efficiency and improving

execution of orders. Over 2500 over-the-counter (OTC) securities now are

designated as NMS securities, 400 more than last year.

The Commission took action on several important NMS initiatives. It

adopted temporary amendments to Rules 10a-1 and 31.1 under the Ex.

change Act, the short sale and transaction fee rules, respectively, to ex.

c1ude from coverage all NMS securities traded on an exchange on a listed

or unlisted trading privileges basis.t'The Commission also approved an au.

tomated interface between the Cincinnati Stock Exchange's National Securities Trading System and the Intermarket Trading System."

The Commission also continued to study automation in the OTC market. The Division of Market Regulation issued two no-action positions con.

cerning regulation of automated OTC trading systems, informing system

developers that the Division would not recommend enforcement action if

such systems were not registered as exchanges.P'The Commission also

directed the Division of Market Regulation to consider new regulatory approaches for such systems.

National System for the Clearance and Settlement of Securities Trans.

actions- The Commission approved a proposed rule change by the National

Securities Clearing Corporation ("NSCC") that established an automated

system for the processing of customer account transfers.?" and approved

proposed rule changes by the New York Stock Exchange, Inc., the National Association of Securities Dealers, Inc. ("NASD"), and the Municipal Securities Rulemaking Board that require members to use this system.?" The

Commission also approved a proposed rule change by the Midwest Securities Trust Company for a pilot program that established a centralized, au31

c.
tomated system for the processing of transactions in commercial paper. 76

The Commission also approved, on a pilot basis, a proposed rule change

by NSCC that established centralized and automated processing of mutual

fund securities sold by broker/dealers."

Securities Immobilization-In fiscal year 1986, the Commission continued

to make progress in its efforts to increase the immobilization of securities

in securities depositories. For example, several states removed restrictions

on depository use by domiciliary insurance companies for their portfolio

assets. Forty-six states now allow domiciliary insurance companies to use

depositories. Also during the fiscal year, issuers, transfer agents, brokerdealers and clearing agencies, through several task forces, continued their

cooperative efforts to identify ways to increase the immobilization of securities certificates and to experiment with uncertificated book-entry systems.

In fact, year-long efforts of one task force, which consists of major investment banking firms, were rewarded in early October 1986, when Ford Motor Credit Corporation became the first "book-entry only" corporate debt

issuer by issuing $200 million of three-year notes in "global certificate form"

through Depository Trust Company.

Intemationalization- The Commission's secondary market internationalization program made significant progress during fiscal year 1986. As part

of its ongoing efforts to foster a dialogue on the issues raised by the increased transnational trading of securities, the Commission released a staff

summary of the comments received in response to the Global Trading

Release." In addition, the Commission worked to facilitate the development

of international linkages between securities markets and clearing agencies,

and to ensure that such linkages incorporate adequate market surveillance

and information sharing arrangements. During the fiscal year, the Commission approved the National Association of Securities Dealers, Inc.-

London Stock Exchange quotation sharing pilot program, the first market

linkage between a U.S. self-regulatory organization and an exchange not

located in North America. 79TheCommission also approved an international

trading linkage between the Midwest and Toronto Stock Exchanges, the

third such linkage involving U.S. and Canadian markets.s'To facilitate trading in the securities included in these linkages, the Commission staff issued no-action letters to the Canadian Depository for Securities, Limited

("CDS") and The Stock Exchange, London, England, permitting them to

establish automated securities processing links with their U.S. counterparts

without registering as clearing agencies in the United States."

The Commission has continued to improve its ability to expose and prosecute those who would abuse the integrity of international securities markets. During the fiscal year, the Commission and the Japanese Ministry of

Finance agreed to facilitate each agency's respective requests for surveillance and investigatory information on a case-by-case basis. 821naddition,

the Commission entered into a memorandum of understanding with the

United Kingdom's Department of Trade and Industry regarding the sharing of information.

32
The Commission also approved a proposed rule change that enables certain Canadian banks and trust companies to qualify as escrow receipt issuers thereby enabling Canadian writers of equity call options to cover their

positions at local financial institutions, and not through U.S. financial institutions as previously requlred.s-Another rule change amended a clearing agency's rules to clarify that all securities deliveries, pledges and

transfers through its facilities are governed by the Illinois Uniform Commercial Code. including key provisions that were recently amended to

recognize the validity of book-entry movements of securities held in fungi.

ble bulk at a foreign clearing corporation.s" The Commission also received

a Form CA-l application for clearing agency registration from the International Securities Clearing Corporation."

Options-During fiscal 1986, the Commission amended Rule 9B-l

under the Exchange Act which provides for the distribution to investors

of an options disclosure document." The amendment eliminated the requirement that the disclosure document contain information regarding the

uses of the options classes discussed by the document. The Commission

also adopted an amendment to Rule 3a 12-8 under the Exchange Act that

exempted Japanese government debt securities from the Exchange Act for

purposes of marketing futures contracts on those securities in the United

States." In addition. the Commission issued a release proposing amendments to the Rule exempting United Kingdom, Canadian, and Japanese

government debt securities from the Exchange Act for purposes of allowing the trading and marketing in the U.S. of futures contracts on such securities by boards of trade which are not located in the country which issued

such securitles.P" In addition, the Commission approved proposals by the

Chicago Board Options Exchange ("CBOE") and the American Stock Exchange ("Amex"), respectively, to implement CBOE's retail automatic execution system ("RAES") for options on the Standard and Poor's 100, and

Arnex's automatic execution system ("AUTO.EX") for options on the Major

Market Index, on a permanent basis.59 In addition, the Commission approved

CBOE's proposal to begin a six month pilot using RAES for the execution

of individual equity options.P'' Moreover, the Commission approved

proposals submitted by the New York Stock Exchange and Arnex, respectively, to trade two new broad-based index options, NYSE's BETA Index,

and Arnex's Institutional lndex.?' Further, the Commission approved a

proposal by the Philadelphia Stock Exchange, Inc. ("Phlx") to trade options

on the European Currency Unit ("ECU").92 The ECU represents the weighted value of the currencies of ten of the member states of the European Economic Community. In addition, the Commission approved CBOE's proposal

to trade European-style options on five foreign currencles.P Finally, the

Commission also approved proposals submitted by the five options exchanges as well as the NASD to establish a uniform, premium-based customer margin system for short options positions, which became effective

on January 31, 1986.94

In fiscal 1986, the Commission also focused on the impact on the

market of certain arbitrage and related trading strategies involving index

33
options and futures and the underlying component stocks on the last trading day before expiration (the so-called "Expiration Friday" phenomenon).

In October 1985, the Division of Market Regulation sent a letter to the options SROs soliciting their views and comments on various alternatives to

address Expiration Friday ectlvlty.v' In response, the SROs commissioned

a study of the expiration day effects of index options and futures trading

on the market. 96The study found that both stock market volatility and trading volume is significantly greater on Expiration Fridays than on other days.

Nevertheless, it concluded that the magnitude and frequency of expiration

day price effects did not warrant any structural changes to expiration day

procedures in view of the important hedging uses for index futures and options and the fact that arbitrage activity maintains the essential pricing linkages necessary to facilitate such hedging.

The Commission also responded to a letter from Congressman Dingell

requesting the Commission's views on issues related to program and arbitrage trading and its effects on options, futures and stock markets. 97The

Commission's response analyzed the costs and benefits of several alternative procedures that have been suggested to address the concerns in this

area. In a continuing effort to address Expiration Friday concerns, the Commission held a Roundtable discussion on index arbitrage and its effects on

the marketplace.w Finally, at the Commission's request, the New York Stock

Exchange experimented with the disclosure of 50-called "Market-on-Close"

orders at 3:30 p.m. on the September 19, 1986, Expiration Friday'"

Issuer Tender Offers-On july 11, 1986, the Commission published a

release adopting amendments to Exchange Act Rule 13e-4.100 Rule 13e-4

regulates tender offers and exchange offers by issuers for their own securities. The amendments, which parallel the requirements of Rule 14d-l0 for

third party tender offers, require that an issuer tender offer must be extended

to all holders of the subject securities and that all security holders must

be paid the highest consideration paid to any other security holder during

the tender offer. The amendments also extend withdrawal rights throughout the offer, and require the offer to remain open for ten business days

from an increase or decrease in the percentage of shares sought or consideration offered.

Regulation of Brokers, Dealers, Municipal Securities Dealers,

and Transfer Agents

Broker-Dealer and Transfer Agent Examinations- During fiscal year 1986,

the Commission improved productivity through the increased use of computers in its broker-dealer regulatory programs. Systems to monitor referrals to the SROs as well as to maintain accurate profiles of broker-dealers

located in various regions of the country have been developed. In addition,

a pilot test begun in fiscal year 1985 to analyze the feasibility of using portable computers to conduct broker-dealer examinations was completed, and

indicated that use of such computers can improve examiner productivity.

34
The broker-dealer oversight program was revised in order to place greater

emphasis on review of sales practices at large national firms. These examinations included on-site reviews at both the headquarters and a number

of branch offices of the chosen firms. In addition, continued concern that

organized crime figures or others might attempt to launder funds through

broker-dealers has led both SEC and SRO staff to spend more examiner

hours on that phase of the examination and to revise the Commission's related examination procedures.

The staff completed 481 oversight examinations of SRO members, an

8 % increase over the record 447 examinations completed in FY 1985. The

staff also completed 69 cause examinations, a decrease from the 145 conducted last fiscal year and 228 in FY 1984. The continued decrease in the

number of cause examinations resulted from increased referrals to SROs

of matters for which they have adequate remedies.

The staff also conducted 102 transfer agent examinations. These examinations were conducted following guidelines set by the staff which are

designed to improve examination selection and to followup on deficiencies noted in prior examinations.

Rule 10b-6 and Shelf Distributions-On September 11, 1986, the Commission issued an interpretive release with respect to shelf distributions and

Exchange Act Rule 10b-6, which proscribes certain conduct by participants

in a distribution of securities. tOt Until recently, the staff had interpreted Rule

10b-6 in the context of shelf distributions to require every distribution participant, including every shelf shareholder, to comply with the applicable

cooling-off period prior to any offers or sales off the shelf by any shelf share.

holder. The interpretive release formulates a revised position, which is briefly that, unless an individual shelf shareholder is affiliated with the issuer

or another shelf shareholder or is acting in concert with the Issuer or-another

shelf shareholder, the restrictions of Rule 10b.6 with respect to the individual

shelf shareholder apply only when the individual shelf shareholder is offering or selling shares off the shelf. The release also discusses the application of Rule 10b-6 to broker-dealers during such distributions.

Rule 1Ob-6 Amendments-On October 22, 1985, the Commission issued

a release soliciting comments on proposed amendments to Rule 10b-6. If

adopted, the amendments would permit broker-dealers to engage in solicited brokerage up until specified cooling-off periods; define Rule 1Ob-6's applicability to distribution participants; modify Rule 10b-6's restrictions on

exercise of standardized call options; and revise Rule 10b-6's preamble.I'"

Financial Responsibility Rules-On September 4, 1986 the Commission

issued a release soliciting comments on some proposed amendments to

the Commission's flnancial responsibility and recordkeeping rules in connection with the treatment of repurchase and reverse repurchase agreements entered into by registered broker-dealers.l'" The proposed

amendments to the rules are intended to ensure accountability of monies

and securities obtained through repurchase agreements and to place a cap

on the leverage now available to firms participating in the repurchase agreement market. With respect to hold-in-custody repurchase aqreements'P' the

35
proposed amendments will further the purposes of the Commission's financial responsibility rules, which are to provide safeguards with respect to

the financial responsibility and related practices of brokers and dealers.

Uniform Net Capital Rule-On November 14, 1986 the Commission approved amendments to the net-capital rule, Rule 15c3-1, which: (l) recognize hedged positions between non-convertible corporate investment grade

fixed income securities; (2) recognize hedged positions between nonconvertible fixed income securities and U.S. Government bond futures; and

(3) reduce the haircut for hedged corporate bond positions. lOS

Interpretations of the Net Capital Rule-On February 14, 1986 the Division issued a no-action letter to the Philadelphia Stock Exchange in which

it acknowledged the risk-reducing features of maintaining offsetting positions in forwards obtained in the interbank market and options in the seven

major foreign currencies.i'"

On February 27, 1986, the Division issued a no-action letter to the New

York Stock Exchange permitting brokers and dealers to apply certain

reduced haircut charges under the net capital rule to positions comprised

of options or futures contracts as to broad-based stock market indices offset by a basket of securities in the actual index.':"

Transfer Agent Registration Forms-On March 27, 1986, the Commission

adopted new forms for the registration and monitoring of transfer agents. lOB

A simplified Form TA-I was implemented to conform with that used by

the federal bank regulatory agencies and a new Supplement was designed

to provide information about persons associated with non-bank, non-issuer

transfer agents. In addition, new Form TA-2 was created to provide annual

reports of essential processing information about each transfer agent's activities, which will enhance the Commission's oversight of these registrants.

Bank Securities Activities-On July 1, 1985, the Commission adopted Rule

3b-9 under the Exchange Act.109 The rule requires banks to conduct certain securities activities through broker-dealers registered under the Exchange Act. These activities are: 1) public solicitation of brokerage for

transaction-related compensation, 2) receipt of transaction-related compensation for providing brokerage services for trust, managing agency or other

accounts to which the bank provides advice, or 3) dealing in or underwriting securities. The rule also contains several exceptions for banks that conduct only limited securities activities.

Rule 3b-9 became effective on January 1, 1986. The Commission has

received at least 170 applications from bank affiliates which were submitted in order to facilitate compliance with the Rule. Between December 1985

and June 1986 the Commission issued numerous letters granting banks

and their affiliates additional time to comply with Rule 3b-9 in order to ease

the registration process. Those extensions expired September 1, 1986.

Extension of Credit by Broker-Dealers of Direct Participation ProgramsOn March 7, 1986, the Commission adopted Rule 3a12-9 under the Exchange Act.IIO The rule exempts the securities of certain direct participation programs from those provisions of the Exchange Act that currently

prohibit broker-dealers from arranging extensions of credit to investors to

36
purchase securities. The rule allows broker-dealers, subject to certain conditions, to participate in public offerings of securities of direct participation programs that provide for mandatory installment payments by

purchasers.

Interpretive Release Concerning the Scope of Section 28(e) of the Exchange

Act-On April 23, 1986, the Commission issued an interpretive release under Section 28(e) of the Exchange ACt.l11Section 28(e) provides a safe harbor for money managers who use commission dollars generated by account

transactions to pay for research and brokerage services. In the release the

Commission clarified its interpretation of certain provisions of Section 28(e)

and discussed various disclosure obligations of money managers under the

federal securities laws. The Commission also expressed its views regarding best execution obligations of fiduciaries for their clients' transactions

and its views and those of the United States Department of Labor regarding directed brokerage practices by sponsors of employee benefit plans.

Lost and Stolen Securities-In 1977, the Commission instituted the Lost

and Stolen Securities Program. The Commission's designee, the Securities Information Center, maintains an up-to-date database on lost, stolen

and counterfeit securities. Program participants number just over 19,600,

and include securities organizations, federally-insured banks and non-bank

transfer agents. Year-end statistics for 1985 show a 19% increase in the

dollar value of securities certificates reported lost, stolen or counterfeit.

As a result, the total value of certificates in the database increased from

$7.9 billion to $9.8 billion during 1985. The number of certificates reported as lost, stolen or counterfeit also increased 3% from 491,944 in 1984

to 506,223 in 1985. SIC also reported approximately a 14% increase in

the number of certificates about which participants inquired in 1985: from

2,658,886 in 1984 to 3,029,304 in 1985. Finally, the number of 1985 in.

quiries from participants that matched previous reports of lost, stolen or

counterfeit securities ("hits") by certificate was 3,022.

On November 29, 1985,112the Commission published for public com.

ment a number of amendments to the Lost and Stolen Securities Program.

The proposed amendments seek to clarify common questions about the

program, codify certain longstanding interpretations of the rules govern.

ing the program, focus the rule on negotiable certificated securities and

effectuate certain recommendations made by the General Accounting

Office.

Transfer Agent Regulation-The Commission adopted amendments to Ex.

change Act Rules 17Ad.5 and 17Ad.1 O. The amendments to Rule 17Ad-5

require registered transfer agents to respond promptly to written inquiries

from security holders concerning dividend and interest payments. The Rule

17Ad.1 0 amendments expand the time period afforded transfer agents to

recover over-issued securities before mandatory buy-in of those securities. I13

The Commission also proposed amendments to Rule 17Ad.1 that treat each

line on a depository-presented shipment control list as a separate item for

turnaround purposes and certain recordkeeping purposes.v'" The Cornmission approved those amendments as modified to reflect industry comments

and suqqestlons.P"

37
Oversight of Self-Regulatory Organizations

National Securities Exchanges-':"'As of September 30, 1986, ten exchanges

were registered with the Commission as national securities exchanges. During the fiscal year, the Commission granted applications by exchanges to

delist 109 equity and debt, and 20 options issues, and granted applications

by issuers requesting withdrawal from listing and registration for 32 issues.

In addition, during the fiscal year the Commission granted 577 applications

by exchanges for unlisted trading privileges.

The exchanges reported to the Commission 419 final disciplinary actions

imposing a variety of sanctions upon member firms and their employees.

This compares with 530 final disciplinary actions in fiscal 1985.

During the fiscal year, the Commission received 181 proposed rule

changes from exchanges. Among the significant rule filings approved by

the Commission were: (1) revisions to the New York Stock Exchange

("NYSE") constitution; 116 (2) a final series of proxy surcharges and rates of

reimbursement for NYSE and American Stock Exchange member firms in

connection with their compliance with shareholder communication requirements; 117 (3) amendments to the NYSE customer account transfer rule; 116

and (4) amendments to NYSE trading halt procedures.t '?

National Association of Securities Dealers, Inc. - The NASD, with over 6400

members, is the only national securities association registered with the Commission. In fiscal 1986, the NASD reported the disposition of 252 formal

and summary disciplinary actions and 174 formal and summary actions

by the Association's NASDAQ Trading Committee.

In addition, the Commission received 33 filings of proposed rule changes

from the NASD. During 1986, the Commission approved NASD proposals:

amending the NASD's Code of Arbitration to conform the NASD's arbitration procedures to amendments made to the Uniform Arbitration Code by

the Securities Industry Conference on Arbitration; 120 amending the Uniform

Practice Code to establish timeframes to be adhered to by broker-dealers

when transferring customer securities accounts from one member firm to

another member firm; 121 amending the requirements of the Series 7 General

Securities Representative exam to cover developments in the securities industry and to place more emphasis on application, evaluation and analysis

than on factual recall; 122 and amending the Rules of Fair Practice to require members to maintain records of their aggregate short positions as

well as their customers' short positions in NASDAQ securities.P?

The Commission also denied a petition for a rehearing from one brokerdealer that sells securities issued by its affiliate ("self-underwriting"), to

amend the NASD's rule regulating those offerings. The petitioner, a former SECO broker-dealer, requested that the Commission amend the NASD's

rules to be consistent with the Commission's self-underwriting rules under

the obsolete SECO prograrn.P"

Municipal Securities RulemaJcing Board-In fiscal 1986, the Commission

received and approved 13 filings of proposed rule changes from the MSRB.

Of particular note was the modification of MSRB Rule G-ll (g), to change

38
the time period during which syndicate managers must inform members

about order allocations. 125

Clearing Agencies

During the fiscal year, the Commission received 99 proposed rule changes

from registered clearing agencies and approved 89 proposed rule changes

genera"lIy providing greater financial protection for clearing agencies and

reducing costs to market participants. For example, Options Clearing Corporation rule changes provided for uniform, same-day funds settlernentt-"

and increased capability of qualifying banks to issue escrow receipts cover.

ing short options call positions without increasing clearing agency exposure

from that activity. 127 The Commission also approved a complete restructuring of Options Clearing Corporation's non-equity options margin program that uses options price and portfolio theories to measure more

accurately the clearing agency's financial exposure from rnernbers'optlons

activity. 128

The Commission also approved rule changes that further extended automated clearance and settlement services for municipal securities. Effi.

cient processing of when-issued and syndicate takedown transactions was

made available nationwide.P" and two depositories established bearer

municipal bond programs. 130 Moreover, one depository established automated processing services for invitations to tender municipal securltles.'>'

Finally, municipal securities brokers' broker participation in the National

Clearance and Settlement System was facilitated by a clearing agency

proposal to establish a special clearing fund formula that reduces the minimum clearing fund contribution requirements for brokers' brokers.':"

SRO Surveillance and Regulatory Compliance Inspections

The Commission continued its program of referring to SROs matters that

are appropriate for SRO investigation and, as necessary, disciplinary action. The use of a computerized tracking system to track SRO referrals instituted in FY 1985 was enhanced this fiscal year. The Commission

continued during the fiscal year to encourage the SROs to pursue greater

numbers of sales practices related matters, while also evaluating SRO performance on handling all referrals in order both to formulate recomrnendations for improved procedures at the SROs and to make determinations

as to the type of matters that are appropriate for referral to SROs or the

states. This fiscal year 235 matters were referred to the SROs as compared

with 343 in fiscal 1985. The decrease in matters referred as compared

with last fiscal year is attributable to a determination to track only the more

significant referrals. The number of referrals for FY'86 is a 26% increase

over the number of matters referred in fiscal year 1984.

Section 19(d)(1) of the Securities Exchange Act of 1934 and Rule 19d.1

thereunder requires all self-regulatory organizations to file notice with the

Commission of all fin-aI disciplinary actions.

A Rule 19d-1 filing may report a completed action that was initiated at

any time during the last four years. This time lag frequently reflects the

severity of the violation(s) charged, the number of respondents involved,

39
or the complexity of the underlying facts. Thus, SROs generally conclude

cases involving minor or technical violations with a single respondent in

less than a year; cases involving serious trading violations (e.g., price

manipulation, prearranged trading, frontrunning, etc.) require more time

to complete because of the necessity to demonstrate specific intent to the

disciplinary panel that acts as a trier of fact. Consequently, the absolute

number of Rule 19d-l notices submitted by a SRO in a given year is not

a precise measure of its proficiency in market surveillance and compliance.

Nevertheless, the number of actions reported can be useful in assessing

the regulatory effectiveness of different SROs over similar time periods,

and this information has proved useful in focusing inspections of SRO

regulatory programs.

SRO Final Disciplinary Actions FY 86

In fiscal 1986 the American Stock Exchange ("AMEX") filed 52 Rule

19d-l filings; the Chicago Board Options Exchange ("CBOE") filed 166;

the New York Stock Exchange ("NYSE") filed 112; the Philadelphia Stock

Exchange ("PHLX")filed 18; the Pacific Stock Exchange ("PSE") filed 68;

the Boston Stock Exchange ("BSE") filed 2; and the Midwest Stock Exchange ("MSE") filed 2; as well as 426 filed by the National Association

of Securities Dealers ("NASD").

SRO Final Disciplinary Actions

1982 1983 1984 1985 1986

Exchanges 334 475 394 530 419

NASD District Committees 429 227 667 348 252

NASDAQ and MSC Comrnlttee'P 248 100 62 93 174

TOTALS 809 802 1123 971 845

During the fiscal year, the staff conducted 22 inspections of SRO market surveillance, disciplinary, compliance, and operational programs.

The staff completed an inspection of the NYSE's Stock Watch and Industry Analysis programs during the year. The inspection revealed that in

response to previous recommendations, the NYSE is developing a new realtime surveillance system. The new system will compare current trading to

historical norms for each exchange listed issue to produce exceptions which

willthen be investigated by staff. In contrast to the current surveillance system, which uses quantitative exception parameters for groups of stocks,

the new system will incorporate price and volume characteristics of each

stock into its exception parameters. It is expected that the new system will

be tested during the later part of 1986. The inspection also noted ways in

which other surveillance exception reports could be enhanced. Late in the

year, the Division began an inspection of the NYSE's Department of Enforcement. This inspection should be completed in October of 1986.

The staff also completed comprehensive inspections of the Amex's surveillance, investigatory and enforcement programs for both equities and

40
equity options. The equities inspection revealed improvements in the surveillance and investigatory programs resulting from the establishment of

automated surveillance reports and refinements in the equity audit trail.

The equity options inspection disclosed that surveillance of upstairs member firms had improved, and encouraged additional automation of the surveillance of floor members. The equity options inspection also found that

the Amex instituted a highly successful new order ticket review procedure

designed to monitor specialist performance.

During 1986, the staff inspected both the equities and equity options surveillance and disciplinary programs of the PSE to determine ifthe Exchange

had appropriately responded to previous inspection findings. The inspection revealed improvement in the surveillance and disciplinary programs

of the PSE, and that both the equities and equity options programs were

functioning adequately. In addition the PSE had implemented a significantly

improved options audit trail.

The staff also completed comprehensive inspections of Phlx's equities

and equity options surveillance programs. The equity options inspection

noted significant improvement from the previous inspection. Although

several minor deficiencies were noted, the program was found to be functioning adequately. In response to the inspection findings, the Phlx agreed

to implement steps to enhance surveillance of Phlx primary issues.

The staff also conducted an inspection of the NASD's Qualification Section to evaluate enforcement standards for inclusion and deletion of securities in the NASDAQ System. The inspection found that the Qualifications

Section was effectively managed, and that established procedures were followed consistently. Late in the year the staff began an inspection of the

NASD's surveillance and disciplinary programs regarding the NASDAQ

market. This inspection revealed substantial improvements in NASDAQ

surveillance programs and progress toward an effective audit trail for NASDAQ securities.

The staff also completed inspections of the Spokane Stock Exchange,

Inc. ("SSE") and the Intermountain Stock Exchange, Inc. ("ISE"). Recommendations resulting from the SSE inspection included creation of a new,

comprehensive self-regulatory program for the Exchange and coordination

of that program with the NASD's member firm examination program. Following the ISE inspection, the exchange proposed a voluntary dissolution.

Subsequently, however, the Commodities Exchange, Inc. ("COMEX") and

the ISE executed an agreement for the purchase of ISE's registration as

a national securities exchange. Subject to Commission approval the ISE

would continue to exist as a dormant exchange, owned by the COMEX.

The staff also completed an inspection of the SSE equity surveillance

program. The inspection revealed that SSE is developing a new automated order routing and execution system. SSE has agreed to use this system

and implement various automated enhancements to its surveillance

programs.

In 1986 the inspection program continued to emphasize increasing the

accuracy of audit trails as a means of improving automated surveillance.

41
As part of each inspection, staff met with exchange personnel to discuss

audit trail developments and ways in which further improvements could

be made. Significant progress was achieved during the year by the NYSE,

the NASD and the PSE in their audit trails.

The staff conducted an inspection of the NYSE's Department of Enforcement in order to analyze the NYSE's policy not to investigate customer com:

plaints, terminations of registered representatives for cause and notices by

members of disciplinary action taken against their registered representatives ("cause matters"). In response to staff recommendations, the NYSE

indicated that a preliminary investigation of all potential sales practice violations would be undertaken unless matters were deferred to another SRO

or previously investigated. Additional policy changes to be implemented

include the periodic review of cases designated "no open," adoption of a

uniform system for recording customer complaints, procedures to improve

reporting among NYSE departments, improved documentation of why

cause referrals are not documented and improved file storage and retrieval.

A comprehensive inspection of compliance programs at the Phlx, including routine examinations, financial surveillance and cause investigations,

was conducted during fiscal year 1986. As a result of the concerns noted

during that inspection, the Phlx entered into a contract with the NASD to

conduct all compliance responsibilities for its foreign currency options

members on the behalf of the Exchange.

A comprehensive compliance inspection of the CBOE was completed during the fiscal year. That inspection reviewed cause investigations, routine

examinations and formal disciplinary actions, and disclosed weakness in

routine sales practice examinations and cause investigations, as well as

minor deficiencies in financial examinations of members and the development of formal disciplinary actions.

The staff also conducted inspections of eight of the fourteen NASD district offices. Inspections of the district offices in Seattle, Denver, Dallas,

Chicago, Cleveland, Philadelphia, and New York were conducted by the

Commission's Regional Offices. Inspections of the district offices in Kansas City and New York (two inspections of New York) were conducted by

the Washington, D.C. office. The NASD district office inspections generally revealed that the NASD was meeting its oversight responsibilities under

the Act. The inspections did reveal isolated deficiencies in the processing

of examinations, documentation of financial surveillance, documentation

and scope of cause investigations and processing of formal disciplinary action programs. With respect to the district office in New York, the staff noted serious delays in processing examinations and cause investigations as

well as delays in processing the related formal disciplinary actions. The inspections also noted that a number of management changes have occurred

in that district and that improvements had been made in addressing

procedural deficiencies. In addition to the inspections conducted during

fiscal year 1986, the staff encouraged and monitored automation by the

NASD of its district recordkeeping functions as well as the development

of a program to use computers for conducting field examinations of broker42
dealers. Reviews of the arbitration programs administered by the NASD

and NYSE were in progress at the end of the fiscal year. Finally, the staff

met with the NYSE and the NASD on a quarterly basis to discuss current

regulatory, examination and oversight issues.

In response to continued investor complaints concerning delays in transferring accounts between broker-dealers, the staff monitored the progress

of the recently implemented automated transfer system.

Applications for Re-entry-During the fiscal year the Division of Market

Regulation received 113 SRO applications to permit persons subject to

statutory disqualifications, as defined in Section 3(aX39) of the Exchange

Act, to become associated with broker-dealers.P? This number of filings,

a 50% increase from fiscal year 1985, represents by far the largest number of 19h-1 filings ever received and processed by the staff in anyone fiscal year. The distribution of filings among the SROs was the following:

NASD (88); NYSE (21); and AMEX ( 4). Of the total filings processed, ( 5)

applications were subsequently withdrawn; 100 completed; and 8 were

pending at the year end. One application was denied by the Commission.

The staff refused to take a no action position in one application.

In February 1986, the Division of Market Regulation requested that

these clearing agencies prepare formal comprehensive risk assessment

reports, as contemplated in Securities Exchange Act Release No. 19600,135

which enumerated the standards for Clearing Agency Registration. These

risk assessment reports would be presented to the clearing agencies' respective Boards of Directors and filed with the Division by January 1, 1987. In

addition, because new services and systems are developed and offered to

clearing agency participants fairly regularly, the Division has requested

these risk assessment reports be updated annually.

Primary responsibility for examining and inspecting registered clearing

agencies was shifted to the Commission's regional offices in 1986. The Division of Market Regulation, in conjunction with appropriate New York, Chicago, Los Angeles and Philadelphia personnel, will coordinate this transfer

to the regional offices and provide support assistance and counsel to regional office examiners. Transfer of the clearing agency inspection program to

the regional offices will ensure more regular Commission oversight of securities depositories and clearing corporations, and allow the Commission

to utilize the expertise and experience of its regional office examiners who

conduct broker-dealer, transfer agent, and investment adviser inspections.

43
Investment Companies and Advisers

Key 1986 Results

The Division of Investment Management oversees the regulation of investment companies and investment advisers under two companion statutes, the Investment Company Act of 1940 (Investment Company Act) and

the Investment Advisers Act of 1940 (Investment Advisers Act),and ad.

ministers the Public Utility Holding Company Act of 1935 (Holding Company Act).

During 1986 the number of registered investment companies increased

by 19% and the assets they manage increased by 61 %. The number of in.

vestment advisers registered increased by 7%. This rate of increase is significantly lower than that experienced in prior years because about 1,500

advisers did not wish to file the new uniform registration form, thus terminating their registrations.

Number of Active Registered Investment Companies

and Investment Advisers

FY '81 FY '82 FY'83 FY'84 FY '85 FY'86 81-86

%

Increase

Investment Companies

Investment Advisers

1,574 1,830 2,057 2,210 2,458 2,912 85%

6,265 5,445 7,043 9,083 10,908 11,707* 87%

Investment Company and Adviser Assets Onder Management

(in billions)

FY '81 FY '82 FY '83 FY '84 FY '85 FY '86 81-86

%

Increase

Investment Companies

Investment Advisers

$315 $315 $360

$450 $670 $780

$370 $ 525 $ 742 136%

$850 $1,170 $1,400 211%

Inspections/Examinations of Investment Companies and Advisers

FY '81 FY '82 FY'83 FY '84 FY '85 FY '86 81-86

%

Increase

Investment Companies

Investment Advisers

Total Examinations

236

512

748

355

710

1,065

348

737

1,085

497

837

1,334

567 643 168%

1,039 1,263 146%

1,606 1,906 155%

* The registrations of up to 3,000 of these advisers may be cancelled during 1987

for failing to file the new, uniform adviser registration form.

44
During fiscal 1986 the Division and the regional offices continued efforts

to coordinate their regulatory activities with state authorities that share the

Commission's jurisdiction over investment advisers, by conducting joint

examinations, providing training for state examiners, and routinely sharing examination results.

Due to the large growth in the number of investment advisers registered

with the Commission in recent years, the Commission took steps to reevaluate the current regulatory structure for advisers. An SEC Roundtable on

Investment Advisers and Financial Planners was held on May 7, 1986 to

give the Commission the benefit of the views of outside experts. Discus.

sion at the Roundtable centered on industry growth, and whether it poses

additional risks to investors; disclosure to investors and how it can be Improved; and alternatives to the current regulatory system, including the establishment of one or more self-regulatory organizations for advisers and

greater emphasis on state regulation.

Regulation of investment advisers and financial planners was also the

topic of a hearing held on June II, 1986 by the Subcommittee on Telecom.

munlcations, Consumer Protection and Finance of the House Committee

on Energy and Commerce. In testimony at the hearing the Commission

stated that, although any abuse is unacceptable, the evidence of abuse by

planners and advisers was limited. Improved coordination with the States

and productivity enhancements are enabling the SEC to deal with the industry's expansion under current regulation. The SEC is continuing to work

with both state regulators and industry representatives to ensure the continuation of cost-effective investor protection.

The staff also cooperated with the National Association of Securities Dealers ("NASD") as it began a pilot program to evaluate the feasibility of conducting inspections of NASD members who are also registered investment

advisers. The pilot is designed to provide information on whether the NASD I

might function as a self-regulatory organization for investment advisers.

The Division and the Regional Offices conducted an investment adviser

training program for NASD examiners participating in the NASD pilot program, which will continue into the coming year.

During the year personal computers were used increasingly by Commission examiners, both for on-site inspections of investment companies and

investment advisers and in subsequent report writing and file maintenance.

These computer applications hold the promise of adding considerable economies to the program's examination capabilities.

Disclosure Requirements

The Commission adopted Form N-14, a simplified form for registering

securities issued by management investment companies and business development companies in business combination transactions. 136 The Commission proposed a package of new rules and rule amendments that would

standardize the computation of mutual fund performance data used in advertisements and sales literature to enhance investors' ability to compare

performance clalrns.P?

45
Edgar

In July, 1985, the Division's Office of Public Utility Regulation began accepting electronic filings from registered public utility holding company

systems and their member companies. The Division also formed an Edgar

Pilot Branch in October, 1985, which began processing electronic filings

for a volunteer group of investment company registrants in November,

1985. The volunteers include a representative group of 158 management

investment companies and 72 unit investment trusts with over 2,000 active series. Additional electronic filings of Form N-SAR (semi-annual report

of registered investment companies) also were made by 441 registered

management investment companies not participating full-time in the Edgar

pilot. As of September 30, 1986, the Division had received 5,063 Edgar

filings

In October, 1986, the Commission published for comment a proposed

rule that would allow optional electronic filing of Form 13F, the report of

securities holdings filed by institutional managers. The rule would specify

a uniform format and require that electronic filings of this form be made

on magnetic tape, a medium particularly suited to large, formatted data

filings.138

Regulatory Policy

In January 1986, the Commission issued an advance concept release requesting comment on whether Rule 10f-3 under the Investment Company

Act should be amended to provide better protection for investors and greater flexibility for investment companies. The current rule provides a limited

exemption from a statutory prohibition against acquisitions by a registered

investment company of securities underwritten by an affiliate of the company during the existence of the underwriting or selling syndicate to give

investment companies greater flexibility in making inve~ents, while

providing better safeguards against overreachlnq.P"

In March 1986, the Commission adopted amendments to Investment

Company Act Rule 2a- 7, which permits money market funds to use the

amortized cost method of valuing their portfolio securities or the pennyrounding method of computing their price per share. The amendments allow funds to acquire put options and treat variable note or floating rate debt

securities with periodic demand features (a type of put option) as short-term

securities under specified conditions.

At the same time, the Commission amended Investment Company Act

Rule 12d3-1 to clarify when investment companies may acquire demand

features and another type of put option known as standby commitments,

and adopted a new Rule 2a4J-J allowing registered investment companies

to assign a fair value of zero to standby commltments.v'?

In September 1986, the Commission proposed Rule 6c-9 under the Act

to provide, under specified conditions, an exemption from the Act to foreign banks that offer or sell their debt securities and non-voting preferred

stock in the United States, either directly or through a finance subsidiary.

46
The Commission also solicited comment on the conditions under which

foreign banks offering or selling their own equity securities in the United

States should be exempted from the ACt.141

In June 1986, the Commission proposed an amendment to Rule 31a-2

to permit investment companies to maintain required records on magnetic tape, disk, or other computer storage medium, in order to recognize the

use of computers in the Industry.':"

Investment Advisers

On November 14, 1985, the Commission adopted Rule 205-3, which permits registered investment advisers, under specified conditions, to receive

performance-based compensation.v" On January 1, 1986, the new Form

ADV became effective, a uniform form for the registration of investment

advisers with the states and the Commission. All previously registered in.

vestment advisers were required to re-register on the new form by March

31, 1986. On September 9, 1986, the Commission adopted Rule 202 (a)(l)-l,

which provides that a transaction that does not result in a change of actual

control of an investment adviser will not be deemed to be an assignment

requiring client consent.v" Also in September 1986, the Commission proposed Rule 206(4)-4 to codify an investment adviser's fiduciary obligation

to give material financial and disciplinary information to clients.r" That

proposed rule would set forth a general disclosure standard and provide

guidance on some of the types of information that advisers must disclose

to clients.

Insurance Requirements

In May 1986, the Commission adopted Rule 151 under the Securities Act,

establishing a "safe harbor" for specified types of annuity contracts. 146The

rule assists insurance companies to determine which of their annuity

products are not covered by the registration and other requirements of the

federal securities statutes. Rule 151defines the term "annuity contract or

optional annuity contract," as used in Section 3(a)(8) of the Securities Act,

to include any contract offered by a corporation subject to state insurance

regulation, under which the insurer assumes the investment risk, and which

is not marketed primarily as an investment.

On October 15, 1985, the Commission amended Rule 22c-1 under the

Investment Company Act,147permitting insurance company separate accounts offering variable annuity contracts an extended time period for

processing and pricing initial purchase payments.

Public Utility Holding Companies

There are now 13 registered holding companies with aggregate assets

as of March 31, 1986, of $82.6 billion, an increase of $4.4 billion, or 5.6 %

over June 30, 1985. Total operating revenues, as of March 31, 1986 were

$34.1 billion, a $0.3 million decrease from June 30, 1985. There are 65

47
electric or gas utility subsidiaries, 74 non-utility subsidiaries, and 22 inactive companies in the 13 registered systems, a total of 174 companies operating in 24 states (excluding seven power supply subsidiary companies).

In March 1986 the Commission revised Holdinq Company Act Rule 70

and amended Rule 50. The revision to Rule 70 increased the number of

persons affiliated with investment bankers and commercial bankers who

may serve as officers or directors of public utility holding companies and

their subsidiaries. The amendment to Rule 50 conformed itto the shelf registration provisions of Securities Exchange Act Rule 415. Rule 50 governs

competitive bidding procedures for the distribution of securities issued by

public utility holding companies and their subsldiaries.v"

Holding Company Fmancmgs-During fiscal 1986, the Commission authorized $9.3 billion of senior securities and common stock financing for the

13 registered systems: $7.7 billion in long-term debt financing, with $1.6

billion in common and preferred stock. Long-term debt financing increased

by 113.9% over fiscal 1985, primarily attributable to redemption and tender

offer refinancings of over $2.4 billion from decreasing interest rates. Over

$1.1 billion of pollution control financing and $5.3 billion of short-term debt

financing were approved. The pollution control financing was a 50%

decrease from amounts authorized in fiscal year 1985. This decrease

represents the uncertainties of the tax-exempt market caused by Congressional limitations on tax-exempt securities and the recent tax legislation.

Short-term debt decreased by 7% over the previous year. Total financings

in fiscal 1986 of $15.7 billion exceeded financings authorized in fiscal 1985

by $3.6 billion, an increase of over 29.8%. The Commission authorized

$134 million for fuel exploration and development activities during 1986.

Subsidiary Seroice Companies-At the end of calendar year 1986, 12 subsidiary service companies provided managerial, accounting, administrative

and engineering service to 11 of the 13 registered holding companies. Bill.

ings for services rendered to the holding company systems amounted to

$1.5 billion or 4.4 % of the total revenues generated by the electric and

gas operating utilities. Subsidiary service companies are heavily laborintensive, employing 18,241 staff, and have assets of $901.5 million.

The Commission's continuing review of holding company fuel procurement activities, accounting policies and annual reports of the subsidiary

service companies and fuel procurement subsidiaries, and the review of nonutility quarterly reports resulted in savings to consumers during the fiscal

year of approximately $43.7 million.

Significant Applications and Interpretations

Investment Company Act-The Commission issued an order on January

30, 1986, exempting the IDS Mutual Fund Group ("Group") from Section

10(f)of the Investment Company Act and Rule 1Of-3,to permit Group funds

to purchase securities through affiliated underwriting syndicates (most significantly Shearson Lehman Brothers Inc.) in amounts exceeding the limits

of Rule 10f-3(d). The order was subject to several conditions designed to

48
assure investor protection, and two sets of quantity limitations on the ago

gregate amount of securities an individual fund could purchase from the

affiliated underwriter.

An order was issued by the Commission on March 17, 1986, permitting

the Kemper Investment Trust, Series 1 and Subsequent Series ("Trusts")

to invest a substantial amount of assets in the shares of the Kemper Mutual Funds in excess of the limitations on a "fund of funds" in Section 12(d)(1)

of the Act. The Trusts are a series of unit investment trusts that maintain

portfolios of zero-coupon obligations and underlying fund shares. Affiliated transactions associated with the purchases were also approved under

Section 17(d) of the Investment Company Act and Rule 17d-I.

On June 19, 1986, Shearson Lehman Brothers Inc. ("Shearson") and

members of the IDS Mutual Fund Group were exempted from Section

17(a)(3) of the Investment Company Act by a Commission order that permitted the Funds to lend portfolio securities to Shearson and its affiliated

broker-dealers, subject to conditions to ensure the Funds fair treatment and

protection from overreaching. Regarding the loans, the applicants were also

granted an order under Section 17(d) and Rule 17d-I to permit associated

joint transactions between Shearson and the Funds.

On July 23, July 28, and August 12, 1986, the Commission issued orders of exemption under Section 6(c) of the Act permitting, respectively,

Westpac Banking Corporation, an Australian bank, and Barclays PLC and

National Westminster Bank PLC, English bank holding companies, to issue and sell equity securities in the U.S. under several conditions, including that the foreign banks have a substantial presence in the U.S. and that

they be regulated as banks both in their home country and the U.S. These

were the first foreign banking entities granted exemptions permitting them

to make general offerings of equity securities in the U.S. Previously, foreign banks had been granted exemptions covering general offerings of debt

securities.

Holding Company Act- The Commission issued a notice of, and order

for, hearing on two applications filed by South Jersey Industries, Inc. on

its proposed acquisition of Chesapeake Utilities Corporation and a declaratory order that the proposed acquisition of Chesapeake common stock

would not affect South Jersey's exemption under the Act. 149 A hearing was

ordered to commence on January 22, 1986; however, on January 24, 1986

South Jersey withdrew its applications, citing Chesapeake's changed financial condition.

The Commission issued an order authorizing Cleveland Electric llluminating Company and Toledo Edison Company to become wholly-owned subsidiaries of Centerior Energy Corporation, a newly created, predominantly

intrastate public utility holding company. A request for hearing by an Ohio

consumers organization was denied. 150 The merger of the two Ohio utilities represented one of the largest utility combinations in recent history.

With combined assets of over $9 billion, the new holding company is the

18th largest electric utility system in the United States.

The Commission issued a series of orders authorizing the Middle South

Utilities, Inc. system to enter into several financing transactions totalling

49
$1 billion. 151 The financial viability of the system had deteriorated from

rate relief insufficient to compensate for the construction of two nuclear

generating plants. The deterioration had extended to a point where the Commission was unable to make the findings required under the Holding Company Act to authorize needed transactions. However, during the fall and

winter of 1985-86 adequate rate relief was received by the system companies, allowing the Commission to authorize these transactions.

The Commission issued an order authorizing Columbia Gas System to

form a non-utility subsidiary, Producer Settlement Corporation, to assist

in the financing of up to $800 million of first mortgage bonds. These bonds

are issued to independent gas producers as compensation for the renegotiation of over $5 billion of high take-or-pay gas contracts. 152 The renegotiation of the gas contracts was needed to reverse the substantial declining

earnings of Columbia from the slide in natural gas rates authorized by

regulatory bodies.

The Commission issued a notice of, and an order for, hearing on an application by Columbia Gas System to form a new gas marketing subsidiary,TriStar Gas Marketing, Inc. 153TriStar proposed to purchase spot market

gas in the open market and arrange for delivery to end-users using associate and non-associate pipeline facilities. The Office of the Consumer Counsel of Ohio and two independent gas marketing companies intervened and

requested a hearing. A hearing was ordered to start on July 21, 1986;

however, on July 17, 1987 Columbia withdrew its application, citing

changed market circumstances.

The Commission issued an order authorizing CSW Credit, Inc., a nonutility subsidiary of Central & South West Corporation, to factor the accounts receivables of specified non-associate electric utilities, in addition

to those of its associate companies. 154 The order limits the amount of nonassociate accounts receivables to less than those of the associate companies.

Institutional Disclosure Program-Securities Exchange Act Section 13(1)(1)

and Rule 13f-1 under it requires specified "institutional investment

managers" to file quarterly reports on Form 13F. Managers filing these

reports disclose specified equity holdings of the accounts over which they

exercise investment discretion. As of June 30, 1986, Form 13F reports had

been filed by 1,543 managers for holdings totaling $1.091 trillion.

Form 13Freports are available to the public at the Commission's Public

Reference Room promptly after filing. Two tabulations of the information

contained in these reports are available for inspection: (1) an alphabetical

list of the individual securities, showing the number of shares held by the

managers reporting the holding; and (2) a list with the total number of shares

of a security reported by all reporting managers. Both tabulations normally are available about two weeks after the date on which the reports must

be filed.

The tabulations are prepared by an independent contractor selected

through the competitive bidding process. The contractor provides its services to the Commission without charge, and is required to make a variety

of specified tabulations available to the public at reasonable prices within

ten days after receiving the reports.

50
Other Litigation and Legal Actlvltle;

Key 1986 Results

FY '83**. FY'84 FY'85 FY'86

Win Loss Other' Win Loss Other' Win Loss Other' Win Loss Other'

Supreme Court

and

Appellate Courts 38 6 3 37 8 5 36 4 5 32 3 2

District Court 40 4 4 26 2 2 23 3 2 21 0 1

Bankruptcy Court" NA NA NA 13 3 2 20 5 0 13 3 1

Other 6 1 6 4 0 0 7 0 0 4 1 0

• Issue not reached, split decision, etc .

•• State Courts and Administrative Tribunals

••• Includes third party subpoena cases, which were deleted for FY 1984-1986 results.

Figures for FY '81 and FY '82 have not been compiled.

The General Counsel represents the Commission in all litigation in the

United States Supreme Court and the Courts of Appeals, defends the Com.

mission and its employees when sued, prosecutes administrative dlsciplinary proceedings against professional persons under Rule 2(e) of the

Commission's Rules of Practice, and appears amicus curiae on behalf of

the Commission in significant private litigation involving the Federal securities laws. In addition, under the supervision and direction of the General

Counsel, the Regional Offices represent the Commission in corporate reorganization cases under the Bankruptcy Code that have a substantial public

investor interest. The General Counsel also seeks to ensure that objectives

of the Commission's enforcement and regulatory programs are accornplished, that judicial interpretations of the Federal securities laws afford

adequate protection to investors, and that the Commission is able to discharge its statutory responsibilities, unimpeded by lawsuits against the agency or its staff.

The General Counsel represented the Commission in 285 litigation matters during fiscal year 1986. During the year, 37 courts of appeals and

Supreme Court cases were concluded, all but three favorably to the Com.

mission. There were 18 appeals before the Supreme Court and Federal

courts of appeals of cases in which a party subject to a Commission injunctive action challenged the lower court's resolution of the case in a manner

favorable to the Commission or, much less frequently, the Commission

challenged an adverse decision. Of these appeals, seven were concluded,

with only two outcomes unfavorable to the Commission. The foregoing com- r

pares with the following cases in fiscal year 1985: a total of 289 matters, I

of which 37 were appeals of injunctive action cases. Of those appellate cases, r

15 were concluded, with only two outcomes unfavorable to the Commission. i

f

51
There also were 25 appellate and district court actions seeking to overturn Commission orders, primarily those issued in administrative proceedings or affirming self-regulatory organization disciplinary proceedings

against regulated entities such as broker-dealers. Of these appeals, eight

were concluded, with no adverse results. In fiscal year 1985, there were 20

actions, 12 of which were concluded with only one adverse result.

The Commission handled 42 amicus cases during the year (compared

to 44 such cases in fiscal year 1985). The Commission participated in 19

private cases that were decided; only two of these resulted in a decision

adverse to views advocated by the Commission.

The General Counsel also handled more than 218 other proceedings before the Commission or in the Federal district courts, compared to 185 in

fiscal year 1985. These included 24 suits brought against the Commission

or its staff, and 54 suits, including actions under various public information statutes, seeking access to Commission documents. Of the latter, 46

involved discovery subpoenas in private actions in which the Commission

is not a party. In fiscal year 1985, there were 63 suits brought against the

Commissioners or the Commission's staff, and 78 suits (including 54 thirdparty subpoenas) under the various public information statutes.

In addition to litigation, the General Counsel is involved in significant

legislative and regulatory work. For example, the Office assisted the Chairman in preparing testimony on a number of important issues, including

regulation of financial services, regulation of investment advisers and financial planners, the Commission's responsibilities regarding bank financial

reporting, and financial reporting and the role of the independent auditor.

The Office also assisted the Commission in preparing a legislative proposal

to amend the private civil liability provisions of the Racketeer Influenced

and Corrupt Organizations Act.

During fiscal year 1986, 116 debtors with securities registered under the

Securities Exchange Act of 1934 (Exchange Act) in the hands of the public

commenced Chapter II reorganizations. The Commission entered its appearance in 48 of these cases, involving aggregate assets of $10.6 billion

and about 260,000 public investors. The Commission entered an appearance in one case to pursue a specific law enforcement interest. A list of

these cases is set forth in Table 42 in the Appendix to this Report. The Office

also submitted proposed amendments to the Bankruptcy Rules to the Committee on Rules of Practice and Procedure of the Judicial Conference of

the United States in connection with that committee's review of the

Bankruptcy Rules following the passage of The Bankruptcy Amendments

and Federal Judgeship Act of 1984.

Litigation

Appeals in Commission Enforcement Actions- This litigation consists

primarily of attempts by defendants in Commission injunctive actions to

obtain reversal by a court of appeals of district court decisions finding that

they have violated the law, enjoining them, and/or ordering other relief such

52
as disgorgement of illegal profits. In addition, the Commission, when it is

denied relief, will in some cases take an appeal.

In SEC v. Drysdale Securities Corp., 155 the Commission appealed the dis.

trict court's dismissal of the Commission's complaint for injunctive relief

in an action involving a fraud by a government securities dealer that caused

losses to institutional investors of almost $300 million. The Commission's

complaint alleged, among other things, that an accountant engaged in securities fraud by preparing false financial statements that concealed the dealer's insolvency and that were relied upon by the investors. The district court

dismissed the complaint, holding that, since the alleged misrepresentations

did not pertain to the merits of the government securities traded or to their

issuer, they did not occur "in" or "in connection with" the offers, purchases

or sales of securities, and therefore did not violate antifraud provisions of

the Federal securities laws. The Court of Appeals for the Second Circuit

reversed, reasoning that the securities were transferred as a direct result

of the misrepresentations of the dealer's financial condition, and that these

misrepresentations related to a significant part of the consideration for the

securities transactions-the dealer's concurrent agreement to repurchase

or to resell the securities.

In SEC v. The American Board of Trade, 156 the United States Court of Appeals for the Second Circuit, which had previously issued a decision in this

case in 1984,157 affirmed the district court's ruling on remand in favor of

the Commission. In the prior decision, the court had stayed an injunction

against defendants' further illegal sales of unregistered short-term notes

to provide them with an opportunity to seek registration of the notes. In

its decision in 1986, the court found that registration of the notes could

not be effected because the defendants could not provide certain essential

certified financial statements. As a result, the court upheld an order granting the Commission's motion to lift the stay of the injunction against illegal sales and enjoining temporarily redemptions of existing notes, pending

formulation of a plan to terminate the notes program. There are now outstanding over $80 million of these unregistered notes.

In SEC v. Rogers, 158 a divided panel of the United States Court of Appeals for the Ninth Circuit affirmed (two to one) the district court's judg'

ment that the defendant did not violate the antifraud and registration

provisions of the Federal securities laws in connection with the offer and

sale of tax-shelter investments in South American gold mining properties.

The court held that the district court's findings of fact with respect to defendant Rogers' liability were not dearly erroneous.

The same court affirmed a judgment against the Commission in another

injunctive action alleging violations of the registration and antifraud provisions, SEC v. Belmont Reid & Co. 159 The court held that sales contracts for

the delayed delivery of gold coins at a substantial discount from the market price of gold were not securities. The court stated that the case "was

a dose one," but reasoned that, even though investors were dependent upon

the promoter to use their funds to develop a mining enterprise capable of

producing the coins, a security was not present since the investors' "primary

53
purpose" was to profit from the rise in the price of gold during the early

1980's. The Commission has filed a petition for rehearing of that decision.

Petitions to Review Commission Orders-Petitions to courts of appeals

for judicial review of Commission orders arise from Commission administrative proceedings conducted under various provisions of the Federal securities laws, including proceedings to review disciplinary actions by national

securities exchanges and the National Association of Securities Dealers,

Inc.(NASD).160These proceedings may involve, among other things, issues

central to the Commission's enforcement program and thus to the integrity of the securities markets, including questions of interpretation of the securities statutes.

For example, in Lowell H. Listrom & Co. v. SEC, 161the United States Court

of Appeals for the Eighth Circuit has been asked to reveew the Commission's determination that a broker-dealer violated recordkeeping, confirmation and credit-extension regulations under the Exchange Act in

connection with a best-efforts underwriting. Petitioner contends that the

Commission's recordkeeping and confirmation requirements were not applicable to transactions by those persons who sought to participate in the

underwriting by submitting a written subscription agreement. The Commission has urged the court to uphold its interpretation of these rules as

applying to transactions by all persons who did business with the broker

in the underwriting rather than only those persons who engaged in oral

transactions, since the rules at issue are important prophylactic measures

designed to provide regulators with tools for detecting broker-dealer misconduct, and to guard against abuses in the underwriting of new issues.

In Exchange Services v. SEC,162 the United States Court of Appeals for

the Fourth Circuit affirmed a Commission decision that upheld an NASD

determination that order takers employed by the petitioner, a discount

broker-dealer, must qualify as registered representatives by passing the

general securities examination required by the NASD of all persons who

engage in the securities business. The court deferred to the judgment of

the Commission, which had concluded that, notwithstanding the limited

nature of their duties, petitioner's order takers must pass the general examination because of their regular and continuous contact with the investing public. The court also upheld the Commission's judgment to refrain

from considering, in the context of a proceeding involving a particular

brokerage firm, allegations that the existing testing requirements are too

onerous in light of the limited nature of order takers' duties. The court emphasized that the NASD and the Commission, in a separate inquiry, are

conducting an ongoing review of overall testing requirements.

And in Earl v. SEC, 163the United States Court of Appeals for the Ninth

Circuit affirmed an order of the Commission that upheld sanctions imposed

by the NASD on the petitioner, who admittedly misappropriated funds from

customers and his firm while employed as a branch manager of a brokerdealer firm. Rejecting the petitioner's contentions, the court of appeals

found that the Commission did not abuse its discretion either in upholding

these sanctions or in denying petitioner oral argument and leave to adduce

additional evidence before the Commission.

54
Commission Participation in Private Litigation-The Commission also par.

ticipates as a friend of the court in selected private litigation that involves

significant securities law issues. Such litigation is an important supplement

to the Commission's enforcement program. In addition, because the Fed.

eral securities laws provide for private remedies as well as governmental

enforcement actions, decisions in private cases may have precedential effect on the Commission's own regulatory activities.

In Randall v. Loftsqeerden, 164 the Supreme Court reversed a decision of

the United States Court of Appeals for the Eighth Circuit: The Supreme

Court held that the recovery available to a defrauded tax-shelter investor,

suing under either Section 12(2) of the Securities Act or Section lO(b) of

the Exchange Act to rescind the fraudulent transaction or to obtain rescissionary damages, may not be reduced by any tax benefits the investor has

received from the investment. Adopting arguments urged by the Commission and the United States in a friend of the court brief, the Court reiterated the important deterrent purpose of private rights of action under the

Federal securities laws.

In light of its ruling in Loftsgaarden, the Supreme Court also vacated and

remanded two rulings by the United States Court of Appeals for the Second Circuit requiring offset of tax benefits: Salcer v. Enuicon Equities

Corp. 165 and Freschi v. Grand Coal Venture. 166 Still pending before the Tenth

Circuit is Feldman v. Pioneer Petroleum Corp., 167 in which the Commission

filed a brief on an issue left open by the Supreme Court in Loftsgaardenwhether tax benefits should be deducted from a Section 10(b) "out-ofpocket" recovery. The Commission's position is that it is likewise improper

to offset tax benefits against an out-of-pocket recovery.

In Point Landing v. Omni Capital Intemational, 166 the Court of Appeals for

the Fifth Circuit affirmed the dismissal of claims under Section 10(b) and

Rule 10b-5 based on alleged fraudulent misrepresentations in the sale of

silver straddle commodity futures through discretionary trading accounts.

Consistent with the position argued in briefs filed (at the request of the court)

by the Commission and by the Commodity Futures Trading Commission,

the court held that the plaintiff purchasers had no private cause of action

under Section 10(b) and Rule 10b-5, but could sue only under the Commodity Exchange Act (CEA). Thus, the court agreed with both agencies

that Section 2(a)(1)(A)of the CEA, which gives exclusive jurisdiction over

commodity accounts to the CFTC, also preempts private actions under the

securities laws based on Commission rules. The court deemed it unnecessary to decide whether the CEA also preempts private rights of action that

are self-executing, in the sense that they do not rely on the promulgation

of a Commission rule.

In Long Island Lighting v. Barbash, 169 the United States Court of Appeals

for the Second Circuit agreed with the position urged by the Commission

in a friend of the court brief concerning the interpretation of the Commission's proxy solicitation rules. Noting that these rules expressly apply to

communications "reasonably calculated" to influence shareholder votes,

the court of appeals rejected the standard adopted by the district court55
that only communications "targeted directly at shareholders" are subject

to the proxy rules. That unduly narrow standard, the court stated, would

alloweasy evasion of the rules. The court of appeals also held that the proxy

rules apply to materials published in newspapers and to communications

addressing matters of public interest. A dissenting judge would have first

considered the First Amendment issue the district court had considered

in connection with the newspaper advertisement involved in this case.

In Beaumont v. American Can Company, 170 the United States Court of

Appeals for the Second Circuit affirmed the district court's dismissal of a

private action brought against the American Can Company for violations

ofthe Commission's antifraud and disclosure rules in connection with the

1982 merger of Associated Madison Companies, Inc., into an American Can

subsidiary. The plaintiffs, former shareholders of Associated Madison,

claimed that, in violation of the rules, the joint proxy statement and prospectusfor the merger failed to disclose information relating to the merger price

terms contained in letters from American Can requesting no-action positions and exemptions under certain Commission rules. Consistent with the

position argued by the Commission in its brief (filed at the request of the

court), the court held that the facts concerning the exemptions and no-action

positions were not material for purposes of disclosure to Associated Madison's shareholders.

In Rembold v. Pacific First Federal Savings Bank, 171 the Commission filed

a friend of the court brief in the United States Court of Appeals for the Ninth

Circuit, urging that the jurisdiction of a Federal district court under the Federal securities laws to consider claims alleging fraud in connection with the

sale of stock by a savings and loan association, pursuant to its conversion

to a stock company, is not ousted by the Federal Home Loan Bank Board's

approval of the conversion. The Commission also urged that position in

a brief filed in the United States Court of Appeals for the Eleventh Circuit

in Craft v. Florida Federal Savings & Loan Association. 172 In Rembold, the

court stated it agreed with the Commission's position and reversed the lower

court; in Craft, the court said it need not reach that question in light of its

disposition of the appeal on another ground.

In Brawer v. Options Clearing Corp., 173 the Commission filed a friend of

the court brief in the United States Court of Appeals for the Second Circuit

in a suit instituted by a writer of put options. Plaintiff alleged that the Options Clearing Corporation (Ocq and the American Stock Exchange had

violated a provision of their by-laws (part of a standardized options contract) when they did not adjust the price and terms of the options after an

issuer exchange offer that effected an alleged recapitalization. The district

court had dismissed the complaint on the ground that no Federal cause

of action existed against a registered clearing agency or national securities exchange for violation of self-regulatory organization rules. The Commission urged affirmance on different grounds, arguing that the plaintiff

had not alleged a violation of the adjustment rule (which provides that the

adjustment decision was to be made in the sole discretion of a committee

ofthe ocq in the absence of sufficient allegations that the adjustment decision was tainted by fraud or bad faith. The Commission further urged that,

56
if a violation of the adjustment rule had been alleged, the common law

breach-of-contract remedy provided an adequate remedy; therefore, no

separate Federal remedy need be implied. The Commission asked that the

appeals court not reach the issue whether an implied action may lie against

an exchange.

In Merrill Lynch, Pierce, Fenner & Smith v. Bobker.P" involving a tender

offer for less than all of the issuer's securities, the District Court foe the

Southern District of New York, as urged by the Commission in a brief filed 1-

at the request of the court, found that a short sale made by a shareholder -

during the proration period of the tender offer, after he had tendered all

of his shares, violated the hedged-tendering prohibitions of Rule IDb-4. Under the rule, the shareholder was required to repurchase the securities sub. t

ject to the stIort sale or withdraw those securities from the tender by the I.

end of the proration period.

In Manufacturers Hanover Trust Co. v. Drysdale Securities Corp.,m a prlvate action arising out of the same circumstances as SEC v. Drysdale Securities Corp. (discussed under appeals in enforcement actions), the

Commission filed a friend of the court brief, at the court's request, taking

the position that traditional repurchase agreements for United States

government securities were not separate securities for purposes of the Securities Act and the Exchange Act. Rather, the Commission urged, as the Second Circuit had held in the Drysdale Securities Corp. case, that fraud in

repurchase agreements occurs in connection with the purchase and sale

of the underlying security and is subject to the antifraud provisions for that

reason. The court of appeals affirmed the jury verdict for the plaintiff on -

this basis, not reaching the question whether repurchase agreements were

separate securities.

In SIPC v. Vigman,176 the Securities Investor Protection Corporation -

sought review in the United States Court of Appeals for the Ninth Circuit -

of a district court order dismissing, on standing grounds, securities fraud -

claims arising out of the collapse of two California brokerage firms. The

Commission filed a memorandum with the court of appeals urging that un- -

authorized broker-dealer trading in customer accounts can violate Rule IIDb-5. The Commission explained that, under the "shingle" theory, a broker- •

dealer may be held liable under Rule 1Db-5 for conduct inconsistent with

its implied representation that customer accounts will be managed with fair- r .

ness and honesty and in accordance with industry standards.

In Levinson v. Basic, lnc., 177 the Commission filed a .brief in the United r

States Court of Appeals for the Sixth Circuit urging the court to reject the

lower court's holding that merger negotiations are never a material event

until an agreement in principle is "reasonably certain." The court of appeals agreed with the Commission and held that, at least where a company

makes statements about corporate developments, merger negotiations may

be material to investors even before there is an agreement in principle. The

court agreed with the Commission.

Trading on Material Non-public Information- The issue of when trading

on material non-public information violates the Federal securities laws con.

57 I
tinues to be actively litigated. This year the Commission submitted amicus briefs in two cases.

In United States v. Carpenter, 178 the United States Court of Appeals for

the Second Circuit affirmed the criminal convictions of defendants who traded on information that one defendant, a columnist for the Wall Street Journal, obtained in the course of his employment and tipped to the other

defendants. The defendants had sought dismissal of the charges, arguing

that, unlike other cases involving trading on misappropriated information,

in this case the only party from whom the information was stolen was not

itself a participant in securities transactions. Agreeing with the position

I urged by the Commission, the court rejected that argument. The court held

! that trading on information misappropriated in breach of an employer-

: imposed fiduciary duty of confidentiality violates Section 10(b) and Rule

[ IOb-5even though the victim of the fraud was not itself a purchaser or seller

, of securities.

In Anheuser-Busch v. Thayer,179 the Commission filed a brief in a Rule

lOb-5 action brought by Anheuser-Busch against a former Anheuser-Busch

director and other defendants. Anheuser-Busch's complaint alleged that the

director and other defendants traded on nonpublic information misappropriated by the director from the plaintiff concerning Anheuser-Busch's plans

to acquire another company, causing the price of the target company's stock

to increase dramatically. As a result, Anheuser-Busch claims, it had to pay

a higher price for that stock than it otherwise would have paid. The Commission's brief, filed in connection with defendants' motions for summary

judgment, urged the court to hold that a person who trades in securities

while in possession of nonpublic information he has misappropriated or

who tips others who trade, violates Rule 10b-5, as do his tippees. The Commission also urged the court to hold that a private plaintiff like AnheuserBusch that satisfies the standing requirements for bringing suit under Rule

lOb-5 may sue persons who violate the rule by such tipping or trading. The

district court, apparently agreeing with the Commission, denied defendants'

motions for summary judgment.

Tender Offer Litigation-This year the Commission, as in past years, filed

friend of the court briefs in several cases involving tender offers.

InRadol v. Thomas, 180 the Solicitor General, at the request of the Supreme

Court, filed a brief expressing the views of the United States and the Commission as to whether certiorari should be granted to review a decision by

the United States Court of Appeals for the Sixth Circuit. The court of appeals had upheld a judgment entered on a jury verdict for the defendants

in a class action brought by former target shareholders of Marathon Oil

Company challenging U.S. Steel's acquisition of the company. In that decision, and in a companion case, Starkman v. Marathon Oil Co., 181 the court

of appeals rejected the plaintiffs' contention that certain appraisals of Marathon's oil and gas reserves should have been disclosed in the context of

U.S.Steel's tender offer, holding that neither these appraisals nor any other

form of future-oriented or "soft" information is material to a target shareholder's decision to tender unless the underlying projections regarding future corporate and economic events are virtually certain. Because the Sixth

58
Circuit's decision turned in large part on specific Commission rules pro.

hibiting the disclosure of appraisals of the target company's oil and gas

reserves, which rules since have been amended, the Commission urged the

Supreme Court to deny certiorari on the ground that the case did not pro.

vide an appropriate vehicle for consideration of the materiality of soft in.

formation. The Court denied certiorari.

In Moran v. Household International, 182 the Commission filed a friend of

the court brief urging the Supreme Court of Delaware to hold that a "poi.

son pill" defense to tender offers adopted by Household International

without submission to its shareholders was not in the interests of the cor.

poratlon's shareholders. The Supreme Court of Delaware disagreed and up.

held the poison pill plan. In so ruling, the court held that the plan was an

appropriate response to certain types of coercive hostile tender offers. The

court rejected the Commission's arguments that the plan would preclude

shareholder consideration of all hostile tender offers, and would deter proxy

contests by persons opposed to management.

In Hanson Trust PLC v. SCM Corp., 183 the Commission filed, at the reo

quest of the Second Circuit, a memorandum taking the position that Han.

son Trust's extensive open market purchases of SCM stock within hours

of terminating its tender offer for that stock created a sufficiently serious

question whether Hanson Trust violated Section 14(d) of the Exchange Act

to support the district court's entry of a preliminary injunction. The Com.

mission argued that a "purported" termination of a tender offer should not

be given effect if designed to evade the Williams Act and that, under an

eight factor test, open market and privately negotiated purchases may con.

stitute an unconventional tender offer. The Second Circuit held that the

purchases by Hanson did not constitute an unconventional tender offer since

the sellers-professional erbltraqeurs-s-were sophisticated and thus did not

require the protections of the Williams Act.

Commission Action Under Rule 2(e)-Under Rule 2(e) of its Rules of Practice, the Commission may suspend or bar from practicing before it professionals who have violated the Federal securities laws, been enjoined, or

engaged in unethical or improper professional conduct. Most Rule 2(e)

proceedings involve the conduct of accountants and lawyers; they playa

critical role in the disclosure of full and accurate information to the invest.

ing public. Thus, the ability to discipline those who have engaged in violative I

conduct is necessary to protect the integrity of the Commission's processes. ';

In the last year, final determinations have been reached in several Rule {

2(e) proceedings Involving accountants and a lawyer; proceedings are still .

pending against other accountants.

In Davy v. SEC, 184 the Ninth Circuit affirmed the Commission's order per. t

manently barring an accountant from practice before the Commission based t

on antifraud violations and improper professional conduct. Significantly, -

the court reaffirmed the validity of Rule 2(e), rejecting a challenge to the

Commission's authority to promulgate the Rule. The court held that the

authority granted the Commission under Section 23(a)(l) of the Exchange

Act to establish rules and regulations "as may be necessary or appropriate

59
to implement the provisions" of the Act provides the statutory foundation

for the Rule. The court explicitly adopted the 1979 opinion in Touche Ross

v. SEC, 185 in which the Second Circuit comprehensively analyzed the history and bases of the Rule and found it a proper exercise of the Commission's prerogative to discipline professionals whose misconduct could

undermine the Commission's processes. The Davy case thus represents a

significant judicial endorsement of the Commission's authority to regulate

the professionals who practice before it.

In Michael S. Hope, c.P.A., 186 the Commission formally censured Hope,

the engagement partner for the audits of a company's 1980 and 1981financialstatements. Without admitting or denying the Commission's allegations,

Hope consented to a Commission Opinion and Order finding that his conduct in connection with those audits had been improper within the meaning of Rule 2(eXIXii).The Commission found that the company's 1980 and

1981financial statements were materially misstated and were not presented in accordance with Generally Accepted Auditing Standards because the

auditors had failed to obtain sufficient competent evidence concerning

several assertions in the financial statements, had failed to exercise the due

care required of independent auditors, and had failed to perform the au.

dits with the requisite level of professional skepticism. The Commission

accepted Hope's offer of settlement based on his representation that he had

not practiced before the Commission as an independent public accountant

for over three years.

In another Rule 2(e) proceeding, John E. Harrington and Gregory 8. Arnott,187 the Commission disciplined two accountants for their role in Fox

8- Company's audits of Flight Transportation Corporations' financial statements for 1979, 1980 and 1981.The Commission had charged that Flight,

two of its subsidiaries and its president, during that period, fraudulently

reported nonexistent sales and assets as part of a scheme for attracting publie investments that were to be used for the personal benefit of Flight's

management. Without admitting or denying the Commission's allegations,

the two respondents consented to an Opinion and Order finding that Harrington, formerly a partner in Fox & Company, had engaged in improper

professional conduct in all three audits, and that Arnott, formerly a manager

with Fox & Company, had engaged in improper professional conduct in

the 1980 and 1981audits. The Commission found that Harrington and Arnott had not performed the audits in accordance with Generally Accepted

AUditingStandards in that they failed to maintain an attitude of professional

skepticism throughout the audits and had failed to obtain sufficient competent evidence of the existence of the material assets and revenues of

Flight's subsidiaries. What evidence the auditors did obtain for those assets and revenues came directly from Flight's management. Based on its

findings, the Commission barred Harrington from appearing and practicing before it, with permission to apply for readmission after five years. Arnott was suspended with permission to apply for limited readmission after

one year and full readmission after two.

In Gary L. Jackson, 188 the Commission affirmed the administrative law

jUdge's initial decision barring Jackson from practicing as an accountant

60
..-

before the Commission based on entry of a permanent injunction, by consent, against further violations of the reporting provisions of the Exchange

Act. In disciplining Jackson, the Commission relied upon evidence disproving his contention that he was unaware that his audit would be used in a

document filed with the Commission. However, the Commission also em.

phasized that accountants should be aware that certified financial state.

ments may be used in Commission filings without their express consent.

And in Richard Hirschfeld, 169 the Commission adopted the initial decision

of the Administrative Law Judge permanently barring Hirschfeld from practice before it as a lawyer. Hirschfeld was disciplined based on a permanent

injunction for antifraud violations entered by the court in SEC v. Crusmpion Sports Management. 190 Based on Hirschfeld's serious misconduct in that

case and prior injunctions entered against him for antifraud violations, the

Administrative Law Judge held that the public interest required that Hirschfeld be barred permanently from practicing before the Commission as a

lawyer.

Litigation InvoLving Requests for Access to Commission Records-Although

the Commission received numerous Freedom of Information Act (FOIA)

and confidential treatment requests in fiscal year 1986, only five of those

requests resulted in the filing of court actions against the Commission; four

were resolved in the Commission's favor and one is pending. The Commission received 1671 requests under the FOIA for access to Commission

records. Approximately 40 % of the 1986 results were for investigatory files.

The Commission also received 2003 requests for confidential treatment

from persons who submitted information. In fiscal year 1986, 64 requestors appealed the denial or partial denial of FOIA requests to the Cornmission's General Counsel, who has delegated authority to decide such appeals.

Additionally, two confidential treatment requesters appealed the denial of

their requests.

In Mermelstein v. SEC, 191 the district court upheld the Commission's withholding under Exemption 8 of the FOIA of a Commission examination

report on a self-regulatory organization. The court agreed with the Com- -

mission that securities exchanges are "financial institutions" for purposes

of the FOIA and, thus, Commission examination reports of the exchanges I

may be exempt from disclosure under Exemption 8.

In Sefecerd Services v. SEC, 192 the district court ruled that an FOIA reo

quester's entitlement to a Vaughn index (a listing of the documents withheld from disclosure) does not attach until after administrative remedies

have been exhausted. The court denied the requester's motion to compel

the Commission to provide a Vaughn index prior to administrative appeal

of the FOIA Officer's decision to withhold various documents. The results

[ -

of the administrative review, the court noted, could obviate the need for

an index or at least reduce the number of documents in dispute. The requester, therefore, must await the ruling on the administrative appeal but

may thereafter seek a Vaughn index as part of any subsequent judicial

challenge to the final agency action.193

61
The Commission also was served with discovery subpoenas in fiscal year

1986 in private actions in which the Commission is not a party. These private parties seek information from Commission investigatory files or testimony from present or former Commission employees related to their

pending litigation.

-I Litigation Against the Commission and Its Staff-During fiscal year 1986,

- the Commission and its staff were defendants in 39 actions in which perl sons sought to challenge Commission rules, to enjoin Commission law enforcement efforts, to obtain damages awards, or to challenge personnel

decisions. The Commission prevailed in each case decided during the fiscal year; 16 cases were still pending at year-end.

InAmerican Bankers Association v. SEC, 194 the district court affirmed the

- validity of Commission Rule 3b-9. With certain exceptions, that rule requires

a bank that wishes to engage in a general securities business to register

with the Commission as a securities broker-dealer, so that it will be subject

to the requirements imposed on such broker-dealers for the protection of

their customers and the integrity of the securities markets. The American

Bankers Association (ABA) argued that the Commission lacked authority

to adopt the rule because banks had been excluded from the Commission's

regulatory authority. The district court rejected the ABA's argument, holding that Rule 3b-9 falls within an area Congress intended the Commission

to regulate. The court noted that while "banks" were excluded from the

definition of "broker-dealer" in 1934, that exclusion is prefaced by the words

"unless the context otherwise requires," and the services now promoted

by banks are "functionally Indistinguishable" from those offered by

registered brokers and dealers. The court held that the statute and legislative history were unclear, and it would defer to the Commission, which had

acted reasonably in promulgating the rule. The ABA's appeal from the district court's decision, decided after the close of the fiscal year, was in favor

of the ABA position.

In Sprecher v. von Stein, 195 the Second Circuit upheld a district court order dismissing fJ suit against the Commission, its Commissioners and three

staff members for failure to state a claim or, alternatively, granting summary judgment for the defendants. The plaintiff claimed that the staff was

conducting an investigation solely to harass him, and alleged violations of

constitutional rights as well as various common-law torts. The court of appeals found the allegations to be "insubstantial," "speculative," "conclusory" and in general "without merit." The court reaffirmed a prior decision

in which it held that the exclusive method to challenge a Commission investigation was in a subpoena enforcement proceeding. Plaintiffs appeal

from the district court's award under Rule IIto the Commission of $14,000

in costs and attorneys' fees is currently pending before the Second Circuit.

In Prevatte v. SEC,196 the Sixth Circuit affirmed the district court's dismissal of a complaint against the Commission and several Commission em.

ployees alleging that the Commission had unlawfully disqualified plaintiffs

from engaging in the securities business. The court affirmed the lower

court's decision that the claims were barred on res judicata and immunity

62
grounds. The court previously had rejected Prevatte's allegations that his

due process rights had been violated by the NASD and the Commission

in proceedings to bar him from the securities industry.'?"

In addition, the Commission litigated five actions involving personnel

matters. Three were decided in the Commission's favor;196 the remaining

two are pending.

Further, three actions were filed under the Right to Financial Privacy Act

seeking to block the Commission from obtaining access to customer records

at banks. In all of these cases, the district court found that the Commission

was properly seeking the subpoenaed records for a legitimate law enforce.

ment inquiry and enforced the Commission's subpoenas.

Finally, only one motion was filed in court in fiscal year 1986 under the

Equal Access to Justice Act seeking attorneys fees and expenses. The motion is pending.

Significant Legislative Developments

ReguLation of Financial Services-During the latter part of the 99th Congress, the Subcommittee on Commerce, Consumer and Monetary Affairs

of the House Committee on Government Operations conducted a broad inquiry into the fundamental premises underlying the present statutory pro.

visions mandating a separation of banking from commerce and of banking

from investment banking. Chairman Shad testified before the Subcommittee on July 22, 1986, concerning issues suggested by the possibility of legislative relaxation of the prohibitions of the Glass-Steagall Act to permit banks

to engage in additional securities activities. In addition, the Commission

staff prepared extensive responses to the Subcommittee's requests for ad.

ditional information and factual data related to the underwriting, marketmaking, and investment advisory activities of securities firms, in order to

assist the Subcommittee in evaluating the current competitive situation and

the possible role that banks might play if permitted.

The Commission's testimony reiterated its longstanding view that, as the

lines of demarcation between the banking and securities industries con.

tinue to erode, reform of financial regulation should be governed by the

principle of functional regulation. Functional regulation means that regulation should be by functional activities, rather than by outmoded industry

classification, and fragmented regulation of essentially similar activities

should be ended. Consistent with this principle, the Commission supported permitting banks to underwrite municipal revenue bonds and mutual

funds, provided that they are required to conduct these new and existing

securities activities in separate corporate affiliates within a bank holding

company structure, subject to the same regulations and administered by

the same regulator, as others that engage in such activities.

Regulation of Investment Advisers and FmanciaL Planners-On June II, 1986,

the Chairman testified before the House Subcommittee on Telecomrnunications, Consumer Protection and Finance concerning investment advisers

and financial planners. The Chairman observed that the recent growth of

investment advisers and financial planners correlated with the increase in

63
securities trading and the 1982-86 bull market and that the available evidence of abuses in the industry was limited. Also, the Chairman noted that

past and contemplated productivity gains by the Commission's staff and

improved coordination with state authorities are enabling current regulation to deal with the industry's expansion. Accordingly, he cautioned against

a hasty extension of Federal regulation in this field.

1 Racketeer Influenced and Corrupt Organizations Act-In May 1986, the

~ Commission submitted to the Subcommittee on Justice of the House Comt mittee on the Judiciary a legislative proposal to amend the private civilliability provisions of the Racketeer Influenced and Corrupt Organizations Act

~ (RICO).The proposal, developed by the Office of the General Counsel, im-

_<! plemented recommendations made by the Chairman in his earlier testimony

before the Subcommittee. Generally, the proposal (I) provides discretion

-~ to the courts to award costs and attorney's fees to prevailing defendants;

"t (2) limits civil RICO claims based on mail, wire or securities fraud to cases

O~ with earmarks of organized crime or cases in which the defendant has a

history of criminal misconduct similar to that which caused the plaintiff's

~ injury; and (3) imposes a uniform statute of limitations on private civil RICO

claims.

Foreign Corrupt Practices Act of 1977-0n June 10, 1986, Commissioner

Fleischman testified on behalf of the Commission in support of amendments

to the accounting provisions of the Foreign Corrupt Practices Act of 1977

("FCPA") before a joint hearing of the Subcommittee on Securities and the

"\ Subcommittee on International Finance and Monetary Policy of the Senate

Banking, Housing and Urban Affairs Committee. The amendments generally would codify the Commission's Policy Statement on the FCPA. The

Commission deferred to the Department of Justice and Commerce with

, regard to amendments to the antibribery provisions of the FCPA.

Bank Accounting and Financial Reporting-On April 24, 1986, Chairman

Shad testified concerning the Commission's responsibilities regarding bank

financial reporting. In that testimony, the Chairman reiterated the recommendation of Vice President Bush's Task Group on Regulation of Financial Services, that regulation of the securities registration and reporting

requirements be consolidated within the Commission. That could be accomplished by requiring all banks and thrifts publicly issuing securities (but

not deposit instruments) to the investing public to comply with the registration requirements of the Securities Act. It also would involve repealing

Section 12(i) of the Exchange Act to transfer administration and enforcement of the reporting requirements to the Commisson.

Financial Reporting and the Role of the Independent Auditor-On June 23,

1986, Chairman Shad testified concerning financial reporting and the role

of the independent auditor. Specifically he discussed recent private sector

regulatory and legislative initiatives, including a bill currently pending in

Congress entitled the Financial Fraud Detection and Disclosure Act of 1986.

The Chairman indicated that the Commission fully supports any costeffective measures that would improve the current regulatory system.

64
Regulation of the Govemment Securities Markets-Following passage by

the House of Representatives of legislation that would establish a regulatory system for the government securities markets, the Senate continued to

consider the appropriate regulatory structure for those markets. In April

1986, the Commission joined with the Department of the Treasury and the

Board of Governors of the Federal Reserve System in sending to the Chair.

man of the Committee on Banking, Housing, and Urban Affairs a letter that

endorsed responsible regulation of the government securities markets. The

agencies also indicated that Treasury would be appropriate as rule-maker

for those markets. Commission staff members provided drafting and other

technical assistance to Committee staff members. On September 3, 1986,

the Senate Committee reported out a bill that conformed with the aqencies' views.

Corporate Reorganizations

The Commission acts in a statutory advisor's role in reorganization cases

under Chapter 11 of the Bankruptcy Code to ensure that interests of pub.

lie investors are adequately protected. In these cases, administered in Fed.

eral court, a debtor generally is allowed to continue business operations

under court protection while it negotiates a plan to rehabilitate the business and to pay the company's debts. Reorganization plans often provide

for the issuance to creditors and shareholders of new securities in exchange

for part or all of their claims or interests in the debtor under an exemption

from registration under the Securities Act provided by the Bankruptcy Code.

In its capacity as special advisor, the Commission may raise or present

its views on any issue in a Chapter 11 case, but it may not initiate an appeal. Although Chapter 11 relief is available to businesses of all sizes, the

Commission generally limits its participation to cases involving debtors that

have publicly traded securities registered under the Exchange Act. In flscal year 1986, the Commission presented its views on a variety of issues.

Committees-Official committees are empowered to consult with a deb.

tor in possession in the administration of a case and to participate in the

formulation of a plan. With court approval, official committees are permit.

ted to employ, as a cost of administration, one or more attorneys, accountants, or other agents to assist the committee in performing its duties. In

addition to a committee to represent creditors holding unsecured claims,

the Code also allows the court to appoint additional committees for stockholders and others where necessary to assure adequate representation of

their interests in a case. During fiscal year 1986, the Commission moved

or supported motions for the appointment of committees to represent in.

vestors in five Chapter 11 cases.199

In a case having practical significance for the representation of equity

security holders by official committees, In re Evans Products Company, 200

the Commission participated in an appeal to the district court, urging that

the Bankruptcy Code permits regular reimbursement of actual, necessary

expenses of members who serve on official committees based on the same

65
standard applicable to other official participants in the case: that the activities that led to the incurring of the expenses were in furtherance of the

members' statutory duties under the Bankruptcy Code. The bankruptcy

court had ruled that there was no statutory basis for authorizing expenses

of official committee members and that, even if these were authorized, comi mittee members have the same burden as unofficial participants in the case

of demonstrating that their activities made "a substantial contribution" to

~ the case. The district court agreed with the Commission that there was a

'" statutory basis for authorizing official committee member expenses, but

~ applied the "substantial contribution" test as proposed by the bankruptcy

court. The potential harshness of the test was mitigated, however, by the

district court's additional holding that expenses incurred by members of

j

an official committee in furtherance of its authorized business are "pre-

'__ sumed" to be expenses that benefit the estate."?'

_ In In re Psych Systems, lnc., 202 the Commission responded to objections

. filed by creditors concerning the proper standard to be applied to review

c4 of fee applications of counsel for an official equity securities holders' committee where the estate proves to be insolvent. The Commission urged that

; actual necessary professional services, as provided for in Section 330(a)

of the Bankruptcy Code, authorizes compensation to official committee

counsel for services reasonably related to the performance of duties within

" the scope of the official responsibilities of the committee, without regard

to whether those services produce a measurable benefit to the estate or

to the committee's constituents. The matter is pending.

Estate Administration-In reorganization cases, the Commission acts to

protect the interests of public investors by participating on selected issues,

arising in the administration of the debtor's estate, that have a significant

impact upon the rights of public investors generally.

In In re Johns-Manville Corp., 203 the bankruptcy court, in an action affirmed by the district court, had enjoined the equity security holders' committee and Manville shareholders from pursuing a Delaware state court

action to compel the debtors to hold an annual shareholders' meeting. The

equity committee had stated that it sought a shareholder meeting because

of a dispute with management over how the reorganization was being conducted, but the bankruptcy court found and the district court agreed that

a shareholder meeting would jeopardize the reorganization. In support of

an appeal to the United States Court of Appeals for the Second Circuit, the

Commission filed a brief urging reversal of the lower court decisions.

The Commission stated that under the Bankruptcy Code, where ordinarily management remains in possession of the debtor, the shareholders

generally retain their state corporate law rights to elect directors during

the pendency of the reorganization case. The Commission argued that, during the plan negotiation phase of a reorganization case-prior to the filing

of a plan impairing shareholder interests and the approval of a related disclosure statement-there should be a strong presumption in favor of the

exercise of the shareholders' corporate franchise to influence the course

of the reorganization. ln this case, the Commission asserted that the deb66
tor had not overcome the presumption favoring shareholder selfgovernance. The Commission pointed out that, in its view, there was no

substantial evidentiary foundation for the bankruptcy court's acceptance

of the debtor's contention that the shareholders' meeting would subvert the

reorganization. The court of appeals reversed the district court, generally

adopting the Commission's positions.

In re Standard Metals 204raised the issue of whether a debtor that had

taken no steps to effect notice to potential creditors not listed on its schedules filed with the court, may invoke the procedures of the Bankruptcy Code

to cut off the right of such creditors to participate in the reorganization.

The bankruptcy court had concluded that, since the claim based on violations of the Federal securities laws by the debtor was unknown to the debtor prior to establishment of the claims bar date, notice of the bar date was

not required. The district court affirmed. In support of an appeal to the

Unite:! States Court of Appeals for the Tenth Circuit, the Commission argued that the Bankruptcy Code and rules imposed a duty on the debtor

to give at least publication notice to unscheduled creditors and that due

process requires an appropriate form of notice before claims may be barred

and discharged in a reorganization case. The appeal is pending.

In two cases this year,205 the Commission reiterated its position that a

creditor may file a class proof of claim on behalf of other similarly situated

creditors. In its briefs, the Commission has urged that neither the Bankrupt.

cy Code nor the Bankruptcy rules should be read to preclude the filing of

class proofs of claims. In the Commission's view, the broadened claim con.

cept adopted in the Bankruptcy Code, and the prospect that many individuals in a bankruptcy setting may have similarly situated claims, are

inconsistent with a restrictive interpretation of a proof of claim requirement.

Both appeals are pending.

In In re Amarex, Inc.,206 the Commission, in support of an appeal to the

district court, urged that the automatic subordination provision in Section

51O(b) of the Bankruptcy Code-for rescission of damage claims arising

out of the purchase or sale of securities-should not be read to subordinate

every claim by security owners against a debtor merely because the claim

would not have existed "but for" the claimant's purchase of the debtor's

securities. The Commission argued that investor claims are not subject to

subordination unless the illegality on which they are based occurs in a securities transaction. The Commission pointed out that it is not uncommon

for security owners to have distinct and legitimate claims other than securities fraud type claims and that the automatic subordination provision

was not intended to affect those claims. The appeal is pending.

In In re Roblin Industries, Inc.,207 the bankruptcy court, as urged by the

Commission, denied a motion by the debtor to approve a stipulation acknowledging the validity of certain bank security interests as a condition

for obtaining post-petition financing from the banks. The Commission had

argued that the debtor had agreed to enter into the stipulation without undertaking any examination of the banks' claims and that the record before

the bankruptcy court, therefore, was insufficient for the court to make an

67
informed judgment as to the propriety of the stipulation. Following the decision, the debtor withdrew an application to approve another portion of

the stipulation that proposed to waive claims and defenses against the

banks.

Plans of Reorganization/Disclosure Statements-A disclosure statement

is a combination proxy and offering statement used in connection with the

.'1

acceptance of a plan of reorganization that often includes the exchange 1 of new securities for claims and interests of creditors and shareholders in

~ the debtor. The Bankruptcy Code provides that adequate disclosure is to

.j be made without regard to whether or not the information provided would

:1 otherwise comply with the disclosure requirements of the Federal securities laws. But, in recognition of the Commission's special expertise on disclosure questions, the Bankruptcy Code recognizes the Commission's right

to be heard, distinct from its special advisory role, on the adequacy of disclosure, and the Bankruptcy rules require service on the Commission of

all disclosure statements.

During fiscal year 1986, the Commission received approximately 4,400

disclosure statements filed in Chapter 11 cases involving both privatelyheld and publicly-held corporations. The staff reviewed 207 disclosure statements, including those disclosure statements filed in cases involving a

publicly-held company.

The Commission staff reviews disclosure statements to determine whether

the plan proposed involves the issuance of securities consistent with the

exemption from registration in the Bankruptcy Code or otherwise in compliance with the Federal securities laws. The Commission also reviews disclosure statements to determine whether there is adequate disclosure

concerning the proposed plan. Generally, the Commission seeks to resolve

questions concerning bankruptcy disclosure through staff comments to the

plan proponent. Ifthose cannot be resolved through this process, the Commission may object to the disclosure statement in the bankruptcy court.

During fiscal year 1986 the Commission commented on disclosure statements in 102 cases, and objected to disclosure statements in five cases.

In addition to specific disclosure concerns, the Commission also acts to

assure that public investors are given an adequate opportunity to be heard

on disclosure-related questions and, from time to time, the Commission

objects to confirmation of plans where there is a significant legal question

presented.

The Commission pressed significant objections this year in two cases/OB

to provisions of the debtors' plan and disclosure statement that provided,

upon confirmation of the plan, for the release and discharge of certain nondebtor individuals-officers, directors and employees of the debtors. The

Commission argued that such a plan provision is contrary to the provision

of the Bankruptcy Code that generally provides that discharges of a debtor

do not affect the liability of any other entity on such debt. The Commission also argued that the proposed release of non-debtor individual liability, without fair consideration paid for such release, was contrary to sound

public policy. Both debtors agreed to delete the plan provisions following

a hearing on the Commission's objections.

68
. In In re Continental Airlines Corp., 209 the debtors' plan provided that unsecured creditors would receive deferred payments from the debtors and a

guarantee of those payments by the non-debtor parent of the debtors. The

guarantee was subject to certain terms and conditions that were not dis.

closed because of the "potential prejudice" that the debtors claimed would

result from such disclosures. The Commission argued that, absent a sub.

stantial showing of the need for confidentiality, the debtors should disclose

the terms and conditions of the guarantee as well as financial information

with respect to the guarantor's ability to perform the guarantee. Following

a hearing on the Commission's objections, the debtor agreed to disclose

the terms of the guarantee.

In In re Dakota Minerals,210 the debtor failed to notify equity security

holders of the time fixed for filing objections to, and the hearing to con.

sider approval of its disclosure statement. Instead, the debtor served no.

tice on a recently authorized and nonfunctioning equity security holders'

committee formed one day before the debtor filed its plan and disclosure

statement. The bankruptcy court agreed with the Commission's objections

that restricting notice in this manner was not appropriate. The court held

that, under the Bankruptcy rules, service on the equity security holders'

committee was not a sufficient substitute for notice to equity security

holders.

In In re Standard Metals Corp., 211 the plan and disclosure statement provided for the sale of substantially all of the debtor's assets and classified stock.

holders as "unimpaired," thus not permitting them to vote on the plan. The

Commission filed an objection to confirmation of the plan on the ground

that the proposed sale altered shareholders rights since under state law such

a sale would require approval of a majority of shareholders. Accordingly,

the Commission argued that the interests of shareholders were impaired,

entitling them to vote on the proposed plan of reorganization. The debtor

agreed to amend the plan to classify shareholders as impaired. The court

denied confirmation on other grounds.

Compliance with the Registration Requirements of the Securities ActSection 1145 of the Bankruptcy Code contains a limited exemption from

registration under the Securities Act for the distribution of securities by

a debtor, or an affiliate or successor to the debtor, pursuant to a plan of

reorganization and in exchange for claims against or securities of the deb.

tor. The issuance of securities pursuant to a plan is deemed to be a "public

offering," which means that there is no restriction on resale of such securities unless the seller is an "underwriter" as specifically defined in Section

1145(b). In one case litigated this year, In re Avanti Motor Corp., 212 the deb.

tor's disclosure statement indicated that the debtor intended to rely upon

Section 1145 of the Code for a .proposed public offering of securities in.

tended to fund the plan of reorganization. The Commission objected to the

debtor's disclosure statement because the recipients of securities under the

proposed public offering are members of the general public who do not

have claims against or interests in the debtor. The debtor agreed to com.

ply with the Federal securities laws if it determined to go ahead with the

public offering.

69
Stockbroker Liquidation Proceedings- The commission monitors stockbroker liquidation proceedings conducted under the Bankruptcy Code

rather than under the provisions of the Securities Investor Protection Act,

forsignificant legal issues that have an impact on customers of those stockbrokers. In one case this year, In re Korbin Secumies.t> the bankruptcy court,

as urged by the Commission, denied a trustee's motion for turnover of all

of the cash and securities contained in some 4,000 to 6,000 securities accounts maintained by the debtor's clearing broker and "introduced" by Korbin. The Commission had urged that, under the regulatory scheme covering

the relationship between introducing and clearing broker-dealers, an introducing broker ordinarily has no interest in the cash or securities held

by its clients in accounts maintained by the clearing broker-dealer. The

Commission noted, however, that ifthe introducing broker-dealer engaged

in unauthorized transactions in the client accounts, the ordinary relationship is severed and turnover may be appropriate with respect to the cash

and securities in those particular accounts.

70
Economic Research and Analyst

The Economic and Statistical Research Program provides the Commission and the operating divisions with the objective perspective and the tech.

nical support required to understand and evaluate the economic aspects

of SEC regulation. This program is carried out by the Office of the Chief

Economist (OCE) and the Directorate of Economic and Policy Analysis

(DEPA).

The economic staff provides the Commission with economic advice and

research studies on rule proposals, established policy and the capital mar.

kets. The staff assists the Commission in making decisions affecting the

efficiency and structure of our nation's securities industry and markets. In

addition, the program encompasses statistical monitoring of major program

initiatives impacting the securities industry and markets and publication

of the SEC's Monthly Statistical Review.

Changes in the market place have increased the number and complexity

of economic issues coming before the Commission. The trend toward in.

creased internationalization of the securities markets, the rapid growth in

both new issues and secondary market trading, the application of new tech.

nology within the industry and the continued expansion of new financial

products have greatly complicated the analysis of the impact of SEC regulation. New and more complex market structures and trading systems are

also increasing the need for economic analysis. Significant changes in the

operations of the options markets have occurred as a result of the introduction of new automated execution systems on a pilot basis and because com.

peting market centers are now permitted to trade options on the same

underlying NASDAQ security in a competitive framework,

A number of international developments will impact the Commission and

require in-depth economic and policy analysis. The securities markets play

a much larger role in international finance than was the case just a few years

ago. In 1985 alone U.S. issuers raised a record $40 billion through international bond issues and foreign issuers tapped the U.S. bond market for $4.7

billion. U.S. and Canadian securities markets have developed electronic

trading linkages and London participates in the first transatlantic exchange

of quotations in selected stocks. U.S. clearing agencies have begun to develop links with clearing agencies from around the world. The global character of our markets is also reflected in the rapid growth of U.S. and foreign

investors' transactions in each other's stock markets and the fourfold in.

crease since 1983 in the number of U.S. mutual funds investing on a global

basis.

During fiscal 1986, the economic staff reviewed 101 rules and rule

proposals. Rule reviews emphasized the economic costs and benefits of alternative approaches to regulation. In addition, advice was given to the operating divisions on requirements of the Regulatory Flexibility Act (RFA),

71
particularly focused on reducing regulatory burdens on small business entities. In fiscal 1986 the economic staff reviewed 25 RFA analyses and 16

RFA certifications.

Staff economists prepared two studies of the effects of multiple trading

on the bid-ask spreads for options in order to assess the impact of competition in the marketplace for these securities and analyzed rule proposals and

amendments related to the exemption from the short sale rule of OTC Na-

;

tional Market System Securities traded on exchanges on the basis of unlisted trading privileges. Other analyses examined proposals to amend rules

concerning reserve requirements of broker-dealers, the capital requirements

on positions held by broker-dealers in equity securities and proposed

changes to dealer mark-up disclosure requirements. As part of an on-going

reviewof broker-dealer financial responsibility rules, the staff analyzed information concerning broker-dealer llquldations by the Securities Investor

Protection Corporation between 1979 and 1984.

During fiscal year 1986 the economic staff published two empirical

studies in the takeover area: "The Economics of Poison Pills" and "Non investment Grade Debt As A Source Of Tender Offer Financing." Also completed was a study of the rules affecting shareholder resale of restricted

securities to determine if more cost-effective rules could be developed to

encourage capital formation while maintaining necessary protection to investors. Additional research was done in policy areas related to corporate

registrants and the staff expanded on its cost/benefit analysis of the proposed quarterly reporting requirement of sales and net profits by business

segments of corporate issuers operating in multiple lines of business.

Two research projects were completed in the area of investment management regulation. One dealt with the relationship between mutual funds performance and sales of fund shares and the effect of sales loads on this

relationship. The other dealt with the growth in the practice of using fund

assets (l2b-l Plans) to promote the distribution of new fund shares.

Other issues analyzed during fiscal 1986 were the differential voting rights

on equity shares and related listing requirements, recent developments in

the takeover debate and the regulation of hostile tender offers.

Additional studies and analyses included an examination of factors affecting stock price runups prior to announcement of tender offers. The impact of SEC's decision to enforce the ceiling test for evaluating reserves

of full-cost oil and gas companies was also studied.

72
Management and Program Supper

Key 1986 Management and Program Developments

In carrying out its mission, the Commission made special efforts to solicit

a wide range of view points on issues affecting investors and the securitle:

industry. The Chairman and Commissioners hosted roundtable discussion.

and other forums with industry and investor representatives on issues relating to the effect of rumors upon securities prices, program trading, internationalization of the securities markets, the role and responsibilities of

independent auditors, and regulation of investment advisers and financial

planners. The Commission's Executive Staff coordinated program activities, including concept releases, rule proposals, legislation, and new initiatives.

Information Systems Management

Under the management of the Office of Information Systems Management (ISM), a total of 314 microcomputers were in use during 1986 through.

out the agency to facilitate the Commission's substantive and administrative

workload. The growth in the number of microcomputers during the year

brought about an increase in services provided by the User Support Information Center, which presented over 200 training courses with a combined

enrollment exceeding 1,200 students. In addition, the center responded to

over 1,300 requests for technical assistance from microcomputer users.

ISM established a communications link between Edgar and the agency's

mainframe computer, permitting access to workload related databases via

the Edgar workstations. ISM designed and implemented five computer systems that enhanced the effectiveness of Commission personnel. Each system is briefly described below.

An electronic funds transfer subsystem allows the electronic transfer of

paychecks from Treasury to individual employee accounts. A multi-agency

payroll/personnel system permits smaller federal agencies to use the SEC

system to process their payroll and personnel requirements. The performance and management recognition system monitors the scheduling of

personnel evaluations. A system was also developed to track delinquent

disclosure statements made by institutional investment managers (13-F filings). Finally, an automated semi-annual report form (N-SAR) which electronically captures specific information used to monitor investment fund

activity was established in the Division of Investment Management.

Financial Management

Funding in 1986 was initially provided to the SEC through an annual appropriation of $111,100,000. This amount was later reduced 4.3 % to

73
$106,323,000 by Gramm-Rudman-Hollings legislation. The net reduction

of $4,777,000 resulted in a loss of 60 staff years, a 3 % decline from 1,994

to 1,934 staff years.

For the fourth consecutive year, and only the fifth year in its 52-year history, the SEC collected fees in excess of its annual appropriation. At the

• end of fiscal year 1986, a record collection of $215 million in fees was

i deposited into the General Fund of the United States Treasury. This

represents twice the amount of the agency's 1986 funding and exceeds the

previous record amount collected in 1985 by $56 million. Fees are generated from four primary sources: securities registered under the Securities

Act of 1933 (57 % of the total), transactions on securities exchanges (21 %),

tender offers and merger filings (19%), and miscellaneous filings (3%).

In 1986, the SEC continued its support of the Administration's Reform

88 initiative, aimed at improving overall agency management and productivity. The Comptroller's staff expanded its use of microcomputers to expedite the preparation of management reports required by the Office of

Management and Budget and other oversight agencies. The staff also revised its accounting manual, incorporating new automation changes into

the SEC accounting system. The use of Diners Club cards for official travel

was instituted, thereby reducing the dra.w of government money from interest bearing accounts, while allowing the traveller more flexibility in paying necessary business expenses.

The Comptroller enhanced the agency's financial accounting system by

providing a single entry update capability for posting entries to the generalledger from subsidiary ledger postings. This change eliminates the need

for separate entries of common data. In addition, an automated inventory

system was designed and implemented.

The SEC payroll system entered its second year as a host system for other

smaller federal agencies. Work is now underway to modify the payroll system to accommodate the new Federal Employee Retirement System options which become effective for all post-1984 employees on January I,

1987.

The Commission is prohibited from accepting reimbursement from regulated entities. The 1983 Securities Exchange Act amendments, however,

gave the Commission the authority to accept payment and reimbursement

from other organizations to defray the cost of travel and subsistence expenses incurred by Commissioners and staff participating in meetings and

conferences related to the functions or activities of the SEC. During 1986,

Commissioners participated in 39 meetings and conferences. To pay the

cost of attendance, private entities reimbursed the SEC $21,170 while the

government's portion amounted to $2,405. SEC staff participated in 345

meetings and conferences. The SEC was reimbursed $101,089; the government's portion of these costs was $16,662.

Facilities Management

The Office of Administrative Services (OAS) handled numerous details

related to the closing of the Washington Regional Office, including the relo74
cation of personnel and equipment to the new Philadelphia Regional Office

and to the SEC headquarters. OAS restructured the Public Reference Room

to provide additional seating for the public as well as for personnel of the

agency's dissemination contractor. OAS facilitated GSA delegation of

authority to enable the Commission to manage property leases for SEC

Offices in Washington, Los Angeles, Denver, Miami, and Houston.

Personnel Management

The Office of Personnel continued to take steps to promote the efficient

utilization of the agency's human resources. The recruitment, development,

and retention of superior candidates and experienced staff remain a high

Commission priority.

During fiscal 1986, the office encouraged programs and projects designed

to enhance the quality of work life for Commission staff. For example, the

orientation session for new employees was completely revised. A

professionally-produced videotape now provides all new staff with a brief

history of the SEC, an overview of agency offices and functions, and welcoming remarks by key officials.

The staff aggressively used recently acquired authority from OPM to hire

accountants and securities compliance examiners. The new procedures have

improved the quality and timeliness of staffing critical positions by shortening the hiring process by five weeks on average.

Training programs emphasized skills development in written communications, microcomputer applications, and litigation techniques and support.

During the past year, approximately 500 headquarters and 300 regional

office staff attended formal training in their disciplines.

The Office of Personnel prepared new or revised policy guidelines for

within-grade quality increases, employee grievances, discipline and performance management. In addition, an automated retirement computation

program was obtained, permitting immediate, on-site preparation of individual figures on annuities and benefits.

The Office of Personnel completed an extensive review and evaluation

of the Personnel Security and Suitability system. The system contains

records of information gathered during employee background investigations conducted by the Office of Personnel Management. This information

assists the Commission in making determinations about the suitability of

applicants for employment with the SEC and of current employees for sensitive positions. As a result, additional controls were implemented to ensure that all existing positions are properly designated as to their sensitivity.

The affected staff is fully aware of its obligations to safeguard confidential

information, as a result of a special training program conducted during the

year.

Public Affairs

The Office of Public Affairs communicates information on Commission

activities to those interested in or affected by Commission actions, includ75
ing regulated entities, the press, employees of the Commission and the

general public.

The office directs publication of the SEC Annual Report that provides

information on Commission activities to Congress, the securities bar and

other interested parties, and, through the Depositary Library System, to

selected colleges and universities throughout the country. Public Affairs

publishes a regular newsletter and prepares a daily summary of news clips

for Commission employees. Speeches presented by Commissioners and

senior staff and testimony are retained and disseminated in response to

requests from the public. During the year, the staff responded to approximately 63,500 requests for information and coordinated programs for more

than 310 foreign visitors. Also during the year, the staff updated and revised such publications as the "SEC Publications Guide," "Investigate Before You Invest," and "Q&A for Small Business."

Public Affairs staff prepares the SEC News Digest, which provides information on virtually all SEC actions-rule changes, enforcement actions

against individuals or corporate entities, acquisition reports, releases, decisions on requests for exemptions, upcoming Commission meetings, and

other events of interest. Information on Commission activity is also disseminated through notices of administrative actions, litigation releases, and

other materials. The News Digest is available in the Public Reference Room.

Press releases issued prior to Commission meetings and press briefings

conducted after these meetings provide insight into proposed and adopted changes in policies and regulation. The office also issues press releases

on upcoming events, on-going programs, and special projects. In all, 75

news releases were issued during the year. When appropriate, actions are

brought to the attention of the national and regional press. Special projects,

such as roundtable discussions on emerging issues in the financial markets, are also publicized.

Consumer Affairs

During fiscal year 1986, the Commission staff responded to more than

36,000 complaints and.Inquirles. Of these, nearly 50% involved investor

disputes with registered broker-dealers, 17% concerned issuers of securities, and 6% pertained to banks. The remainder regarded transfer agents

and investment advisers, or were general inquiries.

Specialists in Consumer Affairs review and respond to all complaint letters. Ifthe investor's concern can best be answered by the investment firm

itself, the matter is referred there for review and resolution. Staff contacted firms in 27% of the cases on behalf of the investor. Consumer Affairs

refers to the appropriate SEC division those matters which appear to violate federal securities laws.

Consumer Affairs received 1,535 Freedom of Information Act (FOIA) requests and 1,960 confidential treatment requests during the year. Confidential treatment requests were typically made in connection with proprietary

76
corporate information and were carefully evaluated to prevent the in.

discriminate and unwarranted release of information exempt from the FOIA.

In addition, the staff answered 1,335 congressional inquiries.

Finally, over 20,000 people visited the Commission's Public Reference

Rooms. To assist these visitors, the staff wrote a booklet entitled "Welcome

to the SEC's Public Reference Room," which explains the operation of the

room and identifies the types of materials available for public review.

Equal Employment Opportunity

The Commission continued its program of Equal Employment Oppertunity instruction for managers and supervisors. Fifty staff members attend.

ed training at headquarters dealing with equal employment opportunity law,

affirmative action, sexual harassment, EEO discrimination complaint

processing, and methods for improving employment opportunities for

minorities and women. Additionally, the Commission's first EEO confer.

ence in over five years was held in Rosslyn, Virginia, for EEO collateral duty

personnel (i.e., EEO Counselors, Federal Women Program Coordinators

and Hispanic Employment Program Coordinators). Twenty-nine employees

attended this meeting, which was intended to enhance participants'

knowledge and skills in EEO program management.

During the year, the employment of Black women increased by 1.0%

and Hispanics by 0.3%. Employment for all other minority groups and for

women of all races remained constant.

The contributions and achievements of minority groups and women were

recognized again this year with programs for Women's Week, AfroAmerican (Black) History Month, Asian-Pacific American Heritage Week,

and Hispanic Heritage Week.

A special program at the New York Stock Exchange was held in April

to celebrate the tenth anniversary of the SEC-Securities Industry Commit.

tee on Equal Employment Opportunity. The Committee, chaired by the

commission's EEO manager, continued its support of a scholarship program for minority students; $25,000 in scholarships was awarded during

1986. Scholarship funds were contributed by brokerage firms, exchanges,

securities associations, broker dealers, and investment advisers who are

members of the Committee.

77
Commissioners and Principal Staff

Officers

(As of September 30, 1986)

Commissioners

John Shad, Chairman

Charles C. Cox

Aulana L. Peters

Joseph A. Grundfest

Edward H. Fleischman

Secretary: Jonathan G. Katz

Executive Assistant to the Chairman: Joseph I. GOldstein

Term Expires

1986

1988

1989

1990

1987

Principal Staff Officers

George G. Kundahl, Executive Director

Kenneth A. Fogash, Deputy Executive Director

Linda C. Quinn, Director, Division of Corporation Finance

William C. Wood, Associate Director

Mary E. T. Beach, Associate Director

Elisse B. Walter, Associate Director

Ernestine M. R. Zipoy, Associate Director

Amy L. Goodman, Associate Director, Edgar

Gary G. Lynch, Director, Division of Enforcement

John G. Sture, Associate Director

William R. McLucas, Associate Director

Phillip B. Parker, Chief Counsel

Thomas C. Newkirk, Chief Litigation Counsel

Michael D. Mann, Office of Intemational Legal Assistance

Richard G. Ketchum, Director, Division of Market Regulation

Richard P. Wessel, Associate Director

Mark D. Fitterman, Associate Director

Brandon C. Becker, Associate Director

Kathryn B. McGrath, Director, Division of Investment Management

Gerald Osheroff, Associate Director

Mary Joan Hoene, Associate Director

William C. Weeden, Office of Public Utility Regulation

Daniel L. Goelzer, General Counsel

Paul Gonson, Solicitor

Vacant, Associate General Counsel

Jacob H. Stillman, Associate General Counsel

Linda D. Fienberg, Associate General Counsel

78
Mary M. McCue, Director, Office of Public Affairs

Chiles T. A. Larson, Deputy Director

A. Clarence Sampson, Chief Accountant

Edmund Coulson, Deputy Chief Accountant

Jeffry L. Davis, Director, Directorate of Economic and Policy Analysis

Terry M. Chuppe, Associate Director

Charles W. Bryson, Associate Director

Gregg A. Jarrell, Chief Economist

William S. 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

Henry I. Hoffman, Assistant Comptroller

Richard J. Kanyan, Director, Office of Administrative Services

James C. Foster, Director, Office of Personnel

William E. Ford, II, Assistant Director

Wilson Butler, Director, Office of Applications and Reports Services

Mary J. Kenney, Deputy Director

Cecilia A. Charles, Acting Director, Office of Consumer Affairs and Information Services

Gregory Jones, Sr, Director, Office of lniormeuon Systems Management

Richard T. Redfearn, Deputy Director

Cecile Z. Srodes, Director of Legislative Affairs

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

Ernest G. Miller, Manager, Equal Employment Opportunity

79
Biographies of Commissioners

John Shad

John Shad was appointed the 22nd Chairman of the SEC by President

Reagan and sworn-in by Vice President Bush on May 6, 1981. To accept the

appointment, he resigned as the vice chairman of an investment banking

and brokerage firm and from the boards of seven New York Stock Exchange

listed corporations, and placed his holdings in a blind trust.

He has served on the boards of 17 publicly-owned corporations; taught

at the New York University Graduate Business School; and is the author of

articles on securities regulations, corporation finance, mergers and

acquisitions.

He is a graduate of the University of Southern California, the Harvard Business School and the New York University Law School and a member of Beta

Gamma Sigma and Phi Kappa Phi. He was born in Utah in 1923, worked his

way through college and served in the Pacific and China as a naval officer

during World War II.He began his career as a securities analyst and became

in investment banker.

He is a member of the advisory boards of the SEC and Financial Reporting Institute at the University of Southern California, the Securities Regulation Institute and the National Center on Financial Services at the University

of California and the Associates of the Harvard Business School. Awards include Investment Banker ofthe Year (1972), National Association of Investment Clubs distinguished service, National Conference of Christians and

Jews brotherhood, Harvard Business School and University of Southern

California alumni achievement, SEC distinguished service.

Charles C. Cox

Charles C. Cox was sworn in as the 62nd Member of the Commission

on December 2, 1983. His term expires in June 1988.

Mr. Cox joined the Commission on September 1, 1982, as Chief

Economist. He organized the Office of the Chief Economist to analyze the

economic effects of proposed rules and legislation, evaluate established

Commission policy, and study various capital market topics.

Previously, Mr. Cox was a professor of management at Texas A&M University from 1980 to 1982, and a professor of economics at Ohio State University from 1972 to 1980. He served as a National Fellow of the Hoover

Institution at Stanford University from 1977 to 1978.

During his academic career, Mr. Cox focused his research on the economics of public regulation of economic activity. He has published various

articles on this topic in scholarly journals. Mr. Cox is a member of the American Economic Association.

80
Mr. Cox was born in Missoula, Montana, on May 8, 1945. He received

his undergraduate education at the University of Washington where he was

elected to Phi Beta Kappa in 1966, and earned a B.A. degree, magna cum

laude, with distinction in economics in 1967. He received A.M. and Ph.D.

degrees in economics from the University of Chicago in 1970 and 1975,

respectively.

Aulana L. Peters

Aulana L. Peters was sworn in as the 64th Member of the Commission

on June 11, 1984. Her term expires in June 1989.

Until her appointment, Mrs. Peters was a partner with the Los Angeles

law firm of Gibson, Dunn £,. Crutcher, which she joined as an associate in

1973. As a member of that firm's Litigation Department, she specialized

in business and commercial litigation with emphasis on the securities and

unfair competition areas, particularly class action suits. About one-third

of her law practice involved cases of alleged violations of the Securities Act

of 1933 and the Securities Exchange Act of 1934, representing both defendants and plaintiffs. She was also involved in tender offer/proxy contest lltlgation.

She has frequently served on legal panels and has lectured for the California Continuing Education of the Bar and others. Mrs. Peters is a member

of the Los Angeles County and American Bar Associations.

From 1963 to 1967, she lived in Milan and then in Paris, where she held

various positions, the last of which was as an Administrative Assistant wlthin the Secretariat of the Organization for Economic Cooperation and Development. She has also lived in San Salvador, Central America, and The

Cameroons (West Africa).

Mrs. Peters, who was born on November 30, 1941, is the first black appointed to the Commission. She earned a J.D. with honors from the University of Southern California Law Center in 1973 and a B.A. in philosophy

from the College of New Rochelle in 1963.

Joseph A. Grundfest

Joseph A. Grundfest was sworn in as the 65th Commissioner of the Securities and Exchange Commission on October 28, 1985. His term expires

in June 1990.

Mr. Grundfest came to the Commission from the Council of Economic

Advisers in the Executive Office of the President, where he was counsel

and senior economist for legal and regulatory matters. While at the Council, he played an active role in the formulation of Administration policy

regarding regulation of securities markets, financial institutions, international trade, and the reformation of the antitrust laws. Mr. Grundfest is both

an attorney and economist. He has practiced law with Wilmer, Cutler £,. Pick.

ering and has served as an economist with The Rand Corporation, the Brook.

ings Institution, and Peat, Marwick £,. Mitchell.

81
Mr. Grundfest is author or co-author of numerous publications dealing

with topics such as contests for corporate control, the legal and economic

regulation of markets subject to kickback schemes, the regulation of markets for broadcast stations and television advertising, and the role of citizen

participation in administrative proceedings. During his academic career,

Mr. Grundfest served as a Brookings Institution Fellow, a Stanford University Fellow, and a California State Fellow for the Study of Law and Economics.

Mr. Grundfest was born in New York City on September 8, 1951. He

received his undergraduate education at Yale University where he earned

a B.A. degree in economics in 1973. During an undergraduate year abroad,

Mr. Grundfest completed, with First Class Distinction, the M.Sc. Program

in Mathematical Economics and Econometrics at the London School of Economics. Between 1974 and 1978, he obtained his J.D. degree from Stanford University and completed all requirements, other than the dissertation,

for a doctorate in economics.

Edward H. Fleischman

Edward H. Fleischman was sworn in as the 66th Member of the Securities and Exchange Commission on January 6, 1986. His term expires in

June 1987.

He formerly practiced law with Gaston, Snow, Beekman & Bogue (formerly Beekman & Bogue), where he specialized in securities and corporate

law and related areas.

During his career, Mr. F.leischman has been elected a member of the

American Law Institute and the American College of Investment Counsel,

and served as an Adjunct Professor of Law teaching securities regulation

at the New York University Law School. He has been a lecturer at seminars

dealing with securities and futures law and practice sponsored by such

groups as the Practising Law Institute, the American Bar Association, the

American College of Investment Counsel, the American Law Institute/American Bar Association, Law and Business, and Law Journal Seminars/Press

as well as at the University of California Securities Registration Institute

and the Southwestern Legal Foundation Symposium on Securities Regulation. He was co-author of a series of articles relating to Commission Rule

144.

Mr. Fleischman was born in Cambridge, Massachusetts, on June 25, 1932.

A member of the U.S. Army from 1952 to 1955, he served with the 173rd

Military Intelligence Platoon in Germany from 1954-1955. Mr. Fleischman

received his undergraduate education at Harvard College and graduated

with a B.A. degree cum laude in history, writing his thesis on an event in

nineteenth-century Russia. He was a Stone Scholar at Columbia Law School,

where he received his LL.B. degree in 1959.

Mr. Fleischman was admitted to the New York Bar in 1959 and to the

bar of the U.S. Supreme Court in 1980. He serves on the Committee on

Federal Regulation of Securities where he has chaired the Ad Hoc Subcom82
mittee on Rule 144 and the Subcommittee on Broker-Dealer Matters, an,'

was the co-draftsperson of the Committee letter on utilization and dlssemf

nation of "inside" information. He is also a member of the Committee on

Counsel Responsibility and Liability as well as the Committee on Develop.

ments in Business Financing where he co-drafted the Committee paper on

resale of institutional privately placed debt and chaired the Subcommittee

on Simplified Indentures in addition to the Annual Review of Developments.

Other bar activities include membership on the Committee on Futures Regu.

lation, the Committee on Developments in Investment Services, and the

Administrative Law Committee on Securities, Commodities and Exchanges

where he was vice chair for Commodities before taking the chair for three

years.

83
REGION 1

REGION 2

REGION 3

REGION 4

Regional and Branch Offices and

Administrators

Ira L. Sorkin

NEW YORK REGIONAL OFFICE

26 Federal Plaza, Room 1028

New York NY 10278

212/264-1636

Region: New York and New Jersey

Douglas Scarff

BOSTON REGIONAL OFFICE

150 Causeway Street

Boston MA 02114

617/223-2721

Region: Maine, New Hampshire, Vermont,

Massachusetts, Rhode Island, and

Connecticut

Michael K. Wolensky

ATLANTA REGIONAL OFFICE

1375 Peachtree Street, NE, Suite 788

Atlanta GA 30367

404/347.4768

Region: Tennessee, Virgin Islands, Puerto Rico,

North Carolina, South Carolina, Georgia,

Alabama, Mississippi, Florida, and

Louisiana east of the Atchafalaya River

Charles C. Harper

MIAMI BRANCH OFFICE

Dupont Plaza Center

300 Biscayne Boulevard Way, Suite 500

Miami FL 33131

305/350-5765

William D. Goldsberry

CHICAGO REGIONAL OFFICE

Everett McKinley Dirksen Building

219 South Dearborn Street, Room 1204

Chicago IL 60604

312/353-7390

Region: Michigan, Ohio, Kentucky, Wisconsin,

Indiana, Iowa, Illinois, Minnesota, and Missouri

84
REGION 5

REGION 6

REGION 7

85

Mark A. Loush

DETROIT BRANCH OFFICE

231 West Lafayette

438 Federal Building and U.S. Courthouse

Detroit MI 48226

313/226.6070

T. Christopher Browne

FORT WORTH REGIONAL OFFICE

411 West Seventh Street, 8th Floor

Fort Worth TX 76102

817/334.3821

Region: Oklahoma, Arkansas, Texas, Louisiana

west of the Atchafalaya River, and Kansas

Vacant

HOUSTON BRANCH OFFICE

7500 San Felipe Street, Suite 550

Houston TX 77063

713/266.3671

Robert H. Davenport

DENVER REGIONAL OFFICE

410 17th Street, Suite 700

Denver CO 80202

303/844-2071

Region: North Dakota, South Dakota,

Wyoming, Nebraska, Colorado,

New Mexico, and Utah

G. Gail Weggeland

SALT LAKE BRANCH OFFICE

U.S. Post Office and Courthouse

350 South Main Street, Room 505

Salt Lake City UT 84101

8011524.5796

Irving M. Einhorn

LOS ANGELES REGIONAL OFFICE

5757 Wilshire Boulevard, Suite 500 East

Los Angeles CA 90036-3648

213/468-3098

Region: Nevada, Arizona, California, Hawaii, and Guam

Bobby C. Lawyer

SAN FRANCISCO BRANCH OFFICE

450 Golden Gate Avenue, Box 36042

San Francisco CA 94102

415/556.5264
REGION 8

REGION 9

Jack H. Bookey

SEA TILE REGIONAL OFFICE

3040 Jackson Federal Building

915 Second Avenue

Seattle WA 98174

206/442.7990

Region: Montana, Idaho, Washington, Oregon,

and Alaska

James C. Kennedy

PHILADELPHIA REGIONAL OFFICE

William J. Green, Jr. Federal Building

600 Arch Street, Room 2204

Philadelphia PA 19106

215/597-3100

Region: Pennsylvania, Delaware, Maryland,

Virginia, West Virginia, and

District of Columbia

86
FOOTNOTES

lCorporate Reporting and Accounting cases include: In the Matter of Michael

R. Maury, Accounting and Auditing Enforcement Release No. 93 (March 26,

1986), 35 SEC Docket 580; In the Matter of Ray M. VanLandingham, et el.,

Accounting and Auditing Enforcement Release No. 102 (June 20, 1986),35

SEC Docket 1666; In the Matter of James D. Francis, Accounting and AUditing

Enforcement Release No. 103 (June 20, 1986),35 SEC Docket 1678; In the

Matter of American Express Company, Accounting and Auditing Enforcement

Release No. 101 (June 17, 1986), 35 SEC Docket 1562; In the Matter of Stewart

Parness, Securities Exchange Act Release No. 23507 (August 6, 1986), 36 SEC

Docket 395; In the Matter of Michael S. Hope, c.P.A., et el., Accounting and

Auditing Enforcement Release No. 109A (August 6, 1986), 36 SEC Docket

663; In the Matter of Lary C. Snodgrass, c.P.A., Accounting and Auditing

Enforcement Release No. 83 (December 26, 1985), 34 SEC Docket 1383; In the

Matter of Seidman & Seidman, Accounting and Auditing Enforcement Release

No. 78 (October 10, 1985), 34 SEC Docket 356; In the Matter of Frantz WaTTick

Strack & Associates, P.c., et aI., Accounting and Auditing Enforcement Release

No. 86 (February 10, 1986), 35 SEC Docket 34; In the Matter of Arthur

Roqouin, et el., Accounting and Auditing Enforcement Release No. 87

(February 27, 1986), 35 SEC Docket 154; In the Matter of S.P. Cooper & Co., et

el., Accounting and Auditing Enforcement Release No. 91 (March 17, 1986),35

SEC Docket 480; In the Matter of Ronald P. Hemnqton, Accounting and

Auditing Enforcement Release No. 92 (March 25, 1986), 35 SEC Docket 630;

In the Matter of Carl E. Wright, et el., Accounting and Auditing Enforcement

Release No. 97 (April 23, 1986), 35 SEC Docket 898; In the Matter of Robert E.

Nilssen, et el., Accounting and Auditing Enforcement Release No. 111

(September 11, 1986), 36 SEC Docket 878; In the Matter of William Geliond,

c.P.A., Accounting and Auditing Enforcement Release No. 106 (July 22,

1986),36 SEC Docket 219; In the Matter of Albert Jacobs, c.P.A., Accounting

and Auditing Enforcement Release No. 114 (September 24, 1986), 36 SEC

Docket 1100; In the Matter of Thomas C. Runge, Securities Exchange Act

Release No. 23066 (March 26, 1986), 35 SEC Docket 575; SEC v. Savin Corp.

Accounting and Auditing Enforcement Release No. 80 (November 12, 1985),

34 SEC Docket 920; SEC v. E.F. Hutton Group, lnc., Litigation Release No.

10915 (October 29, 1985),34 SEC Docket 712; SEC v. Computer Business

Supplies, lnc., et el., Litigation Release No. 10986 (January 22, 1986),34 SEC

Docket 1944; SEC v. Academy Insurance Group, lnc., Accounting and Auditing

Enforcement Release No. 89 (February 10, 1986),35 SEC Docket 82; SEC v.

Arthur Rogovin, et el., Litigation Release No. 11018 (March 6, 1986),35 SEC

Docket 281; SEC u. Inter-Regional Financial Group, lnc., et al., Accounting and

Auditing Enforcement Release No. 90 (March 13, 1986), 35 SEC Docket 445;

SEC u. Everitt A. Carter, et el., Accounting and Auditing Enforcement Release

No. 94 (March 27, 1986),35 SEC Docket 627; SEC 0. Vidalia Sweets Brands,

lnc., et el., Accounting and Auditing Enforcement Release No. 98 (April 23,

1986), 35 SEC Docket 959; SEC v. DanieL C. Maxwell, et el., Accounting and

Auditing Enforcement Release No. 95 (April 14, 1986),35 SEC Docket 867;

SEC 0. Nordic Ltd. lnc., et el., Litigation Release No. 11064 (April 15, 19Be)r35

87
SEC Docket 872; SEC v. Ronald R. Walker, et el., Accounting and Auditing

Enforcement Release No. 96 (April 22, 1986), 35 SEC Docket 956; SEC v.

Time Energy Systems, Inc., et sl., Accounting and Auditing Enforcement

Release No. 99 (May 20, 1986), 35 SEC Docket 1292; SEC v. Charter Co., et

el., Accounting and Auditing Enforcement Release No. 104 (June 24, 1986),35

SEC Docket 1748; SEC v. National Business Communications Corp., et el.,

Accounting and Auditing Enforcement Release No. 113 (September 19, 1986),

35 SEC Docket 1152; SEC v. John Dies, Accounting and Auditing

Enforcement Release No. 100 (June 10, 1986),35 SEC Docket 1527; SEC v.

Automatix lnc., Accounting and Auditing Enforcement Release No. 100 (June

10, 1986),35 SEC Docket 1527; SEC v. GemCraft, lnc., Accounting and

Auditing Enforcement Release No. 107 (July 31, 1986),36 SEC Docket 363;

SEC v. Charles W. Anshen, et el., Litigation Release No. 11224 (September 22,

1986),36 SEC Docket 1154; SEC v. SRO Entertainment, Inc., Accounting and

Auditing Enforcement Release No. 110 (August 7, 1986),36 SEC Docket 452;

SEC v. William Welcsel, et ei., Litigation Release No. 11183 (August 6, 1986),

36 SEC Docket 445; SEC v. Thomas F. Clark, et al., Litigation Release No.

11264 (October 17, 1986), 36 SEC Docket 1525; SEC v. Spectrum Digital

Corp., Litigation Release No. 10976 (January 9, 1986), 34 SEC Docket 1741;

SEC v. Ashland Oil, lnc., et ei., Litigation Release No. 11150 (July 8, 1986), 36

SEC Docket 120; and two private proceedings.

21nsider Trading cases include: In the Matter of Dennis B. Levine, Securities

Exchange Act Release No. 23300 (June 5, 1986), 35 SEC Docket 1426; In the

Matter of Billy Bob Harris, Securities Exchange Act Release No. 23243 (May 15,

1986), 35 SEC Docket 1186; In the Matter of Fred Aizen, Securities Exchange

Act Releaes No. 23519 (August 7, 1986),36 SEC Docket 421; In the Matter of

Marcel Katz, Securities Exchange Act Release No. 23520 (August 7, 1986), 36

SEC Docket 423; In the Matter of Ira B. Sokolow, Securities Exchange Act

Release No. 23386 (July I, 1986),36 SEC Docket 10; In the Matter of Robert

M. Wilkis, Securities Exchange Act Release No. 23385 (July I, 1986), 36 SEC

Docket 9; SEC v. Dwight C. Moorehead, Litigation Release No. 10948

(December 5, 1985),34 SEC Docket 1207; SEC v. Ronald V. Aprahamian,

Litigation Release No. 10961 (December 19, 1985),34 SEC Docket 1363; SEC

v. Emera Bailey, et el., Litigation Release No. 10896 (October 2, 1985),34 SEC

Docket 347; SEC v. Ronald Hengen, et el., Litigation Release No. 10981

(January 14, 1986),34 SEC Docket 1854; SEC v. Joseph G. Cremonese,

Litigation Release No. 10984 (January 17, 1986),34 SEC Docket 1942; SEC v.

Charles S. Offer, Litigation Release No. 11008 (February 24, 1986), 35 SEC

Docket 202; SEC v. John J. Borer, Jr., Litigation Release No. 11009 (February

25, 1986), 35 SEC Docket 203; SEC v. Morgan F. Moore, Litigation Release No.

11013 (March 3, 1986),35 SEC Docket 277; SEC v. Frank M. Rummonds,

Litigation Release No. 11033 (March 24, 1986),35 SEC Docket 613; SEC v.

Jack R. Morris, et sl., Litigation Release No. 11050 (April 3, 1986), 35 SEC

Docket 741; SEC v. Dennis Levine, et sl., Litigation Release No. 11095 (May

12, 1986),35 SEC Docket 1212; SEC v. The First Boston Corp., Litigation

Release No. 11092 (May 5, 1986),35 SEC Docket 1157; SEC v. Andrew L.

Evans, Litigation Release No. 11076 (April 24, 1986),35 SEC Docket 1073;

SEC v. John S. Newton, Litigation Release No. 11101 (May 15, 1986),35 SEC

Docket 1216; SEC v. Carlyle W. Higgins, et al., Litigation Release No. 11056

(April 14, 1986), 35 SEC Docket 866; and SEC v. Richard J. Bastein, Litigation

Release No. 11136 (June 15, 1986),35 SEC Docket 1743; SEC v. Robert A.

Wahl, Litigation Release No. 11203 (August 20, 1986),36 SEC Docket 590;

88
SEC v. Thomas M. Hartnett, Litigation Release No. 11210 (September 8, 1986),

36 SEC Docket 966; SEC v. Anthony M. Franco, Litigation Release No. 11206

(August 26, 1986), 36 SEC Docket 660; SEC v. Harvey Katz, et el., Litigation

Release No. 11185 (August 7, 1986), 36 SEC Docket 448; SEC v. Martin M.

Lewis, Litigation Release No. 11180 (August 4, 1986),36 SEC Docket 443;

SEC v. David J. Henderson, et el., Litigation Release No. 11149 (July 7, 1986),

36 SEC Docket 118; SEC v. Ira B. Sokolow, Litigation Release No. 11146 (July

1, 1986), 36 SEC Docket 72; and SEC v. Robert M. Wilkis, et al., Litigation

Release No. 11145 (July I, 1986),36 SEC Docket 70.

3Regulated Entities and Associated Persons cases include: In the Matter of

James No Cooke, Securities Exchange Act Release No. 22764 (January 3,

1986),34 SEC Docket 1618; In the Matter of Norman Laverne Vance, Securities

Exchange Act Release No. 22816 (January 21, 1986),34 SEC Docket 1894; In

the Matter of Westlake Securities, Inc., et el., Securities Exchange Act Release

No. 23293 (June 2, 1986),34 SEC Docket 1413; In the Matter of Elwyn Willbert

[; Haig lnc., et al., Securities Exchange Act Release No. 23658 (September 30,

1986), 36 SEC Docket 1188; In the Matter of Frank Manders, Securities

Exchange Act Release No. 23351 (June 20, 1986),35 SEC Docket 1684; SEC

v. Comstock Financial Services, Inc., et al., Litigation Release No. 10964

(December 27, 1985),34 SEC Docket 1597; SEC v. Laidlaw Adams s Peck,

lnc., Litigation Release No. 10970 (January 6, 1986), 34 SEC Docket 1735;

SEC v. Drexel Burnham Lambert, Inc., Litigation Release No. 10969 (January 6,

1986), 34 SEC Docket 1734; SEC v. North Atlantic Airlines, lnc., et el.,

Litigation Release No. 10978 (January 14, 1986),34 SEC Docket 1850; SEC v.

Llni-Petro Exploration Corp., et el., Litigation Release No. 11020 (March 7,

1986), 35 SEC Docket 438; SEC v. Sigmundr Exploration Corp., et el.,

Litigation Release No. 11021 (March 7, 1986),35 SEC Docket 440; SEC v.

Joseph D. Stewart, Litigation Release No. 11081 (April 29, 1986),35 SEC

Docket 1070; SEC v. Terry T. Cherry, et el., Litigation Release No. 11102 (May

15, 1986),35 SEC Docket 1217; SEC v. Douglass F. Dumham, Litigation

Release No. 11139 (June 25, 1986), 35 SEC Docket 1146; SEC v. IRE lnc., et

el., (no release); SEC v. Western Gold, lnc., et el., Litigation Release No. 10934

(November 15, 1985),34 SEC Docket 1034; SEC v. Invest Management Service,

et al., Litigation Release No. 10931 (November 12, 1985),34 SEC Docket 923;

SEC v. Jerald Newman, et et., Litigation Release No. 11026 (March 13, 1986),

35 SEC Docket 449; SEC v. Hotlouiell-Petiit, lnc., et el., Litigation Release No.

11247 (October 14, 1986),36 SEC Docket 1420; In the Matter of First Colorado

Investments [; Securities, lnc., Securities Exchange Act Release No. 22626

(November 14, 1985), 34 SEC Docket 890; In the Matter of Kidder Peabody [;

Co., lnc., et ei., Securities Exchange Act Release No. 22514 (October 8, 1985),

34 SEC Docket 411; In the Matter of Michael Levinson [; Co., lnc., et al.,

Securities Exchange Act Release No. 22675 (December 2, 1985), 34 SEC

Docket 1111; In the Matter of Costentino [; DeFelice, lnc., et ei., Securities

Exchange Act Release No. 22749 (December 31, 1985),34 SEC Docket 1449;

In the Matter of Stephen S. York, et el., Securities Exchange Act Release No.

23183 (April 29, 1986),35 SEC Docket 974; In the Matter of Mark D. Seigel, et

el., Securities Exchange Act Release No. 23230 (May 14, 1986), 35 SEC

Docket 1179; In the Matter of Bartel Securities. lnc., et el: Securities Exchange

Act Release No. 23132 (April 16, 1986), 35 SEC Docket 818; In the Matter of

I.M. Simon [; Co., lnc., et el., Securities Exchange Act Release No. 23592

(September 5, 1986), 36 SEC Docket 813; In the Matter of Leonard G. Bednar,

Securities Exchange Act Release No. 23581 (August 29, 1986),36 SEC Docket

89
770; In the Matter of Thomas R. Brimberry, Securities Exchange Act Release

No. 23580 (August 29, 1986), 36 SEC Docket 769; In the Matter of James

Massa, Securities Exchange Act Release No. 23579 (August 29, 1986), 36 SEC

Docket 769; SEC v. Stephen S. York World Wide Investments, et al., Litigation

Release No. 11010 (February 25, 1986),35 SEC Docket 204; 34 SEC Docket

1037; SEC v. Bartel Securities lnc., et al., Litigation Release No. 11000

(February II, 1986), 35 SEC Docket 83; SEC v. Joseph W. Elmendorf, et al.,

Litigation Release No. 11209 (September 5, 1986), 36 SEC Docket 965; SEC v.

K. A. Knapp & Co., lnc., et al., Litigation Release No. 11243 (October 3, 1986),

36 SEC Docket 1345; In the Matter of James M. Studeman, Securities

Exchange Act Release No. 22676 (December 2, 1985),34 SEC Docket 1112; In

the Matter of Rollin H. Needham, et al., Securities Exchange Act Release No.

22687 (December 5, 1985),34 SEC Docket 1149; In the Matter of John Kevin

O'Neill, Securities Exchange Act Release No. 22766 (January 3, 1986), 34 SEC

Docket 1620; In the Matter of Prudeniiel-Becne Securities, lnc., Securities

Exchange Act Release No. 22755 (January 2, 1986),34 SEC Docket 1456; In

the Matter of Pruderuiel-Beche Securities, Inc., et el., Securities Exchange Act

Release No. 22755 (January 2, 1986), 34 SEC Docket 1456; In the Matter of

Richard Keith Saccullo, Securities Exchange Act Release No. 22756 (January 2,

1986),34 SEC Docket 1496; In the Matter of David Lawrence Scharps,

Securities Exchange Act Release No. 22757 (January 2, 1986), 34 SEC Docket

1505; In the Matter of Peter Scott Gewant, Securities Exchange Act Release No.

22862 (February 4, 1986),34 SEC Docket 2071; In the Matter of Robert

Anthony Scermezzo, Securities Exchange Act Release No. 22905 (February 13,

1986), 35 SEC Docket 58; In the Matter of George A. McLendon, Securities

Exchange Act Release No. 23002 (March 12, 1986), 35 SEC Docket 369; In the

Matter of Sigmundr Securities Corp., Securities Exchange Act Release No.

23003 (March 12, 1986),35 SEC Docket 374; In the Matter of James Laiacona,

Securities Exchange Act Release No. 23047 (March 20, 1986),35 SEC Docket

501; In the Matter of Mary A. Schad, et el., Securities Exchange Act Release

No. 23057 (March 24, 1986), 35 SEC Docket 551; In the Matter of Donald T.

Sheldon, et el., Securities Exchange Act Release No. 23058 (March 24, 1986),

35 SEC Docket 557; In the Matter of Neel H. Howard, Jr., Securities Exchange

Act Release No. 23079 (March 31, 1986), 35 SEC Docket 656; In the Matter of

Arlan J. Preblud, Securities Exchange Act Release No. 23297 (June 4, 1986), 35

SEC Docket 1421; In the Matter of Mark Pamass, Accounting and Auditing

Enforcement Release No. 108 (May 19, 1986),35 SEC Docket 1227; In the

Matter of Andrew L. Evans, Securities Exchange Act Release No. 23185 (April

29, 1986),35 SEC Docket 977; In the Matter of Landis Securities Corp., et al.,

Securities Exchange Act Release No. 23373 (June 26, 1986),35 SEC Docket

1706; In the Matter of Seco Securities, lnc., et el., Securities Exchange Act

Release No. 23301 (June 5, 1986), 35 SEC Docket 1427; In the Matter of

Maurice Aresty, Securities. Exchange Act Release No. 23384 (June 30, 1986),

36 SEC Docket 8; In the Matter of Michael Walter Swofford, Securities

Exchange Act Release No. 23521 (August 7, 1986), 36 SEC Docket 424; In the

Matter of Underhill Associates, Inc., et aL, Securities Exchange Act Release No.

23655 (September 30, 1986), 36 SEC Docket 1183; In the Matter of John J.

Bojo, Jr., Securities Exchange Act Release No. 23659 (September 30, 1986),

36 SEC Docket 1193; In the Matter of Michael C. Talley & Co., Inc., et al.,

Securities Exchange Act Release No. 23661 (September 30, 1986),36 SEC

Docket 1194; In the Matter of Sutro & Co., Inc., Securities Exchange Act

90
Release No. 23663 (September 30, 1986), 36 SEC Docket 1199; In the Matter

of Philip Huber, Securities Exchange Act Release No. 23542 (August 18, 1986),

36 SEC Docket 530; In the Matter of Raymond O. Rose, (no release); In the

Matter of Christopher J. Delahunty, Investment Advisers Act Release No. 1037

(September 24, 1986), 36 SEC Docket 1150; In the Matter of Butcher & Singer,

lnc., Investment Company Act Release No. 15073 (April 24, 1986),35 SEC

Docket 941; SEC v. James M. Studemen, Litigation Release No. 10954

(December II, 1985), 34 SEC Docket 1276; SEC v. Beacon Financial Group,

Litigation Release No. 10927 (November 6, 1985),34 SEC Docket 823; SEC v.

James Marzano, et el., Litigation Release No. 10950 (December 5, 1985),34

SEC Docket 1208; SEC v. Rollin H. Needham, et el., Litigation Release No.

10949 (December 5, 1985),34 SEC Docket 1207; SEC v. First Jersey

Securities, Inc., et el., Litigation Release No. 10919 (October 31, 1985),34 SEC

Docket 725; SEC v. The Electronics Warehouse, lnc., et al., Litigation Release

No. 11037 (March 24, 1986), 35 SEC Docket 624; SEC v. Sam Kalil, Jr.,

Litigation Release No. 10967 (January 2, 1986),34 SEC Docket 1601; SEC v.

Landis Securities Corp., et el., Litigation Release No. 11119 (not dated), 35 SEC

Docket 1524; SEC v. Cusack, Light & Co., Inc., Litigation Release No. 11162

(July 18, 1986),36 SEC Docket 268; SEC v. Maroin L. Warner, et el., Litigation

Release No. 11220 (September 16, 1986),36 SEC Docket 1053; In the Matter

of E.F. Hutton & Co., Inc., Securities Exchange Act Release No. 22579

(October 29, 1985),34 SEC Docket 619; In the Matter of Eugene Mulvihill,

Securities Exchange Act Release No. 23034 (March 7, 1986), 35 SEC Docket

437; In the Matter of Eugene Joseph Chiaramonte, et el., Securities Exchange

Act Release No. 23049 (March 21, 1986), 35 SEC Docket 538; In the Matter of

First Affiliated Securities, lnc., Securities Exchange Act Release No. 23335 (June

18, 1986), 35 SEC Docket 1580; In the Matter of Barry Asman, Securities

Exchange Act Release No. 23089 (April I, 1986), 35 SEC Docket 693; SEC v.

Barry Asman, et el., Litigation Release No. 11035 (March 24, 1986), 35 SEC

Docket 621; In the Matter of David L. Williams, Securities Exchange Act

Release No. 23551 (August 25, 1986),36 SEC Docket 614; In the Matter of H.I.

Glass & Co., Investment Advisers Act Release No. 1003 (December 17, 1985),

34 SEC Docket 1351; In the Matter of Vector Capital Management, lnc.,

Investment Advisers Act Release No. 990 (October II, 1985), 34 SEC Docket

499; In the Matter of Norman Behar, Investment Advisers Act Release No. 997

(November 20, 1985),34 SEC Docket 1031; In the Matter of E.F. Hutton & ce.,

lnc., Investment Advisers Act Release No. 993 (October 29, 1985), 34 SEC

Docket 597; In the Matter of Gary A. Wautier, Investment Advisers Act Release

No. 1019 (April 8, 1986),35 SEC Docket 789; In the Matter of F. B. Investment

Services, lnc., et el., Investment Advisers Act Release No. 1022 (May I, 1986),

35 SEC Docket 1063; In the Matter of The Spangler Group, lnc., et el.,

Investment Advisers Act Release No. 1023 (June 18, 1986),35 SEC Docket

1639; In the Matter of ITWin Zuckerman, Investment Advisers Act Release No.

1024 (June 18, 1986),35 SEC Docket 1642; In the Matter of Project Fund

Management Results, lnc., et aL, Investment Advisers Act Release No. 1027

(July 3, 1986), 36 SEC Docket 66; In the Matter of Richard M. Silverstein, et el.,

Investment Advisers Act Release No. 1020 (April 24, 1986), 35 SEC Docket

944; In the Matter of TLS Flnencial Services, Inc., et sl., Investment Advisers Act

Release No. 1031 (August 18, 1986),36 SEC Docket 529; In the Matter of

Robert Donald Jackson, Investment Advisers Act Release No. 1029 (July 15,

1986), 36 SEC Docket 200; In the Matter of Shearson Lehman Brothers, Inc.,

Investment Advisers Act Release No. 1038 (September 24, 1986):36 SEC

91
Docket 1075; In the Matter of GLC Advisors Ltd., Investment Advisers Act

Release No. 1036 (September 22, 1986),36 SEC Docket 1147; In the Matter of

John G. Rinaldo, Investment Advisers Act Release No. 1041 (September 16,

1986),36 SEC Docket 1269; In the Matter of Sunlin L.S. Wong, Investment

Advisers Act Release No. 1042 (September 30, 1986),36 SEC Docket 1270; In

the Matter of Marlin F. Schmidt, Investment Advisers Act Release No. 1043

(September 30, 1986),36 SEC Docket 1204; In the Matter of American

Monetary Corp., et el., Investment Advisers Act Release No. 1040 (September

30, 1986), 36 SEC Docket 1264; In the Matter of Investors Portfolio

Management, lnc., Investment Advisers Act Release No. 1045 (October 2,

1986),36 SEC Docket 1273; In the Matter of John Gium, et el., Investment

Advisers Act Release No. 1028 (July 14, 1986),36 SEC Docket 198; SEC v.

David L. Williams, et el., Litigation Release No. 10900 (October 4, 1985), 34

SEC Docket 444; SEC v. Farrish E. Betton, Litigation Release No. 11077 (April

24, 1986), 35 SEC Docket 964; SEC v. Armstrong Group, lnc., et el., Litigation

Release No. 11060 (April 15, 1986),35 SEC Docket 869; SEC v. The Spangler

Group, lnc., et el., Litigation Release No. 11055 (April 14, 1986),35 SEC

Docket 864; SEC v. Silverstein Fmancial Services, lnc., et el., Litigation Release

No. 11079 (April 24, 1986),35 SEC Docket 967; SEC v. Raymond Sciersppe,

Litigation Release No. 11110 (May 29, 1986),35 SEC Docket 1401; SEC v.

John Adams Trust Corp., et el; Litigation Release No. 11227 (September 25,

1986),36 SEC Docket 1157; SEC v. TLS Fmancial Services, lnc., et sl.,

Litigation Release No. 11208 (August 26, 1986),36 SEC Docket 662; SEC v.

American Monetary Corp., et sl., Litigation Release No. 11233 (September 30,

1986),36 SEC Docket 1280; SEC v. Herbert M. Kirschner, Litigation Release

No. 11099 (May 13, 1986),35 SEC Docket 1215; SEC v. James Travis Comutt,

et el., Litigation Release No. 11157 (July II, 1986), 36 SEC Docket 202; In the

Matter of United States Steel Cotp., Securities Exchange Act Release No. 22700

(December II, 1985),34 SEC Docket 1225; In the Matter of Brian H. McMahon,

Securities Exchange Act Release No. 23176 (April 22, 1986),35 SEC Docket

916; In the Matter of G. Duncan Fraser, Jr., Securities Exchange Act Release

No. 23184 (April 29, 1986),35 SEC Docket 975; and SEC v. Kenneth Smith,

Litigation Release No. 10979 (January 14, 1986),34 SEC Docket 1852.

4Market Manipulation cases include: In the Matter of Martin Rothman,

Securities Exchange Act Release No. 23654 (September 30, 1986), 36 SEC

Docket 1177; In the Matter of Joseph A. Lugo, Securities Exchange Act Release

No. 23653 (September 30, 1986), 36 SEC Docket 1177; In the Matter of Robert

G. Leigh, Securities Exchange Act Release No. 23660 (September 30, 1986),

36 SEC Docket 1193; SEC v. Douglas E. Patty, et aI., Litigation Release No.

11022 (March 10, 1986),35 SEC Docket 442; SEC v. Harry Edward Thomas, et

el., Accounting and Auditing Enforcement Release No. 105 (June 25, 1986),35

SEC Docket 1745; SEC v. Worldwide Ventures Corp., et al., Litigation Release

No. 11123 (June II, 1986),35 SEC Docket 1530; SEC v. Capt. Crab, lnc., et

al., Litigation Release No. 11131 (June 18, 1986),35 SEC Docket 1652; SEC

v. Dynapac lnc., et el., Litigation Release No. 11262 (October 15, 1986),36

SEC Docket 1441; SEC v. Golden Bear Resources, Ltd., et sl., Litigation

Release No. 11228 (September 26, 1986),36 SEC Docket 1274; SEC v.

DataForce Intemational, lnc., et al., Litigation Release No. 11242 (October 3,

1986), 36 SEC Docket 1344; SEC v. Michael J. Hannan, (no release); SEC v. K.

William Busacker, Litigation Release No. 11258 (October 15, 1986), 36 SEC

Docket 1437; SEC v. Patrick W. M. lmeson, et al., Litigation Release No. 11259

(October 15, 1986).36 SEC Docket 1438; and SEC v. Michael C. Talle.1/& Co.,

92
lnc., et el., Litigation Release No. 11265 (October 17, 1986), 36 SEC Docket

1526.

sSecurities Offering Violation cases include: In the Matter of John Henry

Weber, Securities Exchange Act Release No. 23656 (September 30, 1986), 36

SEC Docket 1184; In the Matter of James Newman, Securities Exchange Act

Release No. 23662 (September 30, 1986),36 SEC Docket 1197; In the Matter

of Ellis E. Meister, et el., Securities Exchange Act Release No. 23657

(September 30, 1986),36 SEC Docket 1185; In the Matter of M.Zero Corp.,

Securities Act Release No. 6628 (February 25, 1986), 35 SEC Docket 130; In

the Matter of Theron D. Nelsen Community Fund, Securities Act Release No.

6629 (March 10, 1986), 35 SEC Docket 287; In the Matter of Close Outs Plus,

lnc., Securities Act Release No. 6643 (May 12, 1986),35 SEC Docket 1165; In

the Matter of Swanson Barrell Enterprises, inc., Securities Act Release No. 6657

(September 17, 1986),36 SEC Docket 977; In the Matter of 107, lnc.,

Securities Act Release No. 6657 (September 17, 1986),36 SEC Docket 977; In

the Matter of L.H. Beaslin Enterprises, lnc., Securities Act Release No. 6657

(September 17, 1986),36 SEC Docket 977; In the Matter of Pompeii, lnc.,

Securities Act Release No. 6657 (September 17, 1986),36 SEC Docket 977; In

the Matter of New Order Technology, lnc., Securities Act Release No. 6657

(September 17, 1986), 36 SEC Docket 977; In the Matter of Peter Gun, Inc.,

Securities Act Release No. 6657 (September 17, 1986),36 SEC Docket 977; In

the Matter of 101, lnc., Securities Act Release No. 6657 (September 17, 1986),

36 SEC Docket 977; In the Matter of 102, lnc., Securities Act Release No. 6657

(September 17, 1986),36 SEC Docket 977; In the Matter of 103, lnc.,

Securities Act Release No. 6657 (September 17, 1986),36 SEC Docket 977; In

the Matter of 104, lnc., Securities Act Release No. 6657 (September 17, 1986),

36 SEC Docket 977; In the Matter of 105, lnc., Securities Act Release No. 6657

(September 17, 1986), 36 SEC Docket 977; In the Matter of 106, Technology,

lnc., Securities Act Release No. 6657 (September 17, 1986),36 SEC Docket

977; In the Matter of Santana International, lnc., Securities Act Release No.

6649 (May 29, 1986), 35 SEC Docket 1307; In the Matter of Tanzeer

Management Corp., Securities Act Release No. 6648 (May 29, 1986), 35 SEC

Docket 1306; In the Matter of Silkaro Capital Corp., Securities Act Release No.

6647 (May 29, 1986), 35 SEC Docket 1305; In the Matter of Kearl Thomas J.

Enterprises lnc., Securities Act Release No. 6636 (April 4, 1986), 35 SEC

Docket 745; In the Matter of Ramras Inc., Securities Act Release No. 6637

(April 4, 1986),35 SEC Docket 746; In the Matter of Brian V. Hanson

Enterprises lnc., Securities Act Release No. 6638 (April 4, 1986), 35 SEC

Docket 747; In the Matter of TobinF. Cowley lnc., Securities Act Release No.

6635 (April 4, 1986),35 SEC Docket 744; In the Matter of Abbate, lnc.,

Securities Act Release No. 6658 (September 17, 1986), 36 SEC Docket 978; In

the Matter of Kevin D. Oakes Enterprises, lnc., Securities Act Release No. 6659

(September 17, 1986), 36 SEC Docket 979; In the Matter of Thomas W. Tierney,

Securities Exchange Act Release No. 23169 (April 23, 1986),35 SEC Docket

903; In the Matter of Robert D. Schulman, Securities Exchange Act Release No.

23668 (September 30, 1986),36 SEC Docket 1207; SEC v. Hampstead Energy

International, lnc., et sl., Litigation Release No. 10922 (November I, 1985),34

SEC Docket 818; SEC v. Grady Sanders, et el., Litigation Release No. 10957

(December 9, 1985),34 SEC Docket 1279; SEC v. Fluid. Lift International, lnc.,

et al., Litigation Release No. 10935 (November 15, 1985),34 SEC Docket

1035; SEC v. Doerring & Associates, lnc., et el., Litigation Release No. 10956

(December 9, 1985), 34 SEC Docket 1278; SEC v. North American Industries,

93
Inc., et al., Litigation Release No. 10940(November 20, 1985), 34 SEC Docket 

1040;SEC u. The National Baptist Convention, Litigation Release No. 10977 

(January 9, 1986). 34 SEC Docket 1743;SEC u. Worldmasters Corp., et d., 

Litigati0.n Release No. 10988(January 27, 1986), 34 SEC Docket 2039;SEC v. 

7he lnteleplex Corp., et al., Litigation Release No. 10993(February 4, 1986). 34 

SEC Docket 2101;SEC u. Jack E. White, et aL, Litigation Release No. 11001 

(February 11, 1986), 35 SEC Docket 84;SEC u. James Newman, Litigation 

Release No. 11025(March 13, 1986), 35 SEC Docket 448; SEC u. Meadow 

Fresh Farms, Inc., et aL, Litigation Release No. 11047(April 2, 1986). 35 SEC 

Docket 737;EC u. Hollis 8. Reed, Litigation Release No. 11063 (April 15, 

1986). 35 SEC Docket 871;SEC u. Tomahawk Industries, inc., et at., Litigation 

Release No. 11114(June 4, 1986), 35 SEC Docket 1456;SEC u. Nutri-Health 

Centers, Inc., et a).. Litigation Release No. 11096(May 12, 1986). 35 SEC 

Docket 1213;SEC u. Alvin R. Broerman, eta!., Litigation Release No. 11126 

(June 11. 1986), 35 SEC Docket 1534;SEC u. Francis R. Richardson, et aL. 

Litigation Release No. 11109(May 28, 1986). 35 SEC Docket 1400;SEC u. 

Laser Am Corp., eta!., Litigation Release No. 11085(April 30, 1986), 35 SEC 

Docket 1074;SEC u. Ray L. Waid et al., Litigation Release No. 11108(May 

28, 1986), 35 SEC Docket 1399;SEC u. Ot~sC. Johnson, Litigation Release 

No. 11 105 (May 19, 1986), 35 SEC Docket 1291;SEC u. Olau Jore, et a!., 

Litigation Release No. 11133(June 19, 1986). 35 SEC Docket 1655;SEC u. 

American Financial Planners, et al., Litigation Release No. 11171 (July 24, 

1986). 36 SEC Docket 280;SEC o. MidAmerica Energy. et al., Litigation 

Release No. 11164(July 22, 1986), 36 SEC Docket 270;SEC u. Robert J. Fish, 

et a!., Litigation Release No. 11151 (July 8, 1986). 36 SEC Docket 123;S C u 

Airwave Communications Cop. of America, Litigation Release No. 11 155 f. July

1 

11, 1986), 36 SEC Docket 201;SEC u. John G. Kenning, et al., Litigation 

Release No. 11200(August 20, 1986), 36 SEC Docket 587;SEC u. Doc. G.L. 

Anderson, et dl., (no release); SEC o. Jason Smith Petroleum Corp., et al., 

Litigation Release No. 11160(July 15, 1986). 36 SEC Docket 205;SEC u. 

Edward Ralph Spinger, el al., Litigation Release No. 11163(July 22, 1986), 36 

SEC Docket 269;SEC u. W. Cad Zimmerman, et al., Litigation Release No. 

11 21 9 (September 15. 1986), 36 SEC Docket 1052;SEC u. Eye Contact 

~duenising of North America Inc., et ai., Litigation Release No. 11207 (August 

26.1986). 36 SEC Docket 661:SEC o. Dover Deveiooment Corn.. et al.. 

~itigation Release No. 11 190 (August 7, 1986), 36 SEC ~ockei453;SEC u. 

Tom W. Smith, et ai., Litigation Release No. 11211 (September 9, 1986), 36 

SEC Docket 967;SEC u. Richard Amex Higgins, el aL, Litigation Release No. 

11244(October 3, 1986), 36 SEC Docket 1346;SEC u. Milton Marks, et al., (no 

release); SEC u. Cumberland lnuestment Corp., et aL, (no release); SEC v. 

Hunterdon Pharmaceuticals Inc., et aL, Litigation Release No. 11256(October 

14, 1986). 36 SEC Docket 1435;SEC u. WlUlam R. Hedlund, et al., (no release); 

SEC u. U.S. Rnanclal Consultant, Inc.. (ng release); SEC u. Vernon G. Ash, el 

d.,Litigation Release No. 1 1261 (October 15, 1986). 36 SEC Docket 1440; 

and SEC u. Duck Book Communications Ltd.. et a/.. Litiaation - Release No. 

11266 (October 20. 1986), 36 SEC Docket i527. 

'Changes in Corporate Control cases include: In the Matter of Citizens TmT 

Co., et aL, Accounting and Auditing Enforcement Release No. 84(January 15. 

1986), 34 SEC Docket 1822;In the Matter of Centrust Sauhgs Bank, Securities 

Exchange Act Release No. 23076 (March 31, 1986), 35 SEC Docket 641;In the 

Matter of The BFGoodrfch Co.. Securities Exchange Act Release No. 22792 

(January 15, 1986), 34 SEC Docket 1806;In the Matter of Reulon, Inc., 
Securities Exchange Act Release No. 23320 (June 16, 1986),35 SEC Docket

1541; SEC v. L. Glenn Naf!' Litigation Release No. 11212 (September 10,

1986), 36 SEC Docket 968; and SEC v. FlFSt City Fmancial Corp., et el.,

Litigation Release No. 11195 (August 14, 1986),36 SEC Docket 519.

7Related Party Transactions cases include: SEC v. Gaensel Gold Mines Inc., et

ei., Litigation Release No. 11058 (April 14, 1986),35 SEC Docket 868; SEC v.

Ralph L. Vaerst, et aL, Accounting and Auditing Enforcement Release No. 112

(September 11, 1986), 36 SEC Docket 970; and SEC v. James R. Anderson, et

al., Litigation Release No. 11260 (October 15, 1986),36 SEC Docket 1439.

8Civil and Criminal Contempt cases include: SEC v. Cumberland Investment

Corp., et sl., Litigation Release No. 10973 (January 8, 1986), 34 SEC Docket

1738; SEC v. Elbee International, lnc., et el., Litigation Release No. 10936

(November 19, 1985), 34 SEC Docket 1036; SEC v. Thomas W. Reid, Litigation

Release No. 10959 (December 11, 1985),34 SEC Docket 1281; SEC v. David

Ken Yoshinaga, Litigation Release No. 11006 (February 24, 1986), 35 SEC

Docket 201; SEC v. Ciuuolette {; Edward Garrity, Litigation Release No. 11049

(April 3, 1986),35 SEC Docket 740; SEC v. Larry M. Cheney, (no release); SEC

v. Telecom Management International, (no release); SEC v. Vernon Hulme,

Litigation Release No. 11154 (July 9, 1986),36 SEC Docket 126; SEC v.

Richard W. Suter, Litigation Release No. 11218 (September 15, 1986),36 SEC

Docket 1050; SEC v. Arthur B. Jacoby, et el., Litigation Release No. 10947

(December 4, 1985),34 SEC Docket 1206; U.S. ex rei. SEC v. Donaid C.

Decker, Litigation Release No. 10989 (January 27, 1986),34 SEC Docket 2040;

SEC v. William L. Campbell, Jr., Litigation Release No. 10983 (January 15,

1986), 34 SEC Docket 1858; SEC v. Vernon Hulme, (no release); and U.S. ex

rei. SEC v. Richard Hirschfeld, Litigation Release No. 11159 (July 14, 1986), 36

SEC Docket 204. .

9Delinquent Filing cases include: SEC v. William Ziegler, III, Litigation

Release No. 11191 (August 11, 1986),36 SEC Docket 515; SEC v. Michael

Industries, lnc., Litigation Release No. 11191 (August II, 1986), 36 SEC

Docket 515; SEC v. Henry L. Lee, Jr., Litigation Release No. 11191 (August 11,

1986),36 SEC Docket 515; SEC v. Besicorp Group, Inc., Litigation Release No.

10945 (December 3, 1985),34 SEC Docket 1205; SEC v. Electro.Plastics, lnc.,

Litigation Release No. 10942 (November 27, 1985),34 SEC Docket 1098; SEC

v. Twenty FlFSt Century Distribution Corp., Litigation Release No. 10930

(November 12, 1985),34 SEC Docket 922; SEC v. Sonoma International,

Litigation Release No. 10997 (February 6, 1986),34 SEC Docket 2106; SEC v.

Capital Facilities Corp., Litigation Release No. 11041 (March 27, 1986),35 SEC

Docket 629; SEC v. Hydratron Systems lnc., Litigation Release No. 11046

(April 1, 1986),35 SEC Docket 737; SEC v. American Sports Advisors, lnc.,

Litigation Release No. 11051 (April 4, 1986),35 SEC Docket 792; SEC v.

Futuresat Industries, lnc., Litigation Release No. 11059 (April 15, 1986),35 SEC

Docket 868; SEC v. Toledo Technology, lnc., Litigation Release No. 11080

(April 25, 1986),35 SEC Docket 1069; SEC v. Michael E. Maes, et el.,

Litigation Release No. 11137 (June 25, 1986),35 SEC Docket 1744; SEC v.

Energy Reserve, lnc., Litigation Release No. 11130 (June 17, 1986),35 SEC

Docket 1651; SEC v. Hybrilonics, lnc., Litigation Release No. 11132 (June 19,

1986).35 SEC Docket 1654; SEC v. Uniwest Flnenclsl Corp., Litigation Release

No. 11196 (August 14, 1986),36 SEC Docket 521; SEC v. PMI Holdings Corp.,

Litigation Release No. 11152 (July 9, 1986),36 SEC Docket 124; and SEC v.

Harwyn Industries, lnc., Litigation Release No. 11238 (October 3, 1986),36

SEC Docket 1340.

95
10Cases alleging misconduct by accounting firms or their partners or

employees include: In the Matter of Albert Jacobs, c.P.A., Accounting and

Auditing Enforcement Release No. 114 (September 24, 1986), 36 SEC Docket

1100; In the Matter of Robert E. Nilssen, et el., Accounting and Auditing

Enforcement Release No. 111 (September II, 1986), 36 SEC Docket 878; In

the Matter of William Geliond, c.P.A., Accounting and Auditing Enforcement

Release No. 106 (July 22, 1986),36 SEC Docket 219; In the Matter of Carl E.

Wright, et el., Accounting and Auditing Enforcement Release No. 97 (April 23,

1986),35 SEC Docket 898; SEC u. Harry Edward Thomas, et ai., Accounting

and Auditing Enforcement Release No. 105 (June 25, 1986), 35 SEC Docket

1745; In the Matter of Ronald P. Harrington, Accounting and Auditing

Enforcement Release No. 92 (March 25, 1986), 35 SEC Docket 630; In the

Matter of S.P. Cooper & Co., et el., Accounting and Auditing Enforcement

Release No. 91 (March 17, 1986),35 SEC Docket 480; SEC u. Arthur Rogouin,

et el., Litigation Release No. 11018 (March 6, 1986),35 SEC Docket 281; In

the Matter of Arthur Rogouin, et el., Accounting and Auditing Enforcement

Release No. 87 (February 27,1986), 35 SEC Docket 154; In the Matter of

Frantz, Wanick, Strack & Associates, P.c., et el., Accounting and Auditing

Enforcement Release No. 86 (February 10, 1986),35 SEC Docket 34; In the

Matter of Lary C. Snodgrass, c.P.A., Accounting and Auditing Enforcement

Release No. 83 (December 26, 1985),34 SEC Docket 1383; In the Matter of

Seidman & Seidman, Accounting and Auditing Enforcement Release No. 78

(October 10, 1985), 34 SEC Docket 356; and In the Matter of Michael S. Hope,

c.P.A., et el., Accounting and Auditing Enforcement Release No. 109A (August

6, 1986), 36 SEC Docket 663; and two private proceedings.

11SEC u. Everitt A. Carter, et el., Accounting and Auditing Enforcement

Release No. 94 (March 27, 1986), 35 SEC Docket 627.

12SEC u. Oak Industries, lnc., , Litigation Release No. 10801 (June 25, 1985),

33 SEC Docket 740.

13/n the Matter of American Express Company, Accounting and Auditing

Enforcement Release No. 101 (June 17, 1986),35 SEC Docket 1562.

14SEC u. The Charter Company, Litigation Release No. 11135 (June 24,

1986), 35 SEC Docket 1748.

15SEC v. Richard J. Bestein, Litigation Release No. 11136 (June 15, 1986),

35 SEC Docket 1743.

16/n the Matter of Seidman & Seidman, Accounting and Auditing Enforcement

Release No. 78 (October 10, 1985),34 SEC Docket 356.

171naddition to the cases listed in footnote two, there are four additional cases,

which include allegations of insider trading uiolations. These cases are: SEC v.

William Weksel, et el., Litigation Release No. 11183 (August 6, 1986), 36 SEC

Docket 445; SEC v. Ronald R. Walker, et ai., Accounting and Auditing

Enforcement Release No. 96 (April 22, 1986), 36 SEC Docket 956; SEC u.

Harry Edward Thomas, et el., Accounting and Auditing Enforcement Release

No. 105 (June 25, 1986),35 SEC Docket 1745; and SEC v. Douglas E. Patty,

et el., Litigation Release No. 11022 (March 10, 1986),35 SEC Docket 442.

18SEC v. Dennis Levine, et al., Litigation Release No. 11095 (May 12, 1986),

35 SEC Docket 1212.

19SEC v. Ira B. Sokolow, Litigation Release No. 11146 (July I, 1986),36

SEC Docket 72; SEC v. Robert M. Wilkis, et el., Litigation Release No. 11145

(July I, 1986), 36 SEC Docket 70; SEC v. David S. Brown, Litigation Release

No. 11245 (October 9, 1986),36 SEC Docket 1347; and SEC v. llan K. Reich,

Litigation Release No. 11246 (October 9, 1986),36 SEC Docket 1349.

96
2°SEC v. First Boston Corp., Litigation Release No. 11092 (May 5, 1986),35

SEC Docket 1157.

21SEC v. Harvey Katz, et el., Litigation Release No. 11185 (August 7, 1986),

36 SEC Docket 448.

22SEC v. Banca Della Svizzera Italiana, et el., Litigation Release No. 11120

(June 9, 1986),35 SEC Docket 1525. See also Litigation Release Nos. 9334

(April 3, 1981),22 SEC Docket 749; and 9420 (August 18, 1981),23 SEC

Docket 628.

23SEC v. Certain Unknown Purchasers of the Common Stock of, and CaLL

Options {or the Common Stock of, Santa Fe tntemeuoruu Corp., Litigation

Release No. 11012 (February 26, 1986),35 SEC Docket 207. See also

Litigation Release Nos. 9484 (October 26, 1981),23 SEC Docket 1378; 9485

(October 26, 1981),23 SEC Docket 1379; and 10295 (February 28, 1984),29

SEC Docket 1528.

241nthe Matter of Kidder Peabody & Co., Inc., Securities Exchange Act

Release No. 22514 (October 8, 1985), 34 SEC Docket 411.

251nthe Matter of Prudentisl-Becne Securities, lnc., Securities Exchange Act

Release No. 22755 (January 2, 1986),34 SEC Docket 1456.

261nthe Matter of Richard Keith Ssccullo, Securities Exchange Act Release No.

22756 (January 2, 1986), 34 SEC Docket 1496; In the Matter of David Lawrence

Scharps, Securities Exchange Act Release No. 22757 (January 2, 1986), 34

SEC Docket 1505; and In the Matter of Robert Anthony Scarmazzo, Securities

Exchange Act Release No. 22905 (February 13, 1986), 35 SEC Docket 58.

27SEC v. E.F. Hutton Group, Inc., Litigation Release No. 10915 (October 29,

1985),34 SEC Docket 712; In the Matter of £.F. Hutton & Co., Inc., Securities

Exchange Act Release No. 22579 (October 29, 1985),34 SEC Docket 619; and

In the Matter of E.F. Hutton & Co., lnc., Investment Advisers Act Release No.

993 (October 29, 1986),34 SEC Docket 597.

28SEC o. The SpangLer Group, Inc., et el., Litigation Release No. 11055 (April

14, 1986), 35 SEC Docket 864.

291nthe Matter of The SpangLer Group, lnc., et el., Investment Advisers Act

Release No. 1023 (June 18, 1986),35 SEC Docket 1639.

30SEC v. Doerring & ASSOciates, Inc., et el., Litigation Release No. 10956

(December 9, 1985),34 SEC Docket 1278.

31SEC v. WorLdwide Ventures Corp., et el., Litigation Release No. 11123 (June

11, 1986),35 SEC Docket 1530.

32/n the Matter of Reolon, lnc., Securities Exchange Act Release No. 23320

(June 16, 1986),35 SEC Docket 1541.

331nthe Matter of The BFGoodrich Co., Securities Exchange Act Release No.

22792 (January 15, 1986),34 SEC Docket 1806.

34Securities Act Release No. 33.6651 (June 26, 1986) 35 SEC Docket 1658.

35Securities Act Release No. 33-6653 (July II, 1986) 36 SEC Docket 131.

36Exchange Act Release No. 34.23486 (July 31, 1986) 36 SEC Docket 283.

37Exchange Act Release No. 34-22533 (October 15, 1985) 34 SEC Docket

457.

38Exchange Act Release No. 34-23276 (May 29, 1986) 35 SEC Docket 1318.

39Securities Act Release No. 33-6617 (January 9, 1986) 34 SEC Docket

1610.

4°Securities Act Release No. 33.6672 (October 27,1986) 36 SEC Docket 1536.

41Securities Act Release No. 33-6652 (July 8, 1986) 36 SEC Docket 79.

42Exchange Act Release No. 34.23407 (July 7, 1986) 36 SEC Docket 90.

43Securities Act Release No. 33.6650 (June 5, 1986) 35 SEC Docket 1464.

97
44Securities Act Release No. 33-6663 (October 2, 1986) 36 SEC Docket

1164.

45Staff Accounting Bulletin No. 60 (December 20, 1985), 34 SEC Docket

1441 (Financial Guarantees).

46Staff Accounting Bulletin No. 42A (December 31, 1985), 34 SEC Docket

1602 (Amortization of Goodwill by Financial Institutions Upon Becoming SEC

Registrants).

47Staff Accounting Bulletin No. 61 (May 6, 1986), 35 SEC Docket 1161

(Loan Losses).

48Staff Accounting Bulletin No. 62 (July 7, 1986), 36 SEC Docket 127

(Discounting by Property-Casualty Insurance Companies).

49Staff Accounting Bulletin No. 63 (September 11, 1986), 36 SEC Docket

1059 (Research and Development Arrangements).

50Staff Accounting Bulletin No. 64 (October 2, 1986), 36 SEC Docket 1285.

51Financial Reporting Release No. 22 (November 21, 1985),34 SEC Docket

926.

52Financial Reporting Release No. 25 (May 12, 1986),35 SEC Docket 1088.

53Financial Reporting Release No. 24 (January 22, 1986), 34 SEC Docket

1867.

54Financial Reporting Release No. 23 (December 12, 1985), 34 SEC Docket

1214.

55Statement of Financial Accounting Standards No. 87, Employers'

Accounting for Pensions; Statement of Financial Accounting Standards No. 88

Employers' Accounting for Settlements and Curtailments of Defined Benefit

Pension Plans and for Termination Benefits.

56Proposed Statement of Finalcial Accounting Standards: Statement of Cash

Flows.

57Proposed Statement of Financial Accounting Standards: Accountmg for

Income Taxes.

58Financial Reporting Release No. 26 (October 23, 1986) 36 SEC Docket 1460.

59Proposed Statement of Financial Accounting Standards: Financial Reporting

and Changing Prices.

6°FASB Technical Bulletin No. 85-3, Accounting for Operating Leases with

Scheduled Rent Increases.

61FASB Technical Bulletin No. 85.4, Accounting for Purchases of Life

Insurance.

62FASB Technical Bulletin No. 85-5, Issues Relating to Accounting for

Business Combinations.

63FASB Technical Bulletin No. 85-6, Accounting for a Purchase of Treasury

Shares at a Price Significantly in Excess of the Current Market Price of the Shares

and the Income Statement Classification of Costs Incurred in Defending against a

Takeover Attempt.

64Statement on Auditing Standards No. 50, Reports on the Application of

Accounting Principles.

65ChaIlenges and 0PRortunitg Ior the Accounting Profession: Strengthening the

Public Confidence; The Price Waterhouse Proposals (1985).

66The Future Relevance, Reliability and Credibility of Finenciel Information;

Recommendations to the AICPA Board of Directors (April 1986).

67public Oversight Board, Annual Report 1985.1986, page 28.

68Restructuring Professional Standards to Achieve Professional Excellence in a

Changing Enoironment, Report of Special Committee on Standards of

Professional Conduct for Certified Public Accountants (April 16, 1986).

98
69public Oversight Board, Annual Report 1985.1986, page 15.

7°Securities Exchange Act Release No. 33.6651 (June 26. 1986) 35 SEC

Docket 1658.

71Securities Exchange Act Release Nos. 22975 (March 6, 1986),35 SEC

Docket 229 and 23229 (May 13. 1986),35 SEC Docket 1177.

72Securities Exchange Act Release No. 23365 (June 23, 1986). 35 SEC

Docket 1690.

73Letters from Richard G. Ketchum, Director, Division of Market Regulation,

to Eric D. Roiter, Debevoise & Plimpton, Counsel for Security Pacific National

Bank, and to Daniel T. Brooks, Cadwalader, Wickersham & Taft, Counsel for

Instinet Corporation, August 8, 1986.

74Securities Exchange Act Release No. 22481 (September 30, 1985) 34 SEC

Docket 2.

75See New York Stock Exchange Rule 412, approved by the Commission in

Securities Exchange Act Release No. 22663 (November 26, 1985), 34 SEC

Docket 6. See also Securities Exchange Act Release No. 22941 (February 24,

1986), 35 SEC Docket 143, and Securities Exchange Act Release No. 22948

(February 25, 1986), 35 SEC Docket 147, approving similar rules of the

National Association of Securities Dealers, Inc., and the Municipal Securities

Rulemaking Board.

76Securities Exchange Act Release No. 22967 (March 5. 1986). 35 SEC

Docket 224.

77Securities Exchange Act Release No. 22928 (February 20, 1986), 35 SEC

Docket 103.

78See Division of Market Regulation, Summary of Comments on Concept

Release: Request for Comments on Issues Concerning Internationalization of

the World Securities Markets (Release No. 34.21958; File No. S7.16.85)

(January 27, 1986).

79SeeSecurities Exchange Act Release No. 23158 (April 21. 1986), 35 SEC

Docket 885.

8°SeeSecurities Exchange Act Release No. 23075 (March 28, 1986), 35 SEC

Docket 636.

81SeeLetter from Jonathan Kallman, Assistant Director, Division of Market

Regulation, to Michael Wise. Associate Counsel. Midwest Clearing

Corporation/Midwest Securities Trust. Company (March 21,1986); Letter from

Jonathan Kallman, Assistant Director, Division of Market Regulation, to

Michael Wise, Associate Counsel, Midwest Clearing Corporation/Midwest

Securities Trust Company (June 25, 1986).

82SeeMemorandum of the United States Securities and Exchange

Commission and the Securities Bureau of the Japanese Ministry of Finance on

the Sharing of Information (May 23, 1986).

83Securities Exchange Act Release No. 23550 (August 22, 1986), 36 SEC

Docket 610 (Options Clearing Corporation).

84Securities Exchange Act Release No. 23508 (August 28, 1986) 36 SEC

Docket 622 (Midwest Securities Trust Company).

85Securities Exchange Act Release No. 23514 (August 8, 1986) 36 SEC

Docket 415 (International Securities Clearing Corporation).

86Release No. 23115, April 10, 1986.

8

7Release No. 34-23423, June 11, 1986.

88Release No. 34.23422, June 11, 1986.

8

9Release No. 23544, August 20, 1986.

90ld.

99
91Release No. 23102, April 4, 1986 (NYSE's BETA Index); Release No.

34.23573, August 28, 1986 (Arnex's Institutional Index).

92SR.Phlx.85.10, February 3, 1986.

93SR.CBOE-84.31, Release No. 22471, September 26, 1986.

94Release No. 24.22469, September 26, 1986.

9SLetter to Kenneth Leibler, Amex, et al., October 16, 1985.

96Hans R. Stoll & Robert E. Whaley, Expiration Day Effects of Index Options

and Futures, March 15, 1986.

97Letter to John D. Dingell, Chairman, Committee on Energy and

Commerce, House of Representatives, Washington, D.C. 20515.

98Roundtable on Index Arbitrage, July 9, 1986.

99Letter to John Phelan, NYSE, September II, 1986.

looSecurities Exchange Act Release No. 34.23421 (July 11, 1986), 36 SEC

Docket 131.

10lSecurities Exchange Act Release No. 34-23611 (September II, 1986), 36

SEC Docket 847.

I02Securities Exchange Act Release No. 22510 (October 22, 1985) 34 SEC

Docket 378.

I03Securities Exchange Act Release No. 34.23602 (September 4, 1986) 36

SEC Docket 829.

I04Hoidin custody repurchase agreements are repurchase agreements in

which the broker-dealer agrees to retain custody of securities subject to the

agreement.

losSEC Release No. 34-22532 (October 15, 1985) 34 SEC Docket 453.

I06Letter to Robert B. Gilmore, Phlx, February 14, 1986.

I07Letter to David Marcus, NYSE, February 27, 1986.

I08Adopted New Forms For The Registration and Monitoring of Transfer

Agents, on March 27, 1986.

169Securities Exchange Act Release No. 22205 (July 1, 1985), 33 SEC Docket 941.

110Securities Exchange Act Release No. 22979 (March 7, 1986), 35 SEC

Docket 311. March 25 Volume.

111Securities Exchange Act Release No.23170 (April 23, 1986), 35 SEC 875.

112SeeSecurities Exchange Act Release No. 22671 (November 29, 1985), 34

SEC Docket 1103.

I13Securities Exchange Act Release No. 22882 (February 10, 1986), 35 SEC

Docket 19.

114Securities Exchange Act Release No. 22883 (February 10, 1986), 35 SEC

Docket 25.

IlsSecurities Exchange Act Release No.23677 (October 2, 1986), 36 SEC

Docket 1220.

116Securities Exchange Act Release No. 22959 (February 28, 1986), 35 SEC

Docket 214.

117Securities Exchange Act Release No. 22889 (February 11, 1986), 35 SEC

Docket 43; Securities Exchange Act Release No. 22908 (February 14, 1986),

35 SEC Docket 90; Securities Exchange Act Release No. 23131 (April 15,

1986), 35 SEC Docket 815; Securities Exchange Act Release No. 23316 (June

II, 1986), 35 SEC Docket 1483.

118Securities Exchange Act Release No. 22663 (November 26, 1985), 34 SEC

Docket 1052.

119Securities Exchange Act Release No. 22697 (December 10, 1985), 34 SEC

Docket 1222.

100
120Securities Exchange Act Release No. 34-23277 (May 28, 1986) 35 SEC

Docket 1331.

12ISR-NASD.85-29, Securities Exchange Act Release No. 22941 (February

24, 1986); 35 SEC Docket 143.

122SR-NASD-86.12, Securities Exchange Act Release No. 23325 (June 16,

1986); 35 SEC Docket 1556.

123SR.NASD-86.14, Securities Exchange Act Release No. 23482 (July 30,

1986); 36 SEC Docket 310.

124Letter to William O. Guffey, Metropolitan Mortgage & Securities Co., Inc.

from John Wheeler, Secretary, SEC April 10, 1986.

125Securities Exchange Act Release No. 23601 (September 5, 1986), 36 SEC

Docket 827 (Options Clearing Corporation).

126Securities Exchange Act Release No. 23244 (May 16, 1986) 35 Docket

1221 (Options Clearing Corporation).

I27Securities Exchange Act Release No. 23167 (April 22, 1986), 35 SEC

Docket 89] (Options Clearing Corporation).

128Securities Exchange Act Release No. 23575 (August 29, 1986,) 36 SEC

Docket 765 (Pacific Clearing Corporation); Securities Exchange Act Release

No. 23574 (August 29, 1986), 36 SEC Docket 764 (Pacific Securities Depository Trust Company); Securities Exchange Act Release No. 23342 (June 18,

1986), 35 SEC Docket 1593 (Depository Trust Company); Securities Exchange

Act Release No. 23400 (July 7, 1986), 36 SEC Docket 84 (Securities Clearing

Corporation of Philadelphia).

129Securities Exchange Act Release No. 23187 (April 29, 1986), 35 SEC

Docket 979 (Pacific Securities Depository Trust Company) and Securities Ex.

change Act Release No. 23576 (August 29, 1986),36 SEC Docket 766

(Philadelphia Depository Trust Company.

130Securities Exchange Act Release No. 23106 (April 8, 1986), 35 SEC Docket 752 (Depository Trust Company).

131Securities Exchange Act Release No. 23151 (April 21, 1986),35 SEC

Docket 878 (National Securities Clearing Corporation).

13220SEC Docket 415 (July 1, 1980), 45 FR ( ).

133TheMarket Surveillance Committee (MSC) was recently established by the

NASD as a responsee to the growth and visibility of the NASDAQ market, and

the resulting need for an effective mechanism to deal with NASDAQ disciplinary matters. Of national jurisdiction, it reviews investigations> and disciplines

members for all market-related trading violations such as insider trading, market manipulation, and marklnq-the-close, as well as market maker technical

violations, including excess spreads, erroneous trade reporting and failure to

report volume. The MSC meets four times a year, and its subcommittees (Investigations, which reviews all Market Surveillance investigations, and Compliance, which reviews all NASDAQ market maker violations) meets eight times a

year.

134The staff also completed the processing of 6 applications that had been

pending at the end of the 1985 final year.

135See Securities Exchange Act Release No. 20221 (September 23, 1983),

136Securities Act Release No. 6611 (November 14, 1985), 34 SEC Docket

828.

137lnvestment Company Act Release No. 15315 (September 17,1986) 36 SEC

Docket 980

101
I38Securities Exchange Act Release No. 23694 (October 8, 1986), 34 SEC

Docket 1302.

1391nvestment Company Act Release No. 14924 (January 29, 1986), 34 SEC

Docket 2027.

140lnvestment Company Act kelease No. 14983 (March 12, 1986), 35 SEC

Docket 423.

1411nvestment Company Act Release No. 15314 (September 17, 1986), 36

SEC Docket 1034.

1421nvestment Company Act Release No. 15155 (June 19, 1986) 35 SEC

Docket 1631.

1431nvestment Advisers Act Release No. Y96 (November 14, 1985),34 SEC

Docket 913.

1441nvestment Advisers Act Release No. 1034 (September 9, 1986),36 SEC

Docket 960.

1451nvestment Advisers Act Release No. 1035 (September 19,1986), 36 SEC

Docket 1143.

146Securities Act Release No. 6645 (May 29, 1986), 35 SEC Docket 1296.

1471nvestment Company Act Release No. 14756 (October 15, 1985),34 SEC

Docket 490.

148Holding Company Act Release No. 24044 (March 6, 1986), 35 SEC Docket

262.

149Holding Company Act Release No. 23917 (November 22, 1985), 34 SEC

Docket 1061.

150Holding Company Act Release No. 24073 (April 29, 1986), 35 SEC Docket

1002.

151Holding Company Act Release No. 23934 (December 4, 1985),34 SEC

Docket 1173; Holding Company Act Release No. 23935 (December 23, 1985),

34 SEC Docket 1403; Holding Company Act Release No. 23955 (December 19,

1985), 34 SEC Docket 1323; Holding Company Act Release No. 23959

(December 23, 1985),34 SEC Docket 1401; Holding Company Act Release No.

23967 (December 30, 1985),34 SEC Docket 1443; Holding Company Act

Release No. 23968 (December 30, 1985), 34 SEC Docket 1527; Holding

Company Act Release No. 23969 (December 30, 1985),34 SEC Docket 1534;

Holding Company Act Release No. 24072 (April 28, 1986), 35 SEC Docket

998.

152Holding Company Act Release 23971 (December 30, 1985),34 SEC

Docket 1542.

153Holding Company Act Release 24067 (April 22, 1986), 35 SEC Docket

1540.

154Holding Company Act Release 24157 (July 31, 1986) 36 SEC Docket 324.

155SECv. Drysdale Securities Cotp., 785 F.2d 38 (2d Cir. 1986), cert. denied

sub nom. Essner v. SEC, ..• U.S. r:» 106 S. Ct. 2894 (1986).

156SEC v. The American Board of Trade, 798 F2d 45 (2d Cir. 1986).

157S£C v. The American Board of Trade, 751 F.2d 529 (2d Cir. 1984).

158SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986).

159SEC v. Belmont Reid & Company, 794 F2d 1388 (9th Cir. 1986).

160Petitions to review Commission orders arising from proceedings instituted

pursuant to Commission Rule 2(e) are discussed separately under the heading

"Commission Action Under Rule 2(e)."

161LoweU H. Listrom & Co. v. SEC, No. 86.1130 (8th Cir.).

162Exchange Service v. SEC, 797 F2d 188 (4th Cir. August 7, 1986).

163Earl v. SEC, 798 F2d 472 (9th 1986).

102
164Randall v. Loftsgaarden, .-. U.S. ---, 106 S. Ct. 3143 (1986).

165Salcer v. Envicon Equities Corp., 744 F.2d 935 (2d Cir. 1984), vacated, .-.

U.S. '--, 106 S. Ct. 3324 (1986).

166Freschi v. Grand Coal Venture, 767 F.2d 1041 (2d Cir. 1985), vacated, -.•

U.S. -'-, 106 S. Ct. 3325 (1986).

167Feldman v. Pioneer Petroleum Corp., No. 85-1432 (10th Cir.).

168point Landing v. Omni Capital International, No. 84-3445 (5th Cir. July 25,

1986).

169Long Island Lighting Co. v. Barbash, 779 F.2d 793 (2d Cir. 1985).

17°Beaumont v. American Can Company, No. 85.9063 (2d Cir. July 24, 1986).

l7lRembold v. Pacific First Federal Savings Bank, 798 F2d 1307 (9th Clr.),

172Craft v. Florida Federal SaVings & Loan Association, 786 F.2d 1546 (11th

Cir. 1986). The Eleventh Circuit's decision in that case, however, did not

address that issue.

173Brawer v. Options Clearing Corp., No. 86-7416 (2d Cir.).

174Merrill Lynch, Pierce, Fenner & Smith v. Bobker, 636 F.Supp. 444 (S.D.N. Y.

1986).

175Manutacturers Hanover Trust Co. v. Drysdale Securities Corp., 801 F2d 13

(2d Cir.).

176SIPC v. Vigman, No. 85-5786 (9th Cir.).

177Levinson v. Basic, lnc., 786 F.2d 741 (6th Cir. 1986).

178United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986).

179Anheuser.Busch v. Thayer, CA3-85.0794.R (N.D. Tex.).

18oRadol v. Thomas, 772 F.2d 244 (6th Cir. 1985), cert. denied, .•. U.S. '--,

106 S. Ct. 3272 (1986).

181Starkman v. Marathon OiLCo., 772 F.2d 231 (6th Cir. 1985), cert. denied,

._-U.S. --', 106 S. Ct. 1195 (1986).

182Moran v. Household International, 500 A.2d 1346 (S. Ct. Del. 1985).

163Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985).

1

64Davy v. SEC, 792 F.2d 1418(9th Cir. 1986).

165Touche Ross v. SEC, 609 F.2d 570 (2d Cir. 1979).

1861nthe Matter of Michael S. Hope, c.P.A., Accounting and Auditing

Enforcement ReI. No. 109A, August 6, 1986. The proceeding is continuing

against other respondents.

187/n the Matter of John E. Harrington and Gregory B. Amott, Accounting and

Auditing Enforcement ReI. No. 81, December 5, 1985.

188/n the Matter of Gary L. Jackson, Accounting and Auditing Enforcement

Release No. 85 (January 21, 1986), 35 SEC Docket 1947.

1891nthe Matter of Richard Hirschfeld, Admin. Proc. File No. 3-6544, ReI. No.

34.22796, SEC Docket 1817.

1905EC v. Champion Sports Management, 599 F. Supp. 527 (S.D.N.Y. 1984),

affd 84-6358 (2d Cir. 1985).

191Mermelstein v. SEC, No. 85-3164 (D.D.C., March 7, 1985).

1925afeCard Services v. SEC, No. 84.3073 (D.D.C., April 21, 1986).

1931nCumberland v. SEC, No. CA85.03888 (D.R.I. Feb. 19, 1986), the court

affirmed the Commission's claim of withholding based on ongoing enforcement

activity. In the fourth suit, the FOIA plaintiff dismissed its complaint upon the

Commission's filing of a motion to dismiss.

194American Bankers Association v. SEC, No. 85.2482 (D.D.C. 1985), appeal

pending, No. 85-6055 (D.C. Cir.).

1955precher v. von Stein, 772 F.2d 16(2d Cir. 1985).

196Prevatte v. SEC, 791 F2d 934 (6th Cir. 1986).

103
1975ECv. WACO Financial, 751 F.2d 831 (6th Cir. 1985), cert. denied, ...U.S....

106 S.Ct. 65 (1985).

19BAwkard v. Shad, SEC No. 85-5023 (D.C. Cir. April II, 1986); Rocheleau

v. MSPB, No. 86-713 (Fed. Cir. July 1986); Lubbers v. SEC, Doc. No. SF 315

H85 10677 (MSPB August 13, 1985), pending appeal, No. 86-1188, affirmed

(Fed. Cir. December 11, 1986).

1991nre Beker Industries Corp., Nos. 85 Bkcy. 11705-10 (Bankr.

S.D.N.Y.Xgranted); In re W. J. Sloane s Co., Nos. 85 Bkcy. 11452-11467

(Bankr. S.D.N.Y.Xdenied); In re Amiesco Industries, Nos. 185.51931-252 etc.

(Bankr. E.D.N.Y.Xgranted); In re Texscan Corp., No. 85.3618 PHX (GBN) (Bankr.

D. Az.Xgranted); In re .Johns-Manville Corp., et al. Nos. 82B 11656 through

11676 (Bankr. S.D.N.Y.) (denied). In In re Wheeling.Pittsburgh Steel Corp., No.

85-793 (Bankr. W.D. Pal, the Commission's motion, filed in fiscal year 1985, is

still pending. In re The Charter Co., Nos. 84.289-BK.J.GP through 84-332-BK.J.

GA (M.D. Fla.), a matter reported in the last annual report, is still pending. In

this appeal, the Commission had urged that indenture trustees are eligible to

sit as voting members of an official creditors' committee. See 1985 Annual

Report at 54.

2ooNo.85-00512.519-BKC-TCB (Bankr. S.D. Fla.)

201/n re Evans Products Company, et el., No. 85.3525.CIV-HOEVELER (S.D.

Fla., June 30, 1986).

202No.84.BX.1609 (Bankr. D. Md.).

203/n re Johns-t-tenoule Corp., 52 B.R. 879 (Bankr. S.D.N.Y. 1985), affd, 60

B.R. 842 (S.D.N.Y. 1986), appeal pending, No. 86.5031 (2d Cir.).

204/n re Standard Metals, No. 84 B00945, (Bankr. D. Colo.), appeal pending,

No. 85-2783 (10th Cir.).

205/n re Standard Metals, No. 84 B00945, (Bankr. D. Colo.), appeal pending,

No. 85-2783 (10th Cir.); In re American Reserve Corporation, 80 B 4786 (Bankr.

N.D. Ill), appeal pending, No. 86 C 0219 (N.D. Ill).

206/n re Amarex, No. Bk.82-02335(A) (Bankr. W.D. Okla.), appeal pending,

No. 86-1250 (W.D. Okla.)

207No.85.111661 (Bankr. W.D.N.Y.)

2081nre Continental Airlines Corporation, No. 83-04019-H2-5 (Bankr. S.D.Tex.);

In re Donald Walker, No. 485-40501 et seq. (Bankr. N.D. Tex.).

209No.83.04019-H2-5 (Bankr. S.D. Tex.)

210No.85.00073-B (Bankr. D Wy.)

211No.84.B.009456 (Bankr. D. Colo.)

212No.85 B 30642 (Bankr. N.D. Ind.)

213No.85.03889TT (Bankr. D. N.J.)

104
/

Appendix

105
THE SECURITIES INDUSTRY

Revenues, Expenses, and

Selected Balence Sheet Items

Broker-dealers that are self-regulated

through their membership in a

registered securities exchange or the

National Association of Securities Dealers produced revenues of $50.2 billion

in 1985, 27 percent above the 1984 level. I Almost 61 percent of this increase

in revenues stemmed from the growth

of revenues from the principal securities

activities (brokerage, principal transactions and underwriting). The "all other

revenues," which include interest income from securities purchased under

agreements to resell and fees from handling private placements, mergers and

acquisitions, accounted for 33 percent

of revenues in 1985.

IDue to changes in FOCUS reporting

requirements, consolidated information

for 1981 is not available. In order to provide consistent information, new financial data was developed for prior years

APPENDIX

Securities commission income increased $1.8 billion or 19 percent, while

mutual fund sales rose 88 percent. Trading gains on firms' securities accounts

increased $2.9 billion, or 30 percent,

and represented 25 percent of total

revenues in 1985. Profits from underwriting increased $1.7 billion, and rose

as a percent of total revenues to ten percent in 1985.

Pre-tax income increased 133 percent

from the preceding year to $6.6 billion.

as expenses grew by $6.8 billion (18 percent) to $43.6 billion in 1985.

Assets rose by $142.0 billion to

$456.2 billion and liabilities grew

$136.2 billion to $431.7 billion. Ownership equity increased $5.9 billion during 1985 to $24.5 billion at year's end.

and Table 1 now presents unconsolidated data for all years. This data will not

be comparable to the Table 1 published

in the SEC Annual Report for 1981 and

prior years.

106
Table 1

UNCONSOLIDATED FINANCIAL INFORMATION FOR BROKER.DEALERS

1981.1985

(Millions ot Dollars)

Revenues

1 securities Commissions •..

2 Gain (Loss) In Trading

3. Galn (Loss) In Investments .

4 Profit (Loss) tram Underwriting

and seiling Groups .

5. Revenue from Sale at Investment

Company securities ..•....

6 All Other Revenues ....•...

7. Total Revenues .....

Expenses

8. All Employee Compensation and

Benefits (Except Registered

Representatives' Compensation)

9 comnuesrona and Clearance

. Pald to Other Brokers

10 Interest Expense.

11. Regulatory Fees and Expenses

12 Compensation to Partners

and Voting Stockholder Officers

13. All Other Expenses (Including

Registered Representatives'

Compensation) .

14 Total Expenses . .

15. Pre-Tax Income .

Assets, LiabIlities and capital

16. Total Assets . . ..•..

17 Liabilities

a Total Liabilities (Exlcudlng

Subordinated Debt)

b Subordinated Debt •.•.•.•..

C. Total Liabilities (17a + 17b) .

18 Ownership Equity .•

19. Total Liabilities and Ownership Equity ...•

Number of Firms

1981 1982 1983 1984r 1985p

$ 6,589 $ 7,370 $ 10,493 $ 9,294 $ 11,091

5,401 7,666 8,690 9,644 12,583

635 867 1,176 1,126 2,010

1,860 2,666 4,097 3,253 4,991

342 629 1,494 1,453 2,735

9,545 9,579 11,191 14,903 16,808

$ 24,372 $ 28,601 $ 37,143 $ 39,673 $ 50,218

$ 3,951 $ 4,714 $ 6,«2 $ B,7n $ 8,182

1,104 1,299 1,818 1,912 2,370

6,506 6,452 6,914 10,701 11,603

121 149 202 227 346

1,056 1,179 1,555 1,509 1,788

8,845 10,935 14,979 15,695 19,292

$ 21,583 $ 24,728 $ 31,910 $ 38,821 43,581

$ 2,789 $ 4,073 $ 5,233 $ 2,852 $ 6,637

$155,063 $201,275 $252,270 $314,121 $456,155

142,865 186,028 232,551 290,661 425,016

1,869 2,306 3,083 4,805 6,634

1«,734 188,334 235,634 295,468 431,650

10,329 12,941 16,638 18,855 24,505

$155,063 $201,275 $252,270 $314,121 $456,155

5,714 8,165 7,429 8,298 8,763

Figures may not sum due to rounding.

p = preliminary

r=revlsed

Note. Includes only those broker-deaJers self-regUlated through their membership In the National Association at

Securities Dealers or a registered securities exchange.

Source' FOCUS Report

107
Table 2

UNCONSOLIDATED ANNUAL REVENUES AND EXPENSES FOR BROKER.DEALERS

DOING A PUBLIC BUSINESS'

1981.1985

(Millions of Dollars)

1981 1982 1983 1984r 1985p

Revenues

1 seeunnes ccrnrmsstcn .. $ 6,163 $ 7,129 $ 9,829 $ 8,824 $10,397

2 RealIzed and Unrealized Gains

or Losses In Trading and

Investment Accounts . 5,481 8,138 9,106 9,935 13,654

3. Commodities Revenues 699 731 951 799 1,147

4 Profits or Losses From Underwriting and Seiling Groups 1,797 2,673 3,990 3,207 4,920

5 Revenues From Sale of Investment

Company Secullt,es . 338 625 1,474 1,400 2,657

6 Margin Interest ........ 2,884 2,060 2,150 2,924 2,711

7 All Other Revenues 5,320 6,536 7,405 10,705 12,311

8 Total Revenues. $22,682 $27,892 $34,905 $37,794 $47,797

Expenses

9 Salaries and Other Employment

Costs for General Partners and

Voting Stockholder Officers $ 944 $ 1,095 $ 1,389 $ 1,382 $ 1,645

10 All Other Employee Oornpensatrcn

and Benefits (Except RegIstered

Representatives' Compensatlon):i: 3,749 4,592 6,166 6,527 7,819

11 Commissions and Clearance

Paid to Others. 972 1,231 1,615 1,777 2,166

12 Interest Expense ... 6,016 6,389 6,513 10,331 11,335

13 Regulatory Fees and Expenses 103 137 170 204 319

14. All Other Expenses' .•••.. 8,389 10,722 14,390 15,166 18,567

15 Total Expenses .. $20,173 $24,166 $30,243 $35,389 $41,851

Pre- Tax Incoma

16. Pre-Tax Income ........ .. $ 2,510 $3,726 $ 4,662 $ 2,405 $ 5,946

Number of Firms 2,836 3,256 3,648 4,722 5,352

Figures may not sum due to rounding

p= preliminary

r e revlsed

'Includes Broker-Dealers with four quarters of data only.

'Reglstered representatives' compensation Is Included In "All Other Expenses" because It Is not reported separately on

Part IIA of the FOCUS Report.

Source: FOCUS Report

108
Table 3

UNCONSOLIDATED BALANCE SHEET FOR BROKER.DEALERS

DOING A PUBLIC BUSINESS

YEAR.END, 1981.1985

(Millions of Dollars)

1981 1982 1983 1984r 1985p

Assets

1 Cash $ 2,671 $ 4,636 $ 3,755 $ 4,169 $ 6,362

2 Receivables from Other Broker-Dealers'

a Securities Failed to Deliver 6,257 5,899 5,860 7,161 19,005

b Securities Borrowed 9,228 15,936 17,992 20,761 36,242

c Other, 1,906 2,700 3,544 3,095 11,916

3 Receivables from Customers 21,076 24,762 31,947 30,198 47,270

4 Long Positions In Securities and

Commodities 41,714 71,408 80,498 110,181 156,563

5 Secunties Owned - not Readily

Marketable 104 155 208 495 286

6 Securities Borrowed under Subordinated

Agreements and Partners' IndiVidual

and Capital Securities Accounts, 90 90 98 66 51

7 Securities Purchased under Agreements

to Resell 45,222 53,733 78,362 107,434 143,066

8 Secured Capital Demand Notes, 3O9 306 303 399 409

9 Exchange Memberships 216 286 306 325 365

10 Other Assets 6,771 9,716 12,121 14,709 21,591

11 Total Assets $132,587 $189,985 $234,994 $298,993 $443,126

Liabilities and EqUity Capital

12 Bank Loans Payable

a Secured by Customer Coilateral $ 3,633 $ 2,843 $ 4,416 $ 4,951 5,550

b Secured by Firm Coilateral , , 7,583 8,749 15,606 22,835 38,432

13 Securities Sold under Repurchase

Agreements 55,679 77,330 93,270 135,075 167,604

14 Payable to Other Broker-Dealers

and Clearing Organizations

a Securities Failed to Receive 3,298 6,766 4,769 7,058 18,820

b secunnes Loaned .. 8,273 14,029 15,432 15,844 29,212

c Other 1,418 2,529 4,267 3,827 8,249

15 Payable to Customers 12,705 16,400 18,697 19,694 31,241

16 Short POSitions In Securities

and Commodities 18,698 30,960 40,521 45,773 81,779

17 Other lIablilties 11,001 16,211 20,181 21,818 33,211

18 Total Liabilities (ExclUding

Subordinated Debt) 122,288 175,817 217,159 276,875 414,098

19 Subordinated Debt 1,698 2,158 2,711 4,662 6,350

20 Total Liabilities $177,975 $216,904 $219,870 $281,537 $420,«8

21 EqUity Capital , $ 12,010 $ 14,788 $ 15,124 $ 17,458 22,678

22 Total Liabilities and EqUity Capital $132,587 $189,985 $234,994 $298,993 443,126

Number of Firms 2,836 3,256 3,648 4,722 5,352

Figures may not sum due to rounding

p = preliminary

r;revrsed

Source' FOCUS Report

109
Securities Industry Dollar In

1985 For Carrying and

Clearing Firms

Data for carrying and clearing firms

only are presented here to allow for

more detail, as reporting requirements

for introducing and carrying and clearing firms differ and data aggregation of

these two types of firms necessarily

results in loss of detail. Carrying and

clearing firms are those firms which

clear securities transactions or maintain

possession or control of customers' cash

or securities. This group produced 87

percent of the securities industry's total

revenues.

Securities commissions and trading

gains accounted for 20 cents and 26

cents, respectively, of each revenue dollar in 1985. Together these two items

accounted for 46 cents of each revenue

dollar generated in 1985 the same as in

1984. In terms of dollars, they accounted for $20.2 billion of the $43.7 biIlion

of total revenues earned by carrying and

clearing firms. Margin interest income

accounted for six cents of each revenue

dollar in 1985 compared with nine cents

in 1984.

Total expenses consumed 88 cents of

each revenue dollar earned in 1985, six

cents less than the 1984 level of 94

cents. This improved the industry's pretax profit margin from six cents per

revenue dollar in 1984 to 12 cents in

1985.

Interest expense, again the single largest expense item, declined in 1985 by

ten percent to absorb 26 cents of each

revenue dollar, which compares to 30

cents in 1984. In dollars, interest expense increased to $11.4 billion, $1.0

biIlion more then the year before.

Employee-related expenses (registered

representatives' compensation and clerical and administrative employees' expenses) consumed 34 cents of the

revenue dollar in 1985, with no change

from 1984. Registered representatives'

compensation was 32 percent more

than the 1984 level and absorbed 19

cents of each revenue dollar in 1985

compared to 18 cents in the previous

year. In dollar terms, employee-related

expenses accounted for $14.9 billion of

the $38.4 biIlion of total expenses.

Other expense categories consumed

about the same proportion of the industry revenue dollar in 1985 as they did

in 1984.

Total assets of broker-dealers carrying and clearing customer accounts rose

by $133.5 biIlion to $437.4 biIlion in

1985. About 56 percent of this increase

in assets can be attributed to two items:

resale agreements rose $33.3 billion,

and long positions increased $42.0

biIlion.

Total liabilities, including subordinated debt, increased $128.3 biIlion or 45

percent to $416.5 biIlion with increases

in repurchase agreements of $26.4 billion and short positions in securities of

$30.3 biIlion. Owners' equity rose 33

percent from $15.8 billion in 1984 to

$21.0 biIlion, and total capital increased

33 percent to $27.0 billion from $20.2

billion in 1984.

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111
Table 5

UNCONSOLIDATED REVENUES AND EXPENSES FOR

CARRYING/CLEARING BROKER.DEALERS

(Millions of Dollars)

1984r 1985p .1984.1985

Percent of Percent of Percent

Dollars Total Revenues Dollars Total Revenues Change

Revenues

1. secunnes Commissions. $ 7,322 21.2% $ 8,758 201% 19.6 %

2. Gain (Loss) In Trading ...•• 8,630 250 11,425 262 324

3 Gain (Loss) In Investments 1,010 29 1,729 40 71.2

4 Profit (Loss) from Underwriting

and Seiling Groups ...••.. 3,021 88 4,671 107 546

5. Revenue from Sale of Investment

Company Securities 1,016 29 2,016 4.6 984

6 Margin Interest Income 2,973 86 2,796 64 ( 60)

7 Commodities Revenue • 811 24 1,141 26 407

8 Other Revenue Related to

Securities Business •. . 7,704 223 9,186 210 192

9 Revenue from All Other Sources 2,035 59 1,967 45 (33)

10 Total Revenues $34,522 100.0% $43,689 100.0% 26.6%

Expenses

11 Registered Representatives'

Compensation .. $ 6,179 179% $ 8,131 186% 316 %

12. Clencal and Administrative

Employees' Expenses •. 5,616 163 6,745 154 201

13 Commissions and Clearance Palato Others ....... 1,257 3.6 1,497 3.4 191

14 Interest Expense .. ....• .. 10,397 301 11,424 262 99

15 Communication and Data Processing. 2,363 6.9 2,623 60 101

16 Occupancy and Equipment 1,651 48 2,016 4.6 22.1

17. Compensation to Partners and Voting

Stockholder Officers . 1,090 3.2 1,296 30 18.9

18 All Other Expenses •. 3,863 112 4,649 106 204

19 Total Expenses. $32,436 940% $38,381 878% 183%

Pr&- Tax Income

20 Pre-Tax Income. $ 2,086 60% $ 5,308 122% 1545%

Number of Firms 1,309 1,249 ( 46)%

Figures may not sum due to rounding

p= preliminary

r e revlsed

Note Includes Information ior firms that carry customer accounts or clear sec unties transactions.

Source: FOCUS Report

112
Table 6

UNCONSOLIDATED BALANCE SHEET FOR

CARRYING/CLEARING BROKER.DEALERS

(Millions of Dollars)

Percent

Year End Percent of Year End Percental Change

1984r Total Assets 19B5p Total Assets 1984-1985

Assets

1 Cash $ 3,913 1.3% $ 6,212 14% 588%

2 ReceIvable From Other

Broker-Dealers 33,742 11.1 69,177 158 1050

a secunnes Borrowed . 21,107 69 38,916 89 844

b Other Receivables 12,635 4.2 30,261 6.9 1395

3 Receivables From Customers 30,548 10.1 47,551 10.9 557

4 Resale Agreements . .... 109,965 362 143,289 32.8 303

5 Long Positions onSecurotles

and Spot Commodities 113,322 37.2 155,330 35.5 37.1

6. Other Assets 12,434 41 15,881 3.6 277

7. Total Assets $303,924 1000% $437,440 1000% 43.9 %

Liabilities and EqUity capItal

8 Bank Loans' $ 28,038 92% $ 44,296 101% 580%

a Secured by Customer Sec 4,877 16 5,559 1.3 140

b Secured by Proproetary Sec 23,161 76 36,737 88 673

9 Payable to Other Broker-Dealers 28,628 9.4 62,324 143 1177

a secunnes Loaned .. 16,058 53 31,086 7.1 936

bOther Payables . 12,570 41 31,238 72 1485

10. Payable to Customers 20,017 66 31,654 7.2 581

a Free Credit Balances 8,453 28 10,673 24 263

b Other Credit Balances 11,564 3.8 20,981 4.8 814

11 Repurchase Agreements 141,941 46.7 168,364 385 186

12 Short Positions onsecunnes 46,158 15.2 76,488 175 657

13 Subordonated Debt 4,480 1.5 6,056 1.4 35.2

14 Other LIabilitIes 18,900 62 27,330 62 44.6

15 Total Liabilities 288,162 948 416,490 95.2 445

16 Owners' Equity 15,762 5.2 20,950 48 329

17 Total LIabilities

and Owners' EQUIty $303,924 1000% $437,440 1000% 43.9%

Total Capital $ 20,242 $ 27,006 33.4%

Number of Firms 1,309 1,249 (5.0)%

FIgures may not sum due to rounding

p " preliminary

r"revised

Source. FOCUS Report

Broker-Dealers, Branch Offices,

Employees

The number of broker-dealers filing

FOCUS Reports rose six percent from

8,298 in 1984 to 8,763 in 1985. During

the same period, the number of branch

113

offices increased eight percent from

14,296 to 15,375. The number of fulltime personnel employed in the securities industry rose from 330,000 to

357,133 in 1985, an eight percent in.

crease.
iabte (

Broker-Dealers and Branch Offices

,,-

;;. ""

<0

0)

'"

..,.

,.:::.

....

00 - - -

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....

....

:1; <:>..

~"" .. ""

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0)

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0) .'

0) <0 <0

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..,. ,::;. s: '"

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00 .... ;;: ~~~t::.: z: r-,

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00

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." '.:: ". :::

<0 i~ !~~~~ .~t ..'

..,. .::',

~~~~~~I

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-, i

- - - - - - -

.:

- -

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::.: :~~:::: :::::

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111!1

':~~~~ I

.:: ~~:~~~ :~~~~ ~I i

:::::: ::::: :: {.:

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~~~~~~

IIIII

:~~~~~

~~~~~

::::::

IIIIII 'I!~I~!

:

~t ~t ~~~;~~

::::::

:~:::: o

4,000

8,000

12,000

Thousands

16,000

1977 1978 1979 1980 1981 1982 1983 1984 1985

~\~Iili\ffili\JBroker-Dealers r Branch Offices

r = Revised P = Preliminary

SOURCE: FOCUS REPORT

1i4
Table 8

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934

EFFECTIVE REGISTRANTS AS OF SEPTEMBER 30, 1986

(CLASSIFIED BY TYPE OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE)

Total

Number of Registrants

Sole

Proprte- Partner.

torshlps ships

Corpora.

tlons'

Alabama

Alaska ..

Arizona.

Arkansas.

California

Colorado.

Connecticut

Delaware ..

Drstnct of Columbia .

Flortda.

Georgia

HawaII

Idaho

illinoIs.

Indiana

Iowa

Kansas

Kentucky

LOUISiana

Maine ....

Maryland

Massachusetts ...

Michigan

Minnesota. . .•....

MISSissippi •. .. . •.

Missouri .•....

Montana

Nebraska

Nevada

New Hampshire.

New Jersey . . . . . . . . . • . . ... •• . •. .. ..

New Mexico ..................•.

New York ..•... • .....•.

North Carolina . • . . •. .... .. . . . . • . .• .•

North Dakota ...•.. " •. . . . . . . . ..• .

Ohio

Oklahoma.

Oregon . . . . . . . . . ....•..

Pennsylvania . . . ....

Rhode Island .•... . . . • . . • . . .. .........•. ..

South Carolina. . . • . . '" .

South Dakota •.

Tennessee •..

Texas .

Utah

Vermont

Virginia

Washington

West Virginia.

WIsconsin

Wyoming.

Total •....••.

Foreign' • ..•..•..•....

GRAND TOTAL ..

52

4

82

67

1,311

236

166

21

49

464

134

19

10

2,974

81

49

41

31

83

16

102

256

123

133

23

119

6

28

18

8

395

22

2,569

91

5

163

55

55

459

23

48

6

136

520

56

7

91

130

10

96

2

11,665

23

11,688

2

o

1

3

283

6

20

1

5

18

1

o

o

1,942

7

1

2

3

5

1

1

28

10

5

1

6

1

1

3

1

76

o

784

8

o

6

2

1

23

4

2

o

6

34

2

1

4

7

o

6

o

3,324

2

3,326

o

o

2

1

119

4

11

1

2

15

4

1

o

323

2

1

2

o

4

2

1

10

3

1

o

3

o

1

1

o

44

o

368

1

o

7

o

1

74

1

2

o

3

7

1

1

3

1

o

2

o

1,030

2

1,032

50

4

79

63

909

226

135

19

42

431

129

18

10

709

72

47

37

28

74

13

100

218

110

128

22

110

5

26

14

7

275

22

1,437

82

5

150

53

53

362

18

44

8

127

479

53

5

84

122

10

88

2

7,311

19

7,330

'Includes all forms of organization other than sole proprietorships and partnerships.

'Registrants whose principal offices are located In foreign countries or other Jurisdictions not listed.

115
Table 9

APPLICATIONS AND REGISTRATIONS OF BROKERS, DEALERS,

AND INVESTMENT ADVISERS

FIscal Year 1986

BROKER.DEALER APPLICATIONS

Applications pending at close of preceding year .

Applications received dunng "scal 1986

Total applications for drsposiuon

ursoosmcn of ApplIcatIons

Accepted for filing ...

Returned

Withdrawn

Denied

Total applications disposed of

Applications pending as of September 30, 1986 ..

BROKER.DEALER REGISTRATIONS

Effective registrations at close of precedmg year

Registrations effective during frscal 1986

Total registrations

Registrations terminated during fiscal 1986

Withdrawn

Revoked.

Cancelled .....

Total registrations terminated .....

Total registrations at end of fIscal 1986

INVESTMENT ADVISER APPLICATIONS

Applications pending at close of precedmg year

Applications received during fiscal 1986 •

Total applications for drsposltlon

DIsposition of applications

Accepted for filing.

Returned ..

Withdrawn

Denoed .••...

Total applications disposed of ••.••.

Applications pending as of September 30, 1986

INVESTMENT ADVISER REGISTRATIONS

Effective registrations at close of preceding year

Registrations effective during fiscal 1986

Total registrations. . .

Registrations terminated during fiscal 1986

Withdrawn .

Revoked .•..........

Cancelled ......•.•......

Total registrations terminated .

Total registrations at end of fiscal 1986

200

2,420

2,620

1,769

662

2

0

2,433

187

11,404

1,795

13,199

1,055

4

452

1,511

11,688

204

3,531

3,735

2,386

1,094

4

1

3,485

250

10,908

2,440

13,348

1,615

4

22

1,641

11,707

116
Table 10

APPLICATIONS AND REGISTRATIONS OF MUNICIPAL SECURITIES

DEALERS AND TRANSFER AGENTS

Fiscal Year 1986

MUNICIPAL SECURITIES DEALERS APPLICATIONS

Appncatrons pendrng at close of precedrng year

Applications received dUring fiscal 1986

Total appucatrons for drsposrtron

Disposition of Applications

Accepted for fllrng

Returned

Withdrawn

Denied

Total applications disposed of

Appncanons pending as of September 30, 1986 .....

MUNICIPAL SECURITIES DEALERS REGISTRATIONS

Effective registratIOns at close of precedrng year

RegistratIOns effective dUring fiscal 1986

Total registrations

Reglstrallons termrnated dunnq fiscal 1986

Withdrawn

Revoked

Cancelled

Total registrations termrnated

Total registrations at end of fiscal 1986

TRANSFER AGENTS APPLICATIONS

Applications pendrng at close of precedrng year

Applications received dUring fiscal year 1986

Total applications for drsposuron

Dreposinon of applications

Accepted for fllrng

Returned

Withdrawn

Denied

Total applications disposed of .

Applications pendrng as of September 30, 1986

TRANSFER AGENTS REGISTRATIONS

Effecllve registrations at close of precedrng year

Registrations effective dUring fiscal 1985

Total registrations

Registrations terminated dUring fiscal 1986

Withdrawn

Revoked.

Cancelled

Total reglstrallons termrnated

Total registrations at end of fiscal 1986

117

0

24

24

17

4

0

0

21

3

411

22

433

9

0

0

9

424

0

100

100

87

8

0

0

95

5

1,142

88

1,230

59

1

58

118

1,112
Self-Regulatory Organizations:

Revenues, Expenses, Pre-Tax

Income and Balance Sheet

Structure.

In 1985 the total revenues of selfregulatory organizations ("SROs") rose

approximately $85.3 million to $645.1

million, an increase of 15% over 1984

(the 1984 increase was 8% over 1983).

The New York Stock Exchange

("NYSE"), National Association of Securities Dealers ("NASO") and American

Stock Exchange ("Amex") accounted

for 68% of the SROs' total revenues.

Most SRO revenues came from listing,

trading, and market data fees. The

NYSE reported total revenues of $257.7

million, of which 56 % consisted of listing and trading fees. The Amex report.

ed total revenues of $84.5 million, of

which 56% consisted of listing and trading fees. The Amex reported total

revenues of $84.5 million, of which 72 %

were derived from transaction and com.

munications charges. The NASO reported total revenues of $97.3 million. The

Chicago Board Options Exchange

("CBOE") had the largest percentage increase in revenues over last year, 31 %.

The total expenses of all SROs were

$564.1 million in 1985, an increase of

$64 million (13%) over 1984. The Mid.

west Stock Exchange ("MSE") had the

largest percentage increase in total expenses, 37%. The Cincinnati Stock Exchange ("CSE") reduced its total

expenses by 20 %.

Aggregate pre-tax income of all SROs

rose to $73.8 million in 1985 from $56.9

million in 1984, an increase of 30%.

Pre-tax profit margins widened because

aggregated total revenues increased

15% and aggregate total expenses increased only 13%. These wider margins

can be partly attributed to rising trading volume and a corresponding increase in transaction fees. The NYSE

had a pre-tax income of $35.7 million,

a 120% increase from 1984. The

CBOE's pre-tax income increased of

$7.8 million, from $1.4 million in 1984

to $9.2 million in 1985, an increase of

4.57% (but this increase largely reflects

CBOE's unusually low pre-tax income in

1984). The Arnex's net income rose to

$9.6 million in 1985 from $9.3 million

in 1984, a 4% increase. The Ph lx's net

income rose to $2.1 million in 1985

from $2.0 million in 1985, a 4 % increase. The Boston Stock Exchange's

("SSE's'') pre-tax income rose to $687

thousand in 1985 from $588 thousand

in 1984, a 17% increase. The Pacific

Stock Exchange ("PSE") had a 1985 pretax income of $1.1 million against a loss

of $759 thousand in 1984. Finally, the

CSE had a pre-tax loss of $37 thousand

against a 1984 pre-tax loss of $775 thousand, reducing its pre-tax loss, year to

year, by 95%.

The total assets of all SROs were

$1,188 million in 1985, an increase of

44% from 1984. The NYSE's total assets increased by $54.4 million or 30%,

from 1984 to 1985. The total assets of

the MSE and the Phlx also increased significant but these increases were due

largely to increased asset levels at certain subsidiaries.

The aggregate net worth of the SROs

rose to $400.9 million in 1985 from

$352.3 million in 1984, an increase of

14 %. The largest percentage increase

was at the BSE (39%), followed by the

Phlx (21 %), the Spokane Stock Exchange (19%), and the NASO (18%).

The NYSE's net worth increased by 13%

from $144.6 million to $162.8 million.

The only decrease occurred at CSE,

where net worth decreased by $36 thousand, from $111 thousand in 1984 to

$75 thousand in 1985, a 32% reduction.

Aggregate clearing agency service

revenue increased by 20%, or $38 million in 1985 due to comparable increases in securities trading volumes.

Total depository service revenue increased $23 million, due primarily to a

$15 million gain by the Depository Trust

Company CDTC") and a $5 million gain

by the Midwest Securities Trust Company ("MSTC"). Service revenue of clearing corporations increased by $15

'1 million, due largely to increases of more

than $6 million at both the Options

118
Clearing Corporation ("OCC") and the

National Securities Clearing Corporation ("NSCC").

The depositories continued to expand

the base for service revenues by increasing the number of shares on deposit and

the face value of debt securities in custody. At the end of 1985 the total value

of securities in the depository system

reached $2.3 trillion. DTC alone held

over $1.2 trillion and, in addition, had

more than $780 billion in FAST balance

certificates at transfer agents. This

movement of certificates into deposito.

ries was made possible by the further ex.

pansion of the number of depository

eligible issues. The MSTC had 377,000

eligible securities issues at year end,

while DTC had over 262,000. The major

portion of this composite growth was in

municipal bonds, which increased 84%

to $319 billion of face value, and

represents half the value of all municipal

bonds outstanding in the United States.

Total depository pre-tax income was

ten times the previous year's result.

DTC's excess of revenues over expenses

of $5 million represents 80% of the aggregate pre-tax income for all depositories. The DTC determined that the

amount of shareholders' equity should

be increased to mitigate business uncertainties. DTC, like all clearing agencies,

adjusts refunds of fees and fee structures-to provide funds to meet expenses

and provide the amount of earnings

which it wishes to retain.

The clearing corporations recorded

an aggregate increase in pre-tax income

of more than $3 million. NSCC posted

a pre-tax gain of almost $3.3 million, up

$2.5 million over 1984. NSCC has stated that $1 million of net income will be

used for the purpose of providing

capitalization for the new International

Securities Clearing Corporation

("ISCC"), a wholly owned subsidiary.

ISCC was established in November 1985

to provide services for U.S. institutions

119

through linkages with clearing agencies

in other countries. The OCC also record.

ed a significant increase in pre. tax income, $1.1 million, as compared to $80

thousand in 1984. The OCC also realized $333 thousand from the sale of

stock to NASD, which became a participant. As a result, OCC shareholders

equity increased more than $1.3

million.

The Pacific Clearing Corporation

("PCC") incurred a pre-tax loss of over

$1.2 million after reporting a profit of

$678 thousand in 1984. The Pacific

Securities Depository Trust Company

("PSDTC") reported a pre-tax gain of

$189 thousand in 1985 versus a pre-tax

operating loss of $46 thousand the

previous year. In 1985, PSE, the parent

company, transferred funds from equities trading to PCC and PSDTC in the

amounts of $665 thousand and $272

thousand, respectively; these transfers

are included in revenues. Further PSE

support to its subsidiaries was provided by forgiving allocated administrative

and financial services given by the parent to PCC ClndPSDTC in the amounts

of $756 thousand and $931 thousand,

respectively. The combined net worth of

PCC and PSDTC declined by about one

half to $433 thousand.

The aggregate of all clearing corporation and depository net worth rose by

$8 million to a new high of almost $33

million. In addition to net worth, participant clearing fund contributions provide protection to the clearing agencies

in the event of a participant default.

Should a participant default and his

losses exceed his deposit, the entire participants' fund may be charged on a pro

rata basis. No clearing agency has ever

assessed non-failing participants' contributions. During 1985 the equity clearing funds increased by one-third to $277

million, option clearing funds increased

$22 million and depository clearing

funds remained at $214 million.
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121
Table 13

MUNICIPAL SECURITIES RULEMAKING BOARD

STATEMENTS OF REVENUES AND EXPENSES AND

CHANGE IN FUND BALANCE

for the years ended September 30, 1985 and 1984

1985 1984

Revenues.

Assessment fees ••••.

Annual fees .

Initial fees . . .

Investment Income

Board manuals and other.

Expenses:

Salaries and employee benefits

Board and committee .

Operations.

Education and communication

Professional services

Depreciation and amorttzatron

Revenues over (under) expenses. .

Fund balance, beginning year

Fund balance, end of year ... ... ..

$ 830,534

220,125

29,800

113,950

30,716

556,151

377,914

178,690

228,057

61,603

23,292

(200,582)

1,412,449

$1,211,867

122
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 where such

exemption is consistent with the public

interest and the protection of investors.

For the year beginning October 1,

1985, 4 applications were pending. and

an additional 18 applications were filed

during the year. Of these 22 applications, 11 were granted and 1 was denied

and 1 withdrawn. Nine applications were

pending at the close of the year.

Exemptions For Foreign

Private Issuers

Rule 12g3-2 provides various exemptions from the registration provisions of

Section 12(g) of the Exchange Act for

the securities of foreign private issuers.

Perhaps the most important of these is

that contained in subparagraph (b)

which provides an exemption for certain

foreign issuers which submit. on a cur.

rent basis, the material specified in the

rule. Such material includes that information about which investors ought

reasonably to be informed and which

the issuer: (1) has made public pursuant

to the law of the country of domicile or

in which it is incorporated or organized;

123

(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. Periodically, 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 July 31. 1985

and contains a total of 559 foreign

issuers.

Rule 10b-6 Exemptions

Exchange Act Rule 10b.6 is an antimanipulative rule that prohibits trading

in securities by persons interested in a

distribution of such securities. During

the fiscal year, the Commission granted 32 exemptions pursuant to paragraph (h) of Rule 10b-6 under

circumstances indicating that the proposed transactions did not appear to

constitute manipulative or deceptive

devices or contrivances comprehended

with in the purposes of the rule.

FINANCIAL INSTITUTIONS

There were 2.583 companies

registered under the Investment Company Act of 1940 as of September 3D,

1985. New registrations totaled 299,

with 47 registrations terminated during

the fiscal year. This compares with 1984

fiscal year figures of 2,331 total registrations, 256 new registrations and 54

terminations.
Table 14

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY

ACT OF 1940

AS OF SEPTEMBER 30, 1986

Number of Registered Companies Approximate

Market Value

of Assets of

Active Inactlvea Total Active

Companlesb

(MIllions)

Management open-end ("Mutual Funds") 2,110 69 2,179 620,000

Management closed-end . 220 59 279 20,000

Unit Investment trust 577 28 605 100,000

Face-amount certltrcate companies. 5 4 9 2,000

Total 2,912 160 3,074 742,000

a Inactive refers to registered comparnes which as of September 30, 1986, were In the process of being nqurdated

or merged, or have flied an application pursuant to Section 8(f) of the Act for dereglstrallon, or which have other.

wIse gone out of existence and remain only untu such time as the cornmrssicn Issues an order under Secllon 8(f)

terminating their reglstrallon

b Assets of Investment companies were calculated using various published sources as well as staff esllmates

124
Table 15

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY

ACT OF 1940

(Since 1941)

Approximate

market value

of assets

Registered Registered RegIstration RegIstered of active

FIscal year ended at beginning dUring terminated at end of companies

September 30 of year year dUring year year (millions)

1941 0 450 14 436 $ 2,500

1942 436 17 46 407 2,400

1943 407 14 31 390 2,300

1944 390 18 27 371 2,200

1945 371 14 19 366 3,250

1946 366 13 18 361 3,750

1947 361 12 21 352 3,600

1948 352 18 11 359 3,825

1949 359 12 13 358 3,700

1950 358 26 18 366 4,700

1951 366 12 10 368 5,600

1952 368 13 14 367 6,800

1953 367 17 15 369 7,000

1954 369 20 5 384 8,700

1955 384 37 34 387 12,000

1956 367 46 34 399 14,000

1957. 399 49 16 432 15,000

1958 432 42 21 453 17,000

1959 453 70 11 512 20,000

1960 512 67 9 570 23,500

1961 570 118 25 663 29,000

1962 663 97 33 727 27,300

1963 727 46 48 727 36,000

1964 727 52 48 731 41,600

1965 731 50 54 727 44,600

1966 727 78 30 775 49,800

1967 755 108 41 842 58,197

1968 842 167 42 967 69,732

1969 967 222 22 1,167 72,465

1970 1,167 187 26 1,328 56,337

1971 1,328 121 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 62,287

1975 1,377 88 66 1,399 74,192

1976 1,399 63 86 1,376 80,564

1977" 1,403 91 57 1,437 76,904

1978 . 1,437 98 64 1,471 93,921

1979 1,471 83 47 1,507 108,572

1980 . 1,507 136 52 1,591 155,981

1981 1,591 172 80 1,683 193,362

1982. 1,683 305 45 1,944 281,844

1983 1,944 287 50 2,181 330,458

1984 2,181 256 54 2,331 250,321

1985 . 2,331 299 47 2,583 525,000

1986 2,583 422 44 3,074 742,000

" Began FIscal Year Ending September 30, 1977

125
Table 16

NEW INVESTMENT COMPANY REGISTRATIONS

Management open-end

Management closed-end

SBIC's

All others.

sub-totat ..

Umt Investment trust

Face amount certlftcates ,

Total RegIstered .

Table 17

INVESTMENT COMPANY REGISTRATIONS TERMINATED

Management open-end

Management closed-end

SBIC's •..

All others

Sub-total

Umt Investment trust

Face amount certificates

Total terminated

1986

332

o

48

48

42

o

422

1986

40

o

3

3

o

44

126
SECURITIES ON EXCHANGES

Market Value and Share Volume

The market value of stocks. options,

warrants and rights on registered exchanges totaled $1.3 trillion in 1985. Of

this total. $1.2 trillion, or 92 percent,

represented the market value of transactions in stocks, rights and warrants

and $108.3 billion or eight percent in

equity (including exercises) and nonequity options transactions. The value

of equity/option transactions on the New

York Stock Exchange was $1.0 trillion.

up 26 percent from the previous year.

The market value of such transactions

rose 20 percent to $38.3 billion on the

American Stock Exchange and increased 15 percent to $246.2 billion on

all other exchanges. The volume of trad127

ing in stocks on all registered exchanges

totaled 37.0 billion shares in 1985, a 21

percent increase over the previous year,

with 82 percent of the total accounted

for by trading on the New York Stock

Exchange.

Contract volume traded on options

exchanges was 241.7 million contracts

in 1985, 16% higher than in 1984. The

market value of such contracts

decreased slightly to $108.3 billion. The

volume of contracts (excluding exercises) executed on the Chicago Board

Options Exchange increased 21 percent

to 148.8 million; option trading on the

American Stock Exchange went up 21

percent; Philadelphia Stock Exchange

contract volume rose three percent; and

Pacific Stock Exchange contract

volume went up 12 percent.
Table 18A

MARKET VALUE OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES'

(Thousands of Dollars)

Calendar Year: 1980r

1981r

19B2r

19B3r

19B4r

1965

Total

Market Equity Options Non.Equlty

Value Stocks' Warrants Rights Traded Exercised' Options'"

All Registered Exchanges For Past Six Years

$ 542,524,247 $ 475,932,882 $ 560,895 $ 6,911 $45,873,145 $20,150,414 $ N.A.

567,089,795 490,688,158 327,295 1,686 41,423,216 34,649,440 N.A

693,850,983 602,869,878 423,236 1,152 53,659,796 37,046,803 50,098

1,082,241,196 957,139,047 1,162,124 2,997 59,598,740' 59,714,431 4,623,657

1,059,718,283 950,854,453 430,292 9,754 33,822,259 55,640,028 19,159,477

$1,307,945,003 $1,199,419,614 $ 744,715 $25,162 $29,543,951 $49,182,980 $29,028,581

Breakdown of 1965 Data by Registered Exchanges'

NA 2,750,639

N.A $ 2,967,329

o 0

o 0

o 0

N A. 860,664

N A 20,918

29,435 127 2,403,771

373,755 $ 4,225 $ 8,335,406 $

o 0 0

o 0 0

000

313,630 18,242 43,306

27,895 2,568 3,094,525

17,894,497

26,332,151 $

14,419,101

2,114,026

79,068,763

1,022,826,705

36,7,52,467

23,168,370

38,278,265 $

14,419,101

2,114,026

79,068,763

1,023,862,547

39,907,189

All Registered Exchanges

American Stock Exchange $

Boston Stock Exchange

Cincinnati Stock Exchange

Midwest Stock Exchange

New York Stock Exchange

Pacific Stock Exchange

Philadelphia Stock Ex.

change

Intermountain Stock Ex.

change 295 295 0 0 0 0 0

Spokane Stock Exchange 11,609 11,609 0 0 0 0 0

Chicago Board Options' $ 38,430,547 $ 0 $ 0 $ 0 $15,861,943 $ N.A $22,629,031

Note' For footnotes seeTable 18B This table has been changed to more meaningfUlly reflect current changes In the market

128
Table 188

VOLUME OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES'

(Data In Thousands)

4,924

7,431

8,302

13,630

11,919

8,875

Calendar Year 1980r

1981r

1982r

1963r

19B4r

1985

Equity Options

Stocks' Warrants Rights Traded exercIsed'

(Shares) (UOIls) (Units) (Contracts) (Contracts)

All Registered Exchanges For Past Six Years

15,488,367 61,529 37,090 96,936

15,910,050 46,553 12,563 109,404

22,414,379 56,051 21,505 137,263

30,146,355 157,942 11,737 134,286'

30,456,438 77,452 13,924 118,925

37,046,010 108,111 33,547 118,551

Breakdown of 1985 Data by Registered Exchanges'

Non.EqUlty

Options','

(Contracts)

NA

NA

41

14,399

77,512

114,190

12,458

o

o

o

4,259

95

6,066

o

o

91,312

2,428

o

o

o

2

932

947

o

o

4,566

36,103

o

o

o

162

12,701

12,062

o

o

57,523

4,821

o

o

o

27,786

890

50

o

o

o

31,189

o

o

o

65,598

10,157

1,167

o

o

o

2,114,652

471,896

55,549

2,274,140

30,221,840

1,351,521

544,270

660

11,482

o

All Registered Exchanges

'American Stock Exchange

'Boston Stock Exchange

'Cincinnati Stock Exchange

Midwest Stock Exchange

'New York Stock Exchange

Pacltrc Stock Exchange

'PhIladelphia Stock Exchange

Intermountain Stock Exchange

Spokane Stock Exchange

'Chicago Board Options'

FIgures may not sum due to rounding

r = revised

N.A = Not Available

'Data of those exchanges marked with an asterisk cover transacnons cleared dUring the calendar month; clearance

usually occurs WIthin five days of the execution of a trade Data of other exchanges cover transactions effected on trade

dates failing within the reporting month

,Data on the value and volume of equIty security sales are reported In connection with fees paid under Section 31 of

the secunnes Exchange Act of 1934 as amended by the securtnes Acts Amendments of 1975 They cover odd-lot as

well as round-lot transectrons

'Includes voting trust certincates, certltrcates of deposit for stocks, and American DepOSItory Receipts for stocks but

excludes rights and warrants

'Data for June 1, 2, and 3, 1963 are not Included

'Exercised Contracts do not Include January and February 1985 data

'Includes all exchange trades of call and put options In stock Indices, Interest rates and foreign currencies.

'Tradlng In non-equity options began In October 22, 1982.

'Total market value for mdtvldual exchanges does not Include data for equrty options exercised

Source SEC Form R.31 and Options Clearing ccrporancn StatIstical Report

129
Table 18C

MARKET VALUE OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES'

(Thousands of Dollars)

NA

N.A

N.A

50,098

4,623,657

19,159,477

Calendar Year: 1979

1980r

1981r

1982r

1983r

1984r

Total

Market

Value EqUity Options Non.Equlty

(Dollars) Stocks' Warrants Rights Traded Exercised' Options' ,

All Registered Exchanges For Past Six Years

323,633,9n 299,749,679 721,947 3,884 23,158,467 $ N.A. $

542,524,247 475,932,882 560,895 6,911 45,873,145 20,150,414

567,089,795 490,688,158 327,295 1,686 41,423,216 34,649,440

693,850,963 602,669,878 423,236 1,152 53,659,796 37,046,803

1,082,241,196 957,139,047 1,162,124 2,997 59,598,740' 59,714,431

1,059,716,233 950,654,453 430,292 9,754 33,822,259 55,639,998

Breakdown of 1984 Data by Registered Exchanges'

All Reg/stered Exchanges

'American Stock Exchange 31,945,405 21,349,189 115,957 981 8,889,218 N A 1,590,060

'Boston Stock Exchange 8,087,854 8,087,854 0 0 0 0 0

'Clncmnatl Stock Exchange 1,834,703 1,834,703 0 0 0 0 0

Midwest Stock Exchange 62,291,419 62,291,419 0 0 0 0 0

'New Yorl<Stock Exchange' 815,111,074 814,162,015 300,395 8,676 0 N A 639,986

Pacific Stock Exchange 30,755,102 27,884,301 13,569 95 2,819,324 N.A 57,813

Philadelphia Stock Exchange 19,156,166 15,052,087 371 0 3,468,972 N A. 634,736

Intermountain Stock Exchange 659 659 0 0 0 0 0

Spokane Stock Exchange 12,226 12,226 0 0 0 0 0

'Chicago Board Options' 34,881,627 0 0 0 18,844,745 N.A. 16,236,882

Note Forfootnotes seeTable 180.This table has beenchangedto more meaningfully reflect current changes In the market

130
Table 180

VOLUME OF EQUITY/OPTIONS SALES ON U.S. SECURITIES EXCHANGES'

(Data In Thousands)

N.A

N.A.

N.A.

41

14,399

77,512

N.A.

4,924

7,431

8,302

13,830

11,919

69,469

96,938

109,404

137,263

134,286'

118,925

Equity Options Non.Equlty

Stocks' Warrants Rights Traded exercised - Options'"

(Shares) (Units) (Units) (Contracts) (Contracts) (Contracts)

All Registered Exchanges For Past Six Years

10,849,823 72,595 30,006

15,488,367 61,529 37,090

15,910,050 46,553 12,583

22,414,379 56,051 21,505

30,146,335 157,942 11,737

30,456,438 77,452 13,924

Calendar Year 1979

1980r

1981r

1982r

1983r

1984r

Breakdown of 1984 Data by Registered Exchanges

7,028

o

o

o

4,094

175

1,617

o

o

64,598

N.A.

o

o

o

N.A.

N.A.

N.A.

o

o

N.A.

33,079

o

o

o

o

11,188

15,984

o

o

58,674

2,237

o

o

o

11,627

60

o

o

o

o

20,204

o

o

o

53,041

3,984

223

o

o

o

1,583,971

256,738

55,000

1,843,171

25,150,155

1,006,126

545,599

1,101

12,577

o

All Registered Exchanges

•American Stock Exchange

•Boston Stock Exchange

'Clnclnnatl Stock Exchange

Midwest Stock Exchange

'New York Stock Exchange

Pacific Stock Exchange

• Philadelphia Stock Exchange

Intermountaln Stock Exchange

Spokane Stock Exchange

'Chlcago Board Options'

FIgures may not sum due to rounding.

r = revised

N.A = Not Available

• Data of those exchanges marked with an asterisk cover transactions cleared during the calendar month; clearance

usually occurs within five days of the execution of a trade. Data of other exchanges cover transactions effected on trade

dates failing within the reporting month.

'Data on the value and volume of equity security sales are reported In connection with fees pald under Section 31 of

the Securities Exchange Act of 1934 as amended by the Secuntles Acts Amendments of 1975. They cover odd-lot as

well as round-lot transactions

'Includes voting trust certificates, certificates of deposit for stocks, and American Depository Receipts for stocks but

excludes rights and warrants.

'Data for June 1, 2, and 3, 1983 are not Includad.

'Includes all exchange trades of call and put options In stock Indices, Interest rates and foreign currencies.

'Trading In non-equlty options began In October 22, 1982

'Total market value for Individual exchanges does not Include data for equity options exercised

Source SEC Form R-31 and Options Clearing Corporation Statistical Report.

131
NASDAQ

(Volume and Market Value)

NASDAQ share volume and market

value information for over-the-counter

trading has been reported on a daily basis since November 1, 1971. At the end

of 1985 there were 4,784 issues in the

NASDAQ system. Volume for 1985 was

20.7 billion shares, up 36 percent from

the 15.2 billion shares traded in the

previous year. It was the highest volume

in NASDAQ's 15-year history. This trading volume encompasses the number of

shares bought and sold by marketmakers plus their net inventory

changes. The market value of shares

traded in the NASDAQ system was

$233.5 billion at the end of 1985, the

highest ever.

Share and Dollar Volume

by Exchange

Share volume in 1985 for stocks,

rights and warrants on exchanges totaled 37.2 billion, an increase of 23 percent from the previous year. The New

York Stock Exchange accounted for 82

percent of the 1985 share volume; the

American Stock Exchange, six percent;

the Midwest Stock Exchange, six percent; and the Pacific Stock Exchange,

four percent.

The market value of stocks, rights and

warrants traded was $1.2 trillion, 26 percent over the previous year. Trading on

the New York Stock Exchange cor.

tributed 85 percent of the total. The Midwest Stock Exchange and Pacific Stock

Exchange contributed seven percent

and three percent, respectively. The

American Stock Exchange accounted

for two percent of dollar volume.

132
Table 19

Market Value of Equity 10ptions

Traded On All U.S. Securities Exchanges

Dollars 1,200 ~ - ~-

Billions

B

Stocks, Rights

, & Warrants

Options (Includes Exercises

and Non-Equity Options)!!

1,000

800

600

400

200

123.9

90.8 108.8 108.3

76.0

o

78 79 80 81 82 83 84 1985

11 Includes equity options exercised as of 1/1/80 ..non-equity options as of 10/22/82

133
Table 20

SHARE VOLUME BY EXCHANGES'

In Percentage

Total Share Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX aSE CSE Other'

1940 $ 377,897 7544 1320 2.11 2.78 133 119 008 387

1945 .. 769,018 6587 21.31 1.77 298 1.06 066 005 630

1950 893,320 7632 1354 216 311 097 065 009 316

1955. 1,321,401 68.85 1919 209 308 085 046 005 541

1960 .... 1,441,120 6647 22 27 220 311 066 038 004 265

1961 . 2,142,523 6499 2556 222 341 079 030 004 267

1962 1,711,945 7131 2011 234 295 087 031 004 2.07

1963 1,680,793 7293 1883 232 282 083 029 004 194

1964 2,118,326 7281 1942 243 265 093 029 003 1.44

1965 2,671,012 69.90 2253 263 233 081 026 005 149

1966 3,313,699 6938 2264 2.56 2.68 0.86 040 005 1.23

1967 4,646,553 6440 2841 235 246 087 043 002 106

1968 5,407,923 6198 2974 2.63 264 0.89 078 001 133

1969 5,134,856 6316 27.61 284 347 122 051 000 119

1970 4,634,887 7128 1903 316 366 163 051 002 069

1971 6,172,668 7134 1842 352 372 191 043 003 0.63

1972 6,518,132 7047 1822 371 413 221 059 003 064

1973 5,899,678 7492 13.75 409 368 219 071 004 062

1974r 4,950,842 7847 10.28 4.40 348 182 086 005 0.64

1975r 6,376,094 8099 897 397 326 1.54 085 013 0.29

1976r 7,129,132 8005 935 3.87 393 1.42 078 044 016

1977r 7,124,640 7971 956 396 372 1.49 066 064 026

1978r 9,630,065 79.53 10.65 356 384 1.49 060 016 017

1979r 10,960,424 7988 1085 330 327 184 055 028 023

1980r 15,586,986 7994 1078 384 280 1.54 057 032 021

1981r 15,969,186 8068 932 480 2.87 1.55 051 037 010

1982r 22,491,935 8122 696 5.09 362 218 048 038 007

1983 30,316,014 8037 745 548 356 2.20 065 019 010

1984 30,547,814 8254 526 6.03 3.31 179 085 018 004

1985 .. 37,187,668 81.52 5.78 612 366 147 127 015 003

'Share volume for exchanges Includes stocks, nghls, and warrants. r = revised

'Includes all exchanges not listed indIvidually. Source. SEC Form R-31

Table 21

DOLLAR VOLUME BY EXCHANGES'

In Percenlage

Total Dollar Volume

Year (Thousands) NYSE AMEX MSE PSE PHLX BSE CSE Other'

1940 $ 8,419,772 8517 768 2.07 1.52 1.11 191 009 045

1945 16,284,552 8275 1081 2.00 1.78 0.96 116 006 048

1950 ...... 21,808,284 65.91 6.85 2.35 219 103 1.12 011 044

1955 .. 38,039,107 86.31 698 244 190 103 0.78 009 0.47

1960 45,309,825 8380 9.35 272 1.94 1.03 080 007 049

1961 84,071,623 8243 10.71 275 199 103 049 007 0.53

1962. 54,855,293 8632 681 2.75 2.00 1.05 046 007 054

1963 .. 84,437,900 85.19 751 272 239 106 0.41 006 066

1964 .......... 72,461,584 83.49 845 3.15 248 1.14 042 006 081

1965 89,549,093 8178 9.91 344 243 112 042 008 0.82

1966 ........ 123,697,737 7977 11.84 314 284 110 0.56 007 0.68

1967 ...... 162,189,211 77.29 1448 308 2.79 113 0.66 003 054

1968 ... 197,116,367 7355 1799 312 265 113 1.04 001 0.51

1969 176,389,759 7348 17.59 3.39 3.12 143 0.67 0.01 0.31

1970 ...... 131,707,946 7844 1111 376 3.81 1.99 067 003 0.19

1971 186,375,130 7907 9.98 400 3.79 2.29 058 005 0.24

1972 205,958,283 77.77 10.37 429 394 256 0.75 005 0.27

1973 .............. 178,863,622 82.07 606 454 355 245 1.00 0.06 027

1974r 118,828,270 83.83 440 490 3.50 2.03 124 006 0.24

1975r . .... 157,256,676 6520 3.67 4.84 3.26 1.73 1.19 0.17 014

1976r 195,224,812 84.35 3.88 476 383 169 0.94 053 002

1977r ................ 187,393,084 8396 460 4.79 3.53 162 0.74 075 0.01

1978r ..... ~.Jl,618,179 8367 613 4.16 3.84 1.62 061 017 000

1979r ............. 300,475,510 83 72 694 3.83 2.78 1.80 056 035 0.02

1980r ......... .. ... 476,500,688 83.53 7.33 4.33 227 161 052 040 0.01

1981r ...... ......... 491,017,139 84 74 541 5.04 2.32 160 0.49 040 0.00

1982r 603,094,266 85.32 3.27 5.83 305 1.59 0.51 043 0.00

1983 ................ 958,304,188 85.13 3.32 6.28 2.86 155 0.88 0.16 0.04

1984r ................ 951,094,499 65.24 2.26 6.55 293 158 0.65 0.19 0.00

1985 . $1,200,189,491 65.24 2.23 6.59 3.06 1.49 1.20 0.17 0.02

'Dollar volUme for exc-hanges Includes etocks, rlghts and warrants. r = revised

'Includes all exchanges not listed Individually Source: SEC Form R-31

134
Special Block Distribution

In 1985, there were 12 special block

distributions with a value of $857.9 mil.

lion. Secondary distributions account.

ed for all of these special block

distributions.

Table 22

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value in Thousands)

Secondary Distributions Exchange Distributions Special Offerings

YEAR Number Shares Value No. Shares Value No. Shares Value

sold sold sold

1943. 81 4,270,580 $ 127,462 0 0 $ 0 80 1,097,338 $31,054

1944 94 4,097,298 135,760 0 0 0 87 1,053,667 32,454

1945 115 9,457,358 191,961 0 0 0 79 947,231 29,878

1946 100 6,481,291 232,398 0 0 0 23 308,134 11,002

1947 73 3,961,572 124,671 0 0 0 24 314,270 9,133

1948. 95 7,302,420 175,991 0 0 0 21 238,879 5,466

1949 .. , .. 66 3,737,249 104,062 0 0 0 32 500,211 10,956

1950 77 4,280,881 88,743 0 0 0 20 150,308 4,940

1951 88 5,193,756 146,459 0 0 0 27 323,013 10,751

1952 76 4,223,258 149,117 0 0 0 22 357,897 9,931

1953 68 6,906,017 108,229 0 0 0 17 380,680 10,486

1954 84 5,738,359 218,490 57 705,781 24,664 14 189,772 6,670

1955 .... 116 6,756,767 344,871 19 258,348 10,211 9 161,850 7,223

1956 . 146 11,696,174 520,966 17 158,481 4,645 8 131,755 4,557

1957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,845

1958 122 9,508,505 381,886 38 619,876 29,454 5 88,152 3,286

1959 148 17,330,941 822,338 28 545,038 26,491 3 33,500 3,730

1960 92 11,439,065 424,688 20 441,844 11,108 3 63,663 5,439

1961 130 19,910,013 926,514 33 1,127,266 58,072 2 35,000 1,504

1962 59 12,143,656 658,780 41 2,345,076 65,459 2 48,200 588

1963 . 100 18,937,935 814,984 72 2,892,233 107,498 0 0 0

1964 110 19,462,343 909,821 66 2,553,237 97,711 0 0 0

1965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 0

1966 . 126 29,045,038 1,523,373 52 3,042,599 118,349 0 0 0

1967. 143 30,783,604 1,154,479 51 3,452,656 125,404 0 0 0

1968 . 174 38,110,489 1,571,600 35 2,669,938 93,528 1 3,352 63

1969 142 38,224,799 1,244,186 32 1,706,572 52,198 0 0 0

1970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,886 30,156 0 0 0

1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,862,111 79,889

1974 45 7,512,200 133,838 4 82,200 6,838 33 1,921,755 16,805

1975 51 34,149,069 1,409,933 14 483,846 8,300 14 1,252,925 11,521

1976 44 20,568,432 517,546 16 752,600 13,919 22 1,475,842 18,459

1977 . 39 9,846,986 261,257 6 295,264 5,242 18 1,074,290 14,519

1978. 37 15,233,141 569,487 3 79,000 1,429 3 130,675 1,820

1979 37 10,803,680 192,258 3 1,647,600 86,066 6 388,587 4,708

1980 44 24,979,045 813,542 2 177,900 5,101 4 434,440 7,097

1981 43 16,079,897 449,600 0 0 0 0 0 0

1982 76 40,024,988 1,284,492 0 0 0 3 717,000 11,112

1983 85 70,800,731 2,245,485 0 0 0 0 0 0

1984 23 21,180,207 680,543 0 0 0 0 0 0

1985 12 25,458,047 $ 856,917 0 0$ 0 0 0 $ 0

Source' NYSE and AMEX

135
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds

listed on U.S. exchanges at the end of

1985 was $3.3 trillion. an increase of 27

percent over the previous year. The market value of stocks was $2.0 trillion, an

increase of 25 percent during the year.

The value of listed bonds increased 30

percent. Stocks with primary listing on

the New York Stock Exchange had a

market value of $1.9 trillion and

represented 96 percent of the value of

common and preferred stocks listed on

registered exchanges. Those listed on

the American Stock Exchange accounted for almost all of the remaining four

percent of the total and were valued at

$63.2 billion, an increase of 22 percent

over the previous year.

Table 23

SECURITIES LISTED ON EXCHANGES'

December 31, 1985

EXCHANGES COMMON PREFERRED BONDS TOTAL SECURITIES

Market Market Market Market

Value Value Value Value

Registered Number (Million) Number (Million) Number (Million) Number (Million)

Amencan . 769 $ 59,665 113 $ 3,371 342 $ 17,577 1,224 $ 80,813

Boston 95 1,439 0 0 3 19 98 1,458

Cincinnati 4 141 3 50 6 48 13 239

MIdwest 16 1,024 6 14 0 0 22 1,038

New York 1,449 1,830,548 791 52,119 3,746 1,328,951 5,966 3,211,618

PacIfic 47 1,157 17 628 80 1,347 144 3,132

PhiladelphIa . 17 357 21 1,091 38 1 76 1,449

Intermountain N.A NA 0 0 0 0 NA NA

Spokane 26 8 0 0 0 0 26 8

Total 2,423 $1,894,539 951 $57,273 4,215 $1,347,943 7,589 $3,299,755

Includes ForeIgn Stocks'

New York 54 $ 67,550 4 $ 114 110 $ 10,347 168 $ 78,011

Amencan 48 22,521 3 123 5 78 56 22,722

Pacific .. 4 32 0 0 2 5 6 37

Total 106 $ 90,103 7 $ 237 117 $ 10,430 230 $ 100,770

r =' revised

N.A. = Not AvaIlable

'Excluding secunties which were suspended from trading at the end of the year, and securities which because of

inactivity had no available quotes.

Source SEC Form 1392

136
Table 24

VALUE OF STOCKS LISTED ON EXCHANGES

(Biltlons of Dollars)

New York American exclusIvely

Dec 31 Stock Stock On Other Total

Exchange Exchange Exchanges

1937 $ 389 $ 102 $ 491

1938. 475 108 583

1939. 46.5 10.1 566

1940 419 86 505

1941 358 74 432

1942 388 7.8 46.6

1943 476 99 575

1944. 555 11.2 667

1945 738 144 88.2

1946 686 132 81.8

1947 683 121 804

1948 670 119 $3.0 819

1949 763 122 31 916

1950 938 139 33 111.0

1951 1095 16.5 32 1292

1952 1205 169 31 1405

1953 1173 153 28 135.4

1954 1691 22.1 36 194 8

1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 224.2

1958 2767 317 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 33.0 53 4261

1962 345.8 24.4 40 3742

1963 4113 261 43 4417

1964 4743 28.2 43 5068

1965 5375 309 47 573.1

1966 4825 27.9 40 5144

1967 6058 430 3.9 652.7

1968 692.3 612 60 7595

1969 6295 477 54 682.6

1970 6364 395 48 680.7

1971 7418 491 47 795.6

1972. 8715 55.6 56 9327

1973 7210 387 41 7638

1974 5111 233 29 537.3

1975 6851 293 43 7187

1976 8583 360 42 8985

1977 7767 376 42 8185

1978 8227 39.2 29 864.8

1979 9606 578 39 1,022 3

1980 1,2428 1035 29 1,3492

1981 1,1438 894 50 1,238.2

1982 1,3054 77.6 68 1,3897

1983 1,5222 801 66 1,608.8

1984 1,5295 52.0 58 1,5873

1985 $1,8827 $ 632 $59 $1,9518

Source SEC Form 1392

137
Securities on Exchanges

As of September 30, 1986, a total of

7891 securities, representing 3,133 issuers, were admitted to trading on securities exchanges in the United States.

This compares with 7,570 issues, involving 2,995 issuers a year earlier. Over

5,600 issues were listed and registered

on the New York Stock Exchange, accounting for 65.2 percent of the stock

issues and 78.5 percent of the bond is.

sues. Data below on "Securities Traded

on Exchanges" involved some duplication since it includes both solely and duo

ally listed securities.

Table 25

SECURITIES TRADED ON EXCHANGES

Issuers Stocks Bonds'

Temporarily

RegIstered exempted Unlisted Tolal

American. 970 1,079 23 1,102 324

Boston .. " -- 1,227 192 1,133 1,325 12

Chicago Board of Trade 3 3 3 6

cmcmnan _ 1,134 31 1,187 1,218 47

Intermountaon 29 23 6 29

MIdwest 1,407 347 1,258 1,605 33

New York 1,994 2,677 2 5 2,664 2,970

Pacitrc Coast 889 812 276 1,088 157

Prntadetprua 930 259 809 1,068 107

Spokane .. 42 40 2 42 3

'Issuers exempted under Section 3(a)(12)of the Act, such as obligations of US Government, the states, and cities,

are not oncluded onthis table

Table 26

UNDUPLICATED COUNT OF SECURITIES ON EXCHANGES

(September 30, 1988)

Issuers

Stocks Bonds Total Involved

RegIstered and LIsted 4,101 3,775 8,934 3,130

Temporaroly Exempted from RegIstration

Admitted to Unlisted Tradong Provllege 10 5 15 3

Total 4,111 3,780 7,891 3,133

Certification Imrnoblllzatlon

Again in 1986, the number of electronic book entries in settlement of

securities transactions among DTC participants outpaced physical deliveries.

This trend may be measured by noting

the ratio of computer book-entry deliveries to total certificates withdrawn.

These figures exclude municipal bearer bonds. While the combined number

of shares traded on the Consolidated

Tape and NASDAQ increased by 26%

in 1985 and the number of NSCC trade

settlements increased 28%, the number

of certificates withdrawn decreased in

1985 by 10%. While the total certificates withdrawn from DTC increased

slightly in 1986, the ratio of the bookentry deliveries to certificates withdrawn

has increased to 7.3 to 1 in 1986. In

1981, only 2.4 book-entry deliveries

were made for every certificate

withdrawn.

138
Table 27

IMMOBILIZATION TRENDS

1986 1985 1984 1983 1982 1981

Book-entry Deliveries at DTC

(In thousands) 66,700 55,800 48,000 50,000 37,000 35,000

Total Certmcatss WIthdrawn

from DTC (In thousands) 9,200 9,100 10,100 13,600 12,500 14,400

Book-entry Deliveries per

CertIficates WIthdrawn 73 61 48 37 30 24

1933 ACT REGISTRATIONS

Effective Registration

Statements

During the fiscal year ending September 30, 1986, 5,905 registration statements valued at $491.4 billion became

effective. This represents an increase in

139

registrations of 992 statements. Total

dollar value increased by $203.7 billion.

Among issuers whose registration

statements became effective, there were

1,679 first-time registrants in fiscal year

1986, an increase of 214 registrants (15

percent) from the previous fiscal year's

total of 1,465.
Table 28

EFFECTIVE REGISTRATIONS

(Millions of Dollars)

Cash Sale for Account of Issuars

Common

Total Stock and Bonds,

Fiscal Year Number of Other Debentures Preferred

Statements Value Equity' and Notes Stock Total

Fiscal Year ended June 30

1935' 284 $ 913 $ 168 $ 490 $ 28 $ 686

1936 689 4,835 531 3,153 252 3,936

1937 B40 4,851 802 2,426 406 3,634

1938 .............. 412 2,101 474 686 209 1,349

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 1,721 164 2,081

1942. 193 2,003 263 1,041 162 1,468

1943. .. ........ 123 659 137 316 32 485

1944 . ... 221 1,780 272 732 343 1,347

1945 ........ 340 3,225 456 1,851 407 2,714

1946 .. 661 7,073 1,331 3,102 991 5,424

1947 .. 493 6,732 1,150 2,937 787 4,874

1946 435 6,405 1,676 2,817 537 5,032

1949 ............. 429 5,333 1,063 2,795 326 4,204

1950 ... .... ... 487 5,307 1,766 2,127 468 4,381

1951 487 6,459 1,904 2,838 427 5,169

1952 ... .... .......... 635 9,500 3,332 3,346 851 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 3,951 462 8,277

1956 906 13,096 4,544 4,123 539 9,206

1957 ............ 876 14,624 5,856 5,689 472 12,019

1956 .. .... .... .. 813 16,490 5,998 6,857 427 13,282

1959 1,070 15,657 6,387 5,265 443 12,095

1960 .. ... ....... 1,426 14,367 7,280 4,224 253 11,737

1961 ......... 1,550 19,070 9,850 6,162 246 16,280

1962 ... ....... 1,844 19,547 11,521 4,512 253 16,266

1963 ..... ........ 1,157 14,790 7,227 4,372 270 11,669

1964 ........ .. ... 1,121 16,880 10,006 4,554 224 14,784

1965 .. .................. 1,266 19,437 10,838 3,710 307 14,655

1966 1,523 30,109 18,216 7,061 444 25,723

1967 .......... 1,649 34,218 15,063 12,309 558 27,950

1966 2,417 54,076 22,092 14,036 1,140 37,268

1969 .......... .......... 3,645 66,810 39,614 11,674 751 52,039

1970 ..... 3,389 59,137 28,939 18,436 623 48,198

1971 ............ 2,989 69,562 27,455 27,637 3,360 56,452

1972 ..................... 3,712 62,467 26,518 20,127 3,237 49,662

1973 .... ....... 3,285 59,310 26,615 14,841 2,578 44,034

1974 ............... 2,690 56,924 19,811 20,997 2,274 43,062

1975 ... ....... ...... 2,780 77,457 30,502 37,557 2,201 70,280

1976. ........... .. 2,813 87,733 37,115 29,373 3,013 69,501

Transition Quarter:

July sept 1976 ... ....... 639 15,010 6,767 5,068 413 12,246

Fiscal Year ended

september 30

1977 ................. 2,915 92,579 47,116 28,026 2,426 77,568

1978' .............. 3,037 85,043 25,330 23,251 2,128 50,709

.1979 ........... ......... 3,112 77,400 22,714 28,894 1,712 53,320

1980 ........... 3,402 110,563 33,076 42,764 2,879 78,719

1981 ............... 4,326 144,123 49,276 40,163 2,505 91,944

1962 ..................... 4,846 184,455 50,466 63,950 3,939 118,375

1983 ... 5,503 240,056 77,403 80,718 9,339 167,460

1984 ............ ... 5,087 209,866 66,571 74,136 4,984 145,691

1985 ... ... .... .. ... r 4,913 287,851 72,013 117,178 6,999 196,190

1986 .................... p 5,905 49t,360 83,752 284,918 13,179 361,849

Cumulative Total . 96,501 $2,841,864 $931,128 $1,078,927 $62,344 $2,092,399

P = Preliminary

r = revised

'Includes warrants, shares of beneficial Interest, certificates of participation and all other equity interests not elsewhere Included

'For 10 months ended June 30, 1935.

'The adoption of Rule 241.2 (17 CFR 270.241.2) effective November 3, 1977 made It impossible to report the dollar value

01 securities registered by Investment companies

Note' The Total Cash Sale differs lrom earlier presentations due to changes In rounding procedures

Source: 1933 Act Registration Stetements

140
Table 29

Securities Effectively Registered With S.E.C.

1935 - 1986

500

400

80 1986

r ::

HHH~HHH~; ...............

...............

..............

..............

..............

..............

..............

..............

...............

.................

.................

.................

.................

.................

..................

.................

.................

.................

::::::::::::::::::: ...................

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.........................

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:::::::::::::::::::::::::

.........................

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.........................

............................

..........................

........................

........................

.........................

.........................

.........................

.........................

.........................

.........................

..............

70 75

BILLIONS OF DOLLARS

1935 40 45 50 55 60 65

(Fiscal Years)

i~::::;ln 1977 Fiscal Year End Changed From June To September

Data For Transition Quarter July-September 1976 Not Shown On Charts.

Number Of Registrations 639

11 Does Not Include Investment Companies As Of 1/1178 Due To Rule Change

r= Revised p=Preilmmary

o

300

200

100

141
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142
Purpose and Type of

Registration

Effective registrations for cash sale

for the account of issuers in fiscal year

1986 amounted to $361.9 billion, an 85

percent increase from $196.2 billion

registered a year ago. Some $94.5 billion (26 percent) was intended for immediate cash sale, an increase of $33

billion (56 percent) from fiscal year

1985.

Of this $94.5 billion, debt securities

accounted for $52.7 billion (56 percent),

common stock and other equity accounted for $34.3 billion (36 percent)

and preferred stock $8 billion (8

percent).

Delayed and extended cash sales

registered for the account of the issuer

totalled $267.3 billion (54 percent of all

registrations). Of registrations for

delayed sales, domestic securities accounted for $221.0 billion while foreign

securities accounted for $9.1 billion.

Registrations for extended sales totalled

$37.2 billion.

Securities registered for the account

of issuers other than cash sale (in conjunction with exchange offers, for example) amounted to $112.5 billion for

143

fiscal year 1986 (23 percent of all registrations). Registrations of securities for

secondary offerings (for the accounts of

security holders rather than issuers)

amounted to $17.0 billion (3 percent of

the total) in fiscal year 1986.

The value of registrations aggregating $491.4 billion in fiscal year 1986

consisted of $280.5 billion in bonds, debentures and notes, $21.8 billion in

preferred stock and $189.0 billion in

common stock and other equity. Of the

$280.5 billion of debt securities

registered, $52.7 billion (19 percent)

were registered for immediate cash sale

to the general public for the account of

the issuer and delayed and extended

cash sales accounted for $212.3 billion

(75 percent). Thirty-five percent of the

$21.8 billion in preferred stock registrations consisted of immediate cash offering and a similar portion consisted of

securities for the account of issuers for

other than cash sale. The $189.0 billion

of common stock and other equity consisted of $34.2 billion in immediate

cash, $49.5 billion in delayed or extended cash sale, $93.1 billion of non-cash

registrations for the account of the issuer and $12.2 billion of secondary

offerings.
Table 31

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL YEAR 1986p

(MIllions of Dollars)

Purpose of Registrations

All reg,stratlons (Esllmated Value)

Accouht of Issuer for Cash Sale

Immediate offering

Delayed and Extended Cash Sale

Dornestrc Delayed ....

Foreign Delayed

Extended

Account of Issuer for Other Than Cash Sale .....

Secondary Offenngs

Type of Secunty

Common

Bonds, Stock and

Debentures Preferred Other

Total and Notes Stock Equity'

$491,360 $280,542 $21,784 $189,034

361,849 264,918 13,179 83,752

94,522 52,683 7,603 34,256

267,327 212,255 5,576 49,496

221,042 203,455 5,015 12,572

9,062 8,762 0 300

37,223 38 561 36,624

112,485 11,744 7,617 93,124

$ 17,026 $ 3,880 $ 988 $ 12,158

p = preliminary

'Includes warrants, shares of beneloc,al Interest, certmcates of participation and all other equ,ty Interests not else.

where Included.

Note. The categones of registrations shown In trus table have been changed to more meaningfully reflect current

registration practices. Last year's data (Table 32) have been revised and recast In the same format for cornparabtlrty

Source' 1933 Act Registration Statements

Table 32

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL YEAR 1985r

(Millions of Dollars)

Type of Secunty

Purpose of Registrations

All registrations (Estimated Value) ...

Account of Issuer for Cash Sale

lrnrnedrate offering

Delayed and Extended Cash Sale. . .. .

Domestic Delayed

Foreign Delayed... ..

Extended. • • .. . . . . . • • . . . . . . . .. • . . . . . . . .

Account of Issuer for Other Than Cash Sale. . .. . ..

Secondary Offerings

r = revised

Total

$287,851

196,190

61,670

134,520

93,078

6,374

35,068

82,589

$ 9,072

Bonds,

Debentures

and Notes

$125,193

117,178

30,082

87,096

81,389

5,670

37

6,388

$ 1,627

Preferred

Stock

$14,202

6,999

4,682

2,317

2,240

75

2

6,833

$ 370

Common

Stock and

Other

Equity'

$148,456

72,013

26,906

45,107

9,449

629

35,029

69,388

$ 7,075

'Includes warrants, shares of beneficial mterest, cernftcates of participation and all other equity Interests not else.

where Included.

Source 1933 Act Registration Statements

144
Table 33

Dollars Bllhons

120

Effective Registrations

Cash Sale For Account Of Issuers p

1935 - 1986 BON~'~986

(See Inset Chart)

Dollars Billions

300

110

100

90

1

117.2

45 50 70 1986

100

o

1935 40

200

80

70

50

60

55 60 65

(Fiscal Years) *In 1977 F'scal Vear End Changed from June to September

Data for Transition Quarter Julv-September 1976 Not Shown on Chart

Bonds $5 1 B""on. Preferred Stock $ 4 B,'"on. Common Stock $6 B B,II,on

r = ReVised p = Prellmlnarv

145
Regulation A Offerings

During fiscal year 1986, 104 offering

statements for proposed offerings under

Regulation A were processed and

cleared.

Table 34

OFFERINGS UNDER REGULATION A (CLEARED)

Fiscal FIscal Fiscal Fiscal Fiscal

1986 1985 1984 1983 1982

Size

$500.000 or Less 34 41 40 58 82

500,001.$1,000.000 26 23 24 30 55

1.000,001.$1,500,000 . 44 30 42 41 83

Total. 104 94 106 129 220

Underwriters

Used 10 17 37 67 129

Not Used 94 77 69 62 91

Total 104 94 106 129 220

Olferors

ISSUing Companies 104 94 106 129 220

Stockholders 0 0 0 0 0

Issuers and Stockholders JOintly 0 0 0 0 0

Total 104 94 106 129 220

ENFORCEMENT

Types of Proceedings

As the table reflects, the securities

laws provide for a wide range of enforce.

ment 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 broker-dealer firms and/or

individuals associated with such firms

which may lead to various remedial

sanctions as required in the public in.

terest. When an injunction is entered by

a court, violation of the court's decree

is a basis for civil or criminal contempt

against the violator.

146
Table 35

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to, Acts Constituting,

and Basis for, Enforcement Action

Broker-dllaler, munIcIpaJ aecurltles

dealer, Inwstment adviser or lISSOCIaIed person

Sanction

WlIIful VIolation of securities laws or rules; aiding or abetting censure or limitation on actMtles; revocation, suspension

such violation, failure reasonably to SUpelVlse others, willful or denial of registration, bar or suspension from sssociemisstatement or omission In filing WIth the Commission; tlon (1934Act, Sec1lon 15B(c)(2)-{6), 15(bX4)-(6), AdvIsers Act,

conviction of or Injunction against certain cnmes or conduct. Section 203(eHf).

VIolation of or .nabillty to comply with the 1934 Act, rules there- Suspension or revocation of registration; censure or limitation

under, or Its own rules; unjustified failure to enforce complIance of activities, functions, or operations (1934 Act, Sec110n1~X1)~

with the foregoIng or with rules of the Municipal Securitl8S

Rulemaklng Board by a member or person associated WIth a

member

Member of registered aecurltles

association, or associated person

Entry of Commission order against person pursuant to 1934Act, Suspension or expulsion from the association; bar or suspenseenon 15(b); willful violation of securities laws or rules there- sion from association with member of association (1934 Act,

under or rules of Municipal Securities Rulernaking Board; effect. Sec1lon 19(h)(2}{3».

,"g transaction for other person with reason to believe that person was committing violations of secuntles laWs

National securftIes exchange

vioianon of or Inability to comply WIth 1934Act, rules thereunder Suspension or revocation of registration; censure or limitation of

or Its own rules, unjustified failure to enforce compliance with activities, functions, or operations (1934 Act, Section 19(hX1»)

the foregoing by a member or person associated WIth a member.

Member of natlonII aecurltles

exchange, or associated person

Entry of Commission order against person pursuanlto 1934Aet, Suspension orexpluslon from exchange; bar or suspension from

Sectoon 15(b), willful violation of securities laws or rules there- association with member (1934 Act, Sec1lon 1~)(2K3)~

under, effecting transaction for other person with reason to belIeve that person was committing violations of securities laws

Registered cIe8fIng agency

Violation of or Inability to comply with 1934 Act, rules thereunder, Suspension or revocation of registration; censure or limitation of

or Its own rules, failure to enforce compliance with Its own rules activltlea, functions, or operations (1934 Act, Sec1lon 1~X1».

by parilclpants.

Participant In registered cIe8fIng lIgIflCy

Entry of Commission order against parilclpant pursuant to 1934 Suspension or expulsion from cleMng agency (1934 Act, SecAct, Section 15(bX4);willful violation of clearing agency rules; tlon 1~)(2).

effecting transaction for other person with reason to believe that

person was commlltlng violations of securitlea laws

147
Table 35-Contlnued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constltullng,

and Basis for, Enforcement Acllons

Sanction

5ecurttIes InformlIlIon ..--

Violation of or Inability to comply with provisions of 1934 Act or Censure or limitation of activities, suspensron or revocation of

rules thereunder registration (1934 Act, secnon 11A(bX6))

Transfer agent

Willful violation of or Inability to comply WIth 1934 Act, sections Censure or limitation of actIVIties, demal, suspension, or revoca17 or 17A, or rules thereunder lion of registration (1934 Act, section 17A(cX3})

Willful violation of 1933 Act, 1934 Ac1,lnvestment Compeny Act Tempol1lly or pennanent proIubitlon against selVing m certain caor rules thereunder; aiding or abetting such violation; willful pacltles with registered Investment company (Investment Com.

misstatement in filing with Commission pany Ac1, section 9(b)).

om- or dIr8ctor 01 self.

regulatory Cllg8IlIzatIon

WillfUl VIolation of 1934 Ac1, rules thereunder, or the organiza. Removal from office or censure (1934 Act, section 19(hX4))

tlon's own rules; willful abuse of authority or unjusllfled failure

to enforce complllMlCe

Engaging In business as a broker-dealer after appointment of Bar or suspension from being or becoming eseocrated With a

SIPC trustee broker-dealer (SIPA, section 10(b)),

1933 Act ~ slalllmllnl

Statement materially Inaccurate or Incomplete. Stop order refusing to permlt or suspending eff9ct1veness (1933

Act, section 8(d))

... subIec1 to SectIons 12,

13, 14 or 15(cI) 01 the 1934 Act

or 8SSOCI8I8d peIIIOII

Failure to comply with such provisions or hevlng caused such Older directing compliance or steps effecting compliance (1934

failure by an act of omission that person knew or should have Act, Section 15(cX4»).

known would conlr1bute thereto.

5ecurttIes NgIs-.cI pu!'Sl*lt

to section 1201 the 1934 Act

Noncompliance by Issuer with 1934 Act or rules thereunder. Denial, suspension of effective date, suspension or revocation

of registration; prohibition against tredlng In securities wilen

registration suspended or revoked (1934 Act, section 12(j)).

Public Interest requlres trading suspension. Summary suspension of over-th&counter or exchange trading

(1934 Act, Section 12(1<).

Failure to file Investment Company Ac1 registration statement Suspension or revocation of registration (Investment Company

or required report; filing materially Incomplete or misleading Ac1, Section 8(e)).

statement or report.

Company has not alIaIned $100,000 net worth 90 days after "top order under 1933 Ac1; suspension or revocation of reglstra1933 Ac1 registration statement became effective. tlon (Investment Company Ac1, Section 14(8»).

148
Table 35-Continued

TYPES OF PROCEEDINGS

ADMINISTRATIVE PROCEEDINGS

Persons Subject to Acts Constituting,

and Basts for, Enforcement Action

Anomey, accounlllll~ or other

professional or expert

Sanction

Lack of reqinsrte qualifications to represent others; lacking In Pennanent or temporal)' demal of pnvllege of appearing or

character or Integnty, unethical or Improper professronal con. practicing before the ccmmtseron (17 CFR 201.2(eX1».

duct, Willful Violation of secunnes laws or rules; or aiding and

abetting such Violation

Attomey suspended or disbarred by court, expert's license re- AU10matlc suspension from appearance or practice before

voked or suspended, convrcnon of a felony or of a misdemeanor the Commission (17 CFR Section 201.2(e)(2)

InvolVing moral turpitude.

Pennanent Injunction agaJnsl or finding of securities Violation In Temporary suspension from practiCing; censure, pennanent or

Commlsslon~nstltuted action, finding of securities Violation by temporal)' disqualification from practicing before the CommlsCommiSSion In administrative proceedings. sion, (17 CFR Section 201.2(e)(3)

Member of Munlclpal Securities

RulemakJng Board

Willful Violation of 1934 Act, rules thereunder, or rules of the Censure or removal from office (1934 Act, 5ec1lon 15B(cX8))

Board, abuse of aU1honty

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to, Acts Constituting,

and BasiS for, Enforcement Action

Any person

Engaging In or about to engage In acts or practices violating

secunties laws, rules or orders thereunder Oncludlng rules of a

registered self-regulatory organization)

Noncompliance With provrsrons of the law, rule, or regulation

under 1933, 1934, or Holding Company Act, order issued by

Cornrmssion, rules of a registered self-regulatory organization,

or undertaking In a registration statement

Trading while In possession of material non-publlc InformatIOn In

a transaction on an exchange or from or through a broker-dealer

(and transaction not part of a public offering), or aiding and abet.

tlng such trading.

Securities IlMlStor Protection Co<ponItion

Sanction

Injunc1lon against acts or practices which constitute or would

constitute violations (plus other eqUitable reilef under court's

general equity powers) (1933 Act, seenon ~); 1934 Act. Sec.

tlon 21(d), Holding Company Act, 5ec1lon 1a:fl, Investment C0mpany Act, Section 42(e), Advisers Act, Section 209(e), Trust

Indenture Act, Section 321)

Writ of mandamus, Injunc1lon, or order directing compliance

(1933 Act, Section 2O(c), 1934 Act, Section 21(e), Holding C0mpany Act Section 18(g))

Maximum civil penalty: three times profit gained or loss avoided

as a result of transaction. (1934 Ac1, 5ec1lon 21(d)

Refusal to commit funds or act for the protection of customers. Order directing discharge of obligations and other appropriate

relief (SIPA, Section 7(b))

National securities exchange or

reglst8l9d securities assoclatIon

Failure to enforce compliance by members or persons Writofmandamus,ln/unctlonororderdlrec1lngsuchexchange

associated With Its members with the 1934 Act, rules or orders or association to enforce compliance (1934 Ac1, Section 21(e)~

thereunder, or rules of the exchange or association

lleglstered clear1ng agency

Failure to enforce compliance by Its participants with Its own Writ of mandamus, Injunc110n or order dlrec1lng clearing agency

rules to enforce compliance (1934 Ac1, Section 21(e)).

149
Table 35-Contlnued

TYPES OF PROCEEDINGS

CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Persons Subject to Acts Constituting,

and 6asls for, Enforcement Action

Sanction

Inuer subject to reporting requirements

Failure to file reports required under section 15(d) of 1934 Act Forfeiture of $100 per day (1934 Act, section 32(b))

Registered Investment compsny

Nameofcompanyorofsecurltylssuedbyltdeceptlveormls- Injunction against use of name (Investment Company Act,

leading. Section 36(d»

OffIcer, dIrector,.-nberof advIsofy boerd, edvIser,

depositor, or underwltter of IIMstment company

Engage In act or practice constituting breach of flduclmy duty Injunction against acting In certain capacities for investment

Involving personal misconduct company and other appropriate Allief Onvestment Company Act,

Section 36(8)

CRIMINAL PROSECUTION BY DEPARTMENT OF JUSTICE

BasIs for for Enforcement Action

Arryperson

Willful violation of securities laws or rules thereunder; willful

misstatement In any document required to be filed by securities

laws or rules, willful misstatement In lI1y document required

to be flied by self-fllllulatory organization in connection with

an application for membership or association with member.

Sanction or Relief

Maximum penalltles: $100,000 fine and 5 years Imprisonment,

an exchange may be fined up to $500,000, a publlc-utillty holdIng company up to $200,000 (1933 Act, Secttlons 2O(b), 24; 1934

Act, Sections 21(d), 32(aj; Holding Company Act, Sections 18(1),

29; Trust Indenture Act, Sections 321, 325, Investment Company Act, Sections 42(e), 49; AdvIsers Act, Sections 209(e), 217).

Any Issuer (whIch has securities subject to reporting require- Maximum penalty $1,000,000 fine (1934 Act, Section 32(cXl))

ments of the 1934 Act) which violates Section 3OA(a) of the 1934

Act.

Any officer or director of lI1lssuer, of any stockholder acting on Maximum penalty: $10,000 fine and 5 years Imprisonment (1934

behalf of such Issuer who willfully violates Section 3OA(a)ofthe Act, Section 32(c)(2)

1934 Act.

Anyemp!oyee, or agent subject to the Jurisdiction of the United Maximum penalty $10,000 fine and 5 years Imprisonment (1934

States of an Issuer found to hlMl violated Section 3OA(a) of the Act, SectIon 32(c)(3).

1934 Act, who wlilfully carried out the act or practice constitutIng such violation.

"Statutory references areas follows: "1933 Act", the securities Act of 1933; "1934 Act", the securities Exchll1Q9Act of 1934;

"Investment Company Act", the Investment Company Act of 1940; "AdvIsers Act", the Investment AdvIsers Act of 1940; "Holding

Company Act", the Public Utility Holding Compll1Y Act of 11135;"Trust Indenture Act", the Trust Indenture Act of 1939; and "SlPA",

the securities Investor Protection Act of 1970.

150
Table 36

ENFORCEMENT CASES INITIATED BY THE COMMISSION

DURING FISCAL 1985 IN VARIOUS PROGRAM AREAS

(Each case InItiated has been Included In only one category listed below, even though

many cases Involve multtple allegatIons and may fall under more than one category.)

Program Area In WhIch

Civil Acnon or Administrative

Proceeding Was lnollated

Secufll/es Offermg Cases

CIvil

Actlons'"

AdmlOlstratlve

Proceedings Total'

% of Total

Cases

(a) Non.regulated EntIty ..

(b) Regulated EntIty

Total secunnee Offerong Cases

40 (129)

~

54 (180)

29 (30)

~

34 (39)

69 (159)

~

86 (219) 28%

Broker.Dealer Cases

(a) Backotfice ..

(b) Fraud Against Customer

(c) Stock Loan ...

(d) Other

Total Broker-Dealer Cases.

5 (9)

10 (39)

1 (4)

~

16 (52)

11 (25)

30 (51)

1 (3)

~

46 (84)

16 (34)

40 (90)

2 (7)

~

62 (136) 20%

Issuer Ftnencm; Statement

and Reportmg Cases

(a) Issuer Financial Disclosure

(b) Issuer Reporting Other

(c) Issuer FCPA Violation

Total Issuer Financial Statement

and Reporting Cases. .. .

21 (62)

1 (1)

~

t8 (27)

1 (1)

~

39 (89)

2 (2)

~

13%

Other Regulated Entity Cases

21 (34)

o (0)

~

23 (36)

(a) Investment Advrssrs ..

(b) Investment Companoes .'

(c) Transfer Agents.

Total Other Regulated Entity Cases

Insider Tradmg Cases.. ..

Market Manipulation Cases

9 (18)

2 (6)

~

11 (24)

24 (54)

11 (76)

6

3

(6)

(3)

30 (52)

2 (6)

~

34 (60)

30 (80)

14 (79)

11%

10%

4%

Contempt Proceedmgs

9 (12)

~

14 (18)

3 (14)

___ (_1)

159 (486)

_1 __ (_1)

136 (202)

o (0)

~

o (0) 4%

2%

1%

1%

9 (12)

~

14 (18)

(8)

3 (14)

~

295 (888)

(5)

o (0)

2 (3) 4

Fraud Agamst Regula/ad Entity

SUBTOTALS

Re/ated Party Transactions

(a) CIvIl

(b) Cnrmnal .

Total Contempt Proceedings ..

Corporate Control Violations

Delmquent Ftlmgs

(a) Issuer Reporting

(b) Forms 3 & 4

Total Delinquent FIlings

GRAND TOTALS

15 (16)

-2..-.Q!

18 (19)

177 (505)

o (0)

~

o (0)

136 (202)

15 (16)

-2..-.Q!

18 (19)

313 (707)

6%

100%

'The number of defendants and respondents IS noted parenthetically

'ThIS category Includes Injunctive actrons, and civil and criminal contempt proceedings

151
Table 37

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS

ADMINISTERED BY THE COMMISSION

Pending as of October 1, 1985

Opened onfiscal year 1986

Total .

Closed onfIscal year 1986

Pendong as of September 30, 1986

During the fiscal year ending September 3D, 1986, 92 Formal Orders

of Investigation were issued by the

Commission upon recommendation of the Division of Enforcement.

Table 38

ADMINISTRATIVE PROCEEDINGS INSTITUTED DURING FISCAL YEAR

ENDING SEPTEMBER 30, 1986

Broker-Dealer Proceedings ..... . .

Investment Adviser, Investment Company and Transfer Agent Proceedongs

Stop Order and Regulation A Procee(lmgs

Rule 2(e) Proceedings . . . .

Disclosure Proceedings (secnon 15(cX4)of the Exchange Act) ...

Total Proceedings In fiscal year 1986

Table 39

INJUNCTIVE ACTIONS

741

343

1,084

305

779

62

25

24

15

10

136

1976

1977

1978

1979

1980 ..

1981

1982 ..

1983

1984 ..

1985 .

1986

Fiscal Year Actions lrutrated

158

166

135

108

103

115

136

151

179

143

162

Defendents Named

722

715

607

511

387

398

418

416

508

385

487

Trading Suspensions

During fiscal year 1986, the Commission suspended trading in the securities

of five companies. This compares with

six in fiscal year 1985. In most instances, the trading suspension was ordered 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.

152
Foreign Restricted List

The Securities and Exchange Com.

mission maintains and publishes a For.

eign Restricted List which is designed to

put broker-dealers, financial institutions, investors and others on notice of

possible unlawful distributions of for.

eign securities in the United States. The

list consists of names of foreign companies whose securities the Commission

has reason to believe have been, or are

being offered for public sale in the United States in possible violation of the

registration requirement of Section 5 of

the Securities Act of 1933. The offer and

sale of unregistered securities deprives

investors of all the protections afforded

by the Securities Act of 1933, including

the right to receive a prospectus containing the information required by the

Act for the purpose of enabling the investor to determine whether the investment is suitable 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 promotors from

illegally offering such securities directly to investors in the United States by

mail, by telephone, and sometimes by

personal solicitation. The following foreign corporations and other foreign entities comprise the Foreign Restricted

List.

1. Aquacate Consolidated Mines, Incorporated (Costa Rica)

2. Alan MacTavish, Ltd. (England)

3. Allegheny Mining and Exploration

Company" Ltd. (Canada)

4. Allied Fund for Capital Appreciation

(AFCA, S.A.) (Panama)

5. Amalgamated Rare Earth Mines,

Ltd. (Canada)

6. American Industrial Research S.A.,

also known as Investigation industrial Americana, S.A. (Mexico)

7. American International Mining

(Bahamas)

8. American Mobile Telephone and

Tape Co., Ltd. (Canada)

153

9. Antellntemational Corporation, Ltd.

(Canada)

10. Antoine Silver Mines, Ltd. (Canada)

11. ASCA Enterprisers Limited (Hong

Kong)

12. Atholl Brose (Exports) Ltd.(England)

13. Atholl Brose Ltd. (England)

14. Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

15. Bank of Sark (Sark, Channel Islands,

U.K.)

16. Briar Court Mines, Ltd. (Canada)

17. British Overseas Mutual Fund Corporation Ltd. (Canada)

18. California & Caracas Mining Corp.,

Ltd. (Canada)

19. Caprimex, Inc.(Grand Cayman, British West Indies)

20. Canterra Development Corporation,

Ltd. (Canada)

21. Cardwell Oil Corporation, Ltd.

(Canada)

22. Caribbean Empire Company, Ltd.

(British Honduras)

23. Caye Chapel Club, Ltd. (British

Honduras)

24. Central and Southern Industries

Corp. (Panama)

25. Cerro Azul Coffee Plantation

(Panama)

26. Cia. Rio Banano, S.A. (Costa Rica)

27. City Bank A.S. (Denmark)

28. Claw Lake Molybdenum Mines, Ltd.

(Canada)

29. Claravella Corporation (Costa Rica)

30. Compressed Air Corporation, limited (Bahamas)

31. Continental and Southern Industries, S.A. (Panama)

32. Crossroads Corporation, S.A.

(Panama)

33. Darien Exploration Company, S.A.

(Panama)

34. Derkglen, Ltd. (England)

35. De Veers Consolidated Mining Cor.

poration, S.A. (Panama)

36. Doncannon Spirits, Ltd. (Bahamas)

37. Durman, Ltd. Formerly known as

Bankers International Investment

Corporation (Bahamas)
38. Empresia Minera Caudalosa dePanama, S.A. (Panama)

39. Ethel Copper Mines, Ltd. (Canada)

40. Euroforeign Banking Corporation,

Ltd. (Panama)

41. Finansbanker a1s(Denmark)

42. First Liberty Fund, Ltd. (Bahamas)

43. General Mining S.A. (Canada)

44. Global Explorations, Inc. (Panama)

45. Global Insurance, Company, Limited (British West Indies)

46. Globus Anlage-Vermittlungsgesellschaft MBH (Germany)

47. Golden Age Mines, Ltd. (Canada)

48. Hebilla Mining Corporation (Costa

Rica)

49. Hemisphere Land Corporation

Limited (Bahamas)

50. Henry Ost & Son, Ltd. (England)

51. Hotelera Playa Flamingo, S.A.

52. Intercontinental Technologies Corp.

(Canada)

53. International Communications Corporation (British West Indies)

54. International Monetary Exchange

(Panama)

55. International Trade Development of

Costa Rica, S.A.

56. Ironoco Mining &Smelting Company, Ltd. (Canada)

57. James G. Allan & Sons (Scotland)

58. Jojoba Oil & Seed Industries SA

(Costa Rica)

59. Jupiter Explorations, Ltd. (Canada)

60. Kenilworth Mines, Ltd. (Canada)

61. Klondike Yukon Mining Company

(Canada)

62. KoKanee Moly Mines, Ltd. (Canada)

63. Land Sales Corporation (Canada)

64. Los Dos Hermanos, S.A. (Spain)

65. Lynbar Mining Corp. Ltd. (Canada)

66. Massive Energy Ltd. (Canada)

67. Mercantile Bank and Trust & Co.,

Ltd. (Cayman Island)

68. J.P. Morgan s Company, Ltd., of

London, England (not to be con.

fused with J.P. Morgan & Co., Incorporated, New York)

69. Norart Minerals Limited (Canada)

70. Normandie Trust Company, S.A.

(Panama)

71. Northern Survey (Canada)

72. Northern Trust Company, S.A.

(Switzerland)

73. Northland Minerals, Ltd. (Canada)

74. Obsco Corporation, Ltd. (Canada)

75. Pacific Northwest Developments,

Ltd. (Canada)

76. Pan-Alaska Resources. S.A.

(Panama)

77. Panamerican Bank & Trust Company (Panama)

78. Pascar Oils Ltd. (Canada)

79. Paulpic Gold Mines, Ltd. (Canada)

80. Pyrotex Mining and Exploration Co.,

Ltd. (Canada)

81. Radio Hill Mines Co., Ltd. (Canada)

82. Rancho San Rafael, SA (Costa Rica)

83. Rodney Gold Mines Limited

(Canada)

84. Royal Greyhound and Turf Holdings

Limited (South Africa)

85. SA Valles sCo., Inc. (Philippines)

86. San Salvador Savingss & Loan Co.,

Ltd. (Bahamas)

87. Santack Mines Limited (Canada)

88. Security Capital Fiscal & Guaranty

Corporation S.A. (Panama)

89. Silver Stack Mines, Ltd. (Canada)

90. Societe Anonyme de Refinancement (Switzerland)

91. Strathmore Distillery Company, Ltd.

(Scotland)

92. Strathross Blending Company

limited (England)

93. Swiss Caribbean Development &

Finance Corporation (Switzerland)

94. Tam O'Shanter, Ltd. (Switzerland)

95. Timberland (Canada)

96. Trans-American Investments, limited (Canada)

97. Trihope Resources, Ltd. (West

Indies)

98. Trust Company of Jamaica, Ltd.

(West Indies)

99. United Mining and Milling Corpora.

tion (Bahamas)

100. Unitrust Limited (Ireland)

101. Vacationland (Canada)

102. Valores de Inversion, S.A. (Mexico)

103. Victoria Oriente, Inc. (panama)

154
104. Warden Walker Worldwide Investment Co. (England)

105. Wee Gee Uranium Mines. Ltd.

(Canada)

106. Westem International Explorations.

Ltd. (Bahamas)

107. Ykon Wolverine Mining Company

(Canada)

paragraphs and clauses of Section

21(h)(2) to obtain access to financial

records of a customer. The table below

sets forth the number of occasions upon

which the Commission obtained access

to the financial records of a customer

using the procedures provided by (i)

Section 1105 of the RFPA [12 U.S.C.

3405J, applicable to administrative subpoenas; and (ii) Section 1107 of the

RFPA [12 U.S.c. 3407). applicable to judicial subpoenas.

Right to Financial Privacy

Section 21(h)(6) of the Securities Exchange Act of 1934 [15 U.S.C. 78u(hX6)]

requires that the Commission "compile

an annual tabulation of the occasions on

which the Commission used each

separate subparagraph or clause of [Section 21(h)(21)] or the provisions of the

Right to Financial Privacy Act of 1978

[12 U.S.c. 3401-22 (the RFPA)I to obtain

access to financial records of a customer

and include it in its annual report to the

Congress." During the fiscal year, the

Commission made no applications to

courts for orders pursuant to the sub.

155

Section 1105

232

Section 1107

6
PUBLIC UTILITY

HOLDING COMPANIES

System Companies

During fiscal year 1986. there were 13

holding companies registered under the

Public Utility Holding Company Act of

1935 of which 12 were "active." The

registered systems include 65 electric or

gas utility subsidiaries 74 non-utility

subsidiaries and 22 inactive companies,

or a total of 174 system companies including the parent but excluding seven

power supply company subsidiaries.

The following table lists the active

systems.

Table 40

PUBLIC UTILITY HOLDING COMPANY SYSTEMS

Solely Registered Electric

Registered Holding and/or

Holding Operating Gas Utility Nonutility Inactive Total

Companies Companies Subsidiaries Subsidiaries Companies Companies Other

Alleghany Power System

(APS) ••••••••••••••

American Electric Power

Company (AEP)

Central and South West

Corporation (CSW) •..•.

Columbia Gas System

(CGS) .•...•...

Consolidated Natural Gas

Company (CNG).. . ....

Eastem Utilities Associates

(EUA) .. .. .. ..... ..

General Public Utilities

(GPU). ...... .....

Middle South Utilities

(MSU) • ....... .. .....

National Fuel Gas Company

(NFG) .

New England Electric

System (NEES)..•...•..•

Northeast Utilities (NEU) •.

Phlledelphia Electric Power

Company (PEP). '" '"

Southem Company (SC). ..

Total Companies ••.••.

o

1

12

o

o

o

o

o

o

o

o

1

o

3

4

12

4

8

5

3

6

6

5

5

4

15

13

9

4

4

3

5

o

5

72

o

5

o

o

3

3

6

1

o

22

9

33

13

23

15

5

10

14

7

12

17

3

11

172

o

o

o

o

o

18

Bahlo Valley Elec. Corp. & Subs; Indiana-Kentucky Elec. Corp electric utility' 37.8% AEP, 12.5% APS, 497% Other

Companies.

bArklahoma Corp: 32% CSW, 34% MSU, 34% Oklahoma Gas & Elec.

cYankee Atomic Electric Co .30% NEES, 31.5% NEU; 4.5% EUA; Connecticut Yankee Atomic Power Co.: 15% NEES,

44% NEU, 4.5% EUA; Vermont Yankee Nuclear Power Corp.: 20% NEES, 12% NEU, 12% EUA, Maine Yankee Atomic

Power Co.: 20% NEES, 15% NEU, 4% EUA; Statutory utility subsidiaries.

dWest Penn Power Co. In APS and Southwestern Electric Power Co In CSW are both electric utility and holding

companies.

156
Table 41

KEY FINANCIAL STATISTICS OF REGISTERED PUBLIC UTILITY

HOLDING COMPANY SYSTEMS

Name of Company

As of March 31, 1986 (000) Omitted)

Total Assets Operating Revenues

Allegheny Power System .

American Electric Power Company, Inc

Central and South West Corporation.

Columbra Gas System, Inc

Consolrdated Natural Gas Company

Eastern ununes Associates

General Publrc ununes Corp

MIddle South Utllrtres, Inc.

Natronal Fuel Gas Company

New England Electric System

Northeast UtIIltres

Ptnladelprua ElectriC Power Company.

Southern Company, The

157

$ 4,128,870

13,600,898

6,813,605

5,444,032

3,721,163

724,724

6,481,178

13,827,416

1,053,934

3,718,977

6,246,589

66,691

16,757,724

Total = $82,585,801

$ 1,801,106

4,798,288

2,694,244

3,908,363

3,120,509

336,795

2,883,673

3,289,121

932,351

1,480,428

2,040,100

12,305

6,807,012

$34,104,295
CORPORATE

REORGANIZATION

During the fiscal year the Commission entered its appearance in 52 reorganization cases filed under Chapter 11

of the Bankruptcy Code involving com.

panies with aggregated stated assets of

about $10.6 billion and close to 270,000

public investors. Including these new

cases, the Commission was a party in a

total of 134 Chapter 11 cases during the

fiscal year. In these cases the stated assets totalled approximately $32.5 billion

and about 730,000 public investors were

involved. During the fiscal year, 33

cases were concluded through confirmation of a plan of reorganization, dismissal, or liquidation, leaving 101 cases in

which the Commission was a party at

year-end.

Table 42

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

A H Robins Co , Inc

AlA Industnes, Inc

AIC Photo' .. ..

A" Flonda System, Inc

A" One, Inc

Alrhlt International, Inc

Altec Corp .

Amarex, Inc

American MOnitor Corp

Amfesco Ind ,Inc ....

Amfood Ind .

Anglo Energy, Ltd'

ATI,Inc •. , ...•..

Avanu Corp' 41 • •

BaldWin URlted Corp'

Bear Lake West, Inc'

Beehive lnternatronal!

Beker Industnes Corp .•.

Berry Industries Corp

Bevill, Bressler & Schulman' .

The Bishop's Glen Fndn., Inc.'

Branch Industries, Inc .,

Buttes Gas & 011Co

CapItol AI', Inc ..

Chalet Gourmet Corp

Charter Co

Chern-Technics, Inc' . .. .

Cltel, Inc ...

CitYWide Secuntles Corp.' .•.•..

CLC of America .•..• .

CoElco Ltd ..•..•.. . .•.••.....

Colonial X.Ray Corp. •... . . . . • .

Columbia Data Products, Inc .••.••.•. .

Commodore Corporation ...•..••.••..•.

Commonwealth Oil Refining Oo., Inc •.

Computer Devices, Inc' . . • . . . . •. • ..•

Computer Depot, Inc.. .. . ..

Computer Usage Co.'.... •.... .

Coriesco Ind, Ltd ..•... .•.... .•....•..•. . .•...

Consolidated Packaging Corp.' •

Continental Airlines Corp.' . • . . • • . .• . ...•..•...

Continental Steel Corp.' .• ...•...•..•. . .•......

Cook United,lnc. ...••.. . .

Crompton Co., Inc. ...... .. .. . ............•......

FIscal Year

District FIled

ED VA 1985

ED PA 1984

ED NY 1985

SD FL 1984

ED MO 1985

SD FL 1981

CD CA 1985

WD OK 1983

S.D IN 1986

ED NY 1986

N D IL 1986

SD NY 1984

D NJ 1985

N D.IN 1986

SD OH 1984

D ID 1982

D UT 1985

SD. NY 1986

CD CA 1985

D NJ 1985

ND FL 1985

SD NY 1985

SD TX 1986

SD NY 1985

C.D CA 1985

M D FL 1984

N D GA 1986

N D CA 1985

S.D NY 1985

ED MO 1986

CD CA 1986

S.D FL 1986

D MD 1985

N.D. IN 1985

W.D TX 1984

D MA 1984

D MN 1986

N.D. CA 1985

D NJ 1986

D CO 1984

S.D. TX 1984

S.D. IN 1986

N.D OH 1985

SD NY 1985

FIscal Year

Closed

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

158
Table 42-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

FIscal Year

Debtor Distnct FIled

Dakota Minerals, Inc .... 0 WY 1986

The Diet Institute, Inc' 0 NJ 1985

O'lites of Amenca, Inc. NO GA 1986

Oreco Ener9Y Service, Ltd • S.O TX 1982

ORW Realty Services, Inc " • NO TX 1986

Eastmet Corp O. MO 1986

Emons Industries, Inc SO NY 1984

EmpIre 011 & Gas Co ' 0 CO 1982

Energy Exchange Corp WO OK 1985

Energy Management Corp. 0 CO 1986

Enertec Corp ... N D TX 1986

Enterpnse Technologies, Inc SO TX 1984

Equestrran Ctrs of Amenca, Inc CD CA 1985

Evans Products Co SO FL 1985

FIdelIty Amencan Financial Corp' EO PA 1981

Frnanctal & Bus Serv, Inc' . WD NC 1986

Flanigan Enterpnses SO FL 1986

General Exploratron Co NOOH 1986

General Resources Corp NO GA 1980

GIC Government secunnes, Inc r, , M 0 FL 1986

Global Manne, Inc SO TX 1986

Haven Properties, Inc' 0 OR 1981

Homacraftsrs Warehouse, Inc .... NO AL 1986

ICX, Inc 0 CO 1984

International Instltute of Applied Tech, Inc 0 DC 1983

International Waste Water' M 0 PA 1985

K.Tel lnternanonal, Inc' 0 MN 1985

Kelly-Johnston Enterpnses, Inc' WO OK 1985

Koss Corp' 0 WI 1985

LTV Ccrporatron SO NY 1986

MagiC Circle Energy Corp WO OK 1985

Manoa Finance Co , Inc' . 0 HA 1983

Mansfield TIre & Rubber Co ' NOOH 1980

ManvIlle Corp . SO NY 1982

Manon Corp' . SO. AL 1983

Microcomputer Memories, Inc CD CA 1986

Mld.Amenca Petroleum, Inc N.O TX 1986

Midland CapItal Corp. SO NY 1986

Midwestern Companies, Inc' W.O MO 1984

MobIle Home Industnes, Inc' . NO FL 1985

National Bus Communications Corp SO FL 1986

NO Resource, Inc 0 AZ 1985

New Brothers, Inc SO GA 1985

Nlcklos 011 & Gas Co SO TX 1986

North Atlantic Airlines, Inc '. , 0 VT 1984

Nucorp Energy, Inc SO CA 1982

Oxoco, Inc SO TX 1986

Pacrtrc Express HoldIng, Inc ED CA 1984

Paiute 011 & Mining Corp 0 UT 1985

Penn Paciftc Corp CD CA 1986

Peoples Restaurants, Inc' M 0 FL 1985

Petromac Energy, Inc' SO TX 1986

Pettibone Corp NOlL 1986

Provincetown-Boston Airline' . M 0 FL 1985

Psych Systems 0 MO 1986

Roblin Industnes, Inc WO NY 1985

Ronco Teleproducts, Inc NO IL 1984

Rusco Industries, Inc SO GA 1986

159

F,scal Year

Closed

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986

1986
Table 42-Continued

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

IN WHICH COMMISSION ENTERED APPEARANCE

Debtor

Salant Corp .

Satelco, Inc' .

Seatraon Lones, Inc.

Selectors, Inc

Seneca 011Co •

servamanc Systems, Inc

SPW Corporation

Standard Metals Corp

State Capital Corp

Steiger Tractor, Inc

Storage Technology, Inc

Swanton Corp

Sykes Datatromcs, Inc

Taco Eds, Inc'

Tacoma Boatbulldong Co

Techrucal EqUIties Corp

Texscan Corp

Tidwell lndustnes, Inc

Towle ManufactuTlng Co

Towner Petro 2

Trans Western Exploration

Transcontonental Energy Corp'

Ummet Corp . .

The Veta Grande Cos, Inc

Vlctona Station

Vldeostatlon, Inc .

W & J Sloane Corp .

Wheatland Investment Co.'

Wheeling-Pittsburgh Steel Corp

Wondsor Ind , Inc

WTlght Air Lones, Inc'

Xenerex Corp

Total Cases Opened (FY 1986)

Total Cases Closed (FY 1986)

Drstnct

SD NY

N D TX

SD NY

ED WA

WD OK

N D CA

N D TX

D CO

M D FL

o ND

D CO

SO NY

WD NY

N D OH

SD NY

N D CA

D AZ

N D AL

SD NY

WO OK

N D OK

NO TX

N D OH

CD CA

N D CA

CD CA

SD NY

ED WA

WD PA

NOlL

N D OH

WD OK

Fiscal Year

Filed

1985

1985

1981

1986

1985

1986

1985

1984

1985

1986

1985

1985

1986

1984

1986

1986

1986

1986

1986

1985

1985

1985

1986

1986

1986

1985

1986

1985

1985

1986

1985

1986

52

Fiscal Year

Closed

1986

1986

1986

1986

1986

33

'Debtor's secunttes not registered under Section 12(g) of the Exchange Act

'Plan of reorqamzatron conformed

'Debtor uquidated under Chapter 7

'Chapter 11 case dismissed

160
SEC OPERATIONS

In fiscal year 1986, the Commission

estimates that it will colJect a record of

more than $200 million in fees for

deposit into the General Fund of the

Treasury. Such fees will amount to nearly 188 percent of the Commission's fiscal year 1986 funding, compared with

161

135 percent in fiscal year 1985. The four

primary sources of fees were registration of securities under the Securities

Act of 1933 (57 percent), transactions

on securities exchanges (21 percent),

tender offer and merger filings (19 percent), and miscelJaneous filings and

reporting fees (three percent).
Table 43

Appropriated Funds vs Fees Collected

Dollars Billions

230

1976 77 78 79 80 81 82 83 84 85 1986

(est 1

162
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163
Index

Enforcement 7

Key 1986 Results 7

Introduction 7

Program Areas 8

Corporate Reporting and Accounting 9

Insider Trading 10

Regulated Entities and Associated Persons 12

Securities Offering Violations 14

Market Manipulation 14

Changes in Corporate Control 15

Other Developments 15

Transnational Securities Issues 15

Sources for Further Inquiry 16

See also Footnotes 87

Appendix 105

Types of Proceedings 146

Trading Suspensions 152

Foreign Restricted List 153

Right to Financial Privacy 155

Full Disclosure System 17

Key 1986 Results 17

Rulemaking 18

Operational Edgar System 18

Tender Offers 18

Shareholder Communications 18

Filing Fees 19

Pricing Amendments 19

Classification of Issuers 19

Filings for Exempt Private Offerings 19

The Proxy Review Program 19

Interpretations 20

Conferences 20

SEC Government-Business Forum on Small Business Capital

Formation 20

SEC/NASAA Conference under Section 29(c) of the Securities Act of

1933 20

Accounting and Auditing Matters 20

Accounting-Related Rules and Interpretations 21

Oversight of Private Sector Standards-Setting 22

FASB 22

Pensions 23

Cash Flow Reporting 23

164
Income Taxes 24

Other Projects 23

Timely Financial Reporting Guidance 23

Oversight of the Accounting Profession's Initiatives 24

SEC Practice Section 25

Special Investigations Committee 26

The Edgar Project 27

Introduction 27

Pilot System " 27

Operational System 28

Conclusion 29

Regulation of the Securities Markets 30

Key 1986 Results 30

Securities Markets, Facilities and Trading 31

The National Market System 31

National System for Clearance and Settlement of

Securities Transactions 31

Securities Immobilization 32

Internationalization 32

Options 33

Issuer Tender Offers 34

Regulation of Brokers, Dealers, Municipal Securities

Dealers and Transfer Agents 34

Rule 10b-6; shelf distributions 35

Rule 10b.6; shelf amendments 35

Financial Responsibility Rules 35

Uniform Net Capital Rules 36

Interpretations of the Net Capital Rules 36

Transfer Agent Registration Form 36

Bank Securities Activities 36

Extension of Credit by Broker Dealers of Direct

Participation Programs 36

Interpretive Release, Section 28(e) of Exchange Act 37

Lost and Stolen Securities 37

Transfer Agent Regulation 37

Oversight of Self-Regulatory Organizations 38

National Securities Exchanges 38

National Association of Securities Dealers, Inc 38

Municipal Securities Rulemaking Board 38

Clearing Agencies 39

SRO Surveillance and Regulatory Compliance Inspections 39

SRO Final Disciplinary Actions 40

Applications for Re-entry 43

Investment Company Advisers 44

Disclosure Requirements 45

Edgar 46

Regulatory Policy 46

165