Thirteenth Annual Report

of the

\\,s.Securities and Exchange

Commission

Fiscal Year Ended Jnne 30, 1947

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UNITED STATES GOVERNMEJI<T PRINTING OFFIC;E. WASHINlGjTON: 1948

For sale by the Superintendent of Documents, U. S. Government Printing Omce. Washilliton 25, D. C.

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SECURITIES AND EXCHANGE COMMISSION

Central Office

425 Second Street, N. W.

Washlngtou 25, D. C.

COMMISSIONERS

JAMES J. CAFFREY, Chairman

ROBERT K. MCCONNAUGHEY

RICHARD B. McENTIRE

EDMOND M. HANRAHAN

HARRY A. McDONALD

ORVAL L. DuBoIS, Secretary
ROBERT K. MCCONNAUGHEY,

Acting 0 hairman.

I

r-,

LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION,

Washington, D.O., M arch e,19.I,B.

Sm: I have the honor to transmit to you the Thirteenth Annual

Report of the Securities and Exchange Commission, in accordance

with the provisions of section 23 (b) of the Securities Exchange Act

of 1934, approved June 6, 1934; section 23 of the Public Utility

Holding Company Act of 1935, approved August 26, 1935; section

46 (a) of the Investment Company Act of 1940, approved August 22,

1940,and section 216 of the Investment Advisers Act of 1940,approved

August 22, 1940.

Respectfully,

THE PRESIDENT OF THE SENATE,

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D. o.

ill

TABLE OF CONTENTS

Page

!oreword_________________________________________________________ XII

Commissioners and staff officers , __ _______________________________ XUI

Regional and branch offices_________________________________________ XIII

Commissioners appointed during fiscal year , , ____ _ __ _______________ XIV

PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933__________ 1

The registration process_ __________ __ ______ __ 1

The registration statement and prospectus____________________ 1

Effective date of registration statemenL______________________ 2

Time required for registration_______________________________ 3

The volume of securities registered_______________________________ 4

Volume of all securities registered_____ __________ _____ _ 4

Volume of securities registered for cash sale___________________ 4

A. All securities______ ____________________________ 4

B. Stocks and bonds_____ ______________________________ 5

C. All securities registered for cash sale for the accounts of issuers-by type of issuer ________________ __ 5

D. Use of investment bankers as to securities registered for

cash sale for the accounts of issuers_________________ 6

E. Cost of flotation of securities registered for cash sale for the accounts of issuers , __________________ _ __ 6

The volume of unregistered seeurities., 7

Total of unregistered corporate Issues, 7

Total of unregistered governmental and eleemosynary issues____ 7

Volume of all unregistered issues offered for cash sale__________ 7

The volume of all securities offered for cash sale___________________ 8

Total of registered and unregistered securities offered for cash sale; 8

New capital and refinaneing , __ _____________ ___________ _ 8

Statistics of securities registered under the act_____________________ 8

Disposition of registration statements ________________________ 8

Exemption from registration under the acL_______________________ 9

Exempt offerings under regulation A_________________________ 9

Exempt offerings under regulation A-M______________________ 10

Exempt offerings under regulation B_________________________ 10

Confidential written reports under regulation B __ _________ 11

Oil and gas invest.igatlons.Lc , , __________________________ 11

Formal actions under section 8__________________________________ 12

Examinations under section 8 (e) ____ _____ _____ ___ 12

Consolidated Hotels, Inc_______________________________ 13

Health Institute, Inc____ _________ ______ _____________ 13

Oro Yellowknife Gold Mines, Ltd________________________ 13

Stop-order proceedings under section 8 (d) ____________________ 14

Midas Yellowknife Gold Mines, Ltd_____________________ 14

Tucker Corp__________________________________________ 15

Globe Aircraft Corp , _ _________________________________ 16

Hayes Manufacturing Corp., , __ _____________________ 17

Kiwago Gold Mines Ltd________________________________ 18

Red Bank Oil Co__ _______________ _______ _ _______ 19

Western Tin Mining Corp; _____________________________ 19

Disclosures resulting from examination of registration statements; ___ 20

Profitable inside dealings with affiliated companies., ___________ 20

Gross omission of material facts; _______________ ___________ 20

Importance of disclosure to underwriters, ___________________ 20

Relative investment positions of public and promoters__________ 21

Maintenance of insider control-restrictions on stock resalea.,., 21

Speculative hazards of stock issue__________________________ 22

Speculative nature of venture spelled out____________________ 22

Impact of domestic and foreign law on company's op"erations____ 23

Liabilities under employees' retirement plan__________________ 23

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VI TABLE OF CONTENTS 

. DMINISTRATION OF THE SECURITIES ACT OF 1933-Con . Chances . ~~~~ in rules . . re~ulations. and form ..........................
 gule 131-l'hc red-herring pro.91. cctus....................... 
 Forms 8.1. A-1. and A-2-Hegiarrsrion of s~rllriries .......... 


... llcwulnrion -. . C. Rulca aoverninu rrviatratiott ...................
 Rules adonted in connection wTth che International Bank ....... 
 Suppleme~tT.........................................z. .. 


Injunction actions instituted under the act ........................ 


PART11 

DMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 

1934........................................................... 


Regulation of exchanges and exchange tradng .................... 
 Registration of exchanges ................................... 
 Disciplinary actions by exchanges against members ............ 
 Market value and volume of exchange tradmg ................ 
 Special offerings on exchanges ............................... 
 Registration of securities on exchanges. .......................... 
 Purpose and nature of registration of securities on exchanges .... Statistics of securities registered on exchanges ................. Temporary exemption of substituted or additional securities.... .... Proceedings under section 19 (a) (2) ......................... 
 Unlisted trading privileges on exchanges .......................... 
 Unlisted trading on registered exchanges ...................... 
 Applications for unlisted trading privileges .................... Changes in securities admitted to unlisted trading privileges .... Delisting of securities from exchanges ............................ Securities delisted by apphcation ............................ Securities delisted by certification ............................ 
 Securities removed from listing on exempted exchanges ......... 
 Exempted securities removed from exchange trading ........... 
 Manipulation and atabilieation- ................................. 
 M+iulatioq ........................................... 
 radmg mvest~gatmons ................................. 
 Stabilization..............................................
 . . Security transactions of corporate mslders- ....................... 
 Preventing unfair use of inside information ................... 
 . Statistics of ownership reports ............................... 
 Solicitations of proxies, consents, and authorieations- .............. 
 Regulation of. brokers and dealem ............................... 
 Registration .............................................. 
 Broker-deal? inspections................................... 
 Administratme proceedmgs ................................. 
 Special financial reports of brokers and dealers ................ 
 Supervision of NASD activity ................................... 
 Membership. ............................................. Disciplinary actions ........................................ Commission review of disciplinary action and of denial of mem- bership................1 

Comrni.uiion actiox . or, petitio~s for apl,rur.al of ur r~~~rtinuariuu 

in mrtnlxrshin ......................................... 


Chhges in rules and forms ..................................... 
 Rule X-11D1-l-Extensions of credit by broker-dealers ........ 
 Rule X-l2DZ-l-Reports by exchanges ...................... 
 Rule X-12DZ-2-Delisting of retired securities ................ 
 Rule X-13A-6B-Quarterly reports.......................... 
 Rule X-15A-2-Shares in cooperative dweilingz ............... Rules X-16B-2 and X-16G2-Exemptions from sections 16 (b) 

and16 (c) .............................................. Rule X-1qB4-Exemption of registered holding companies .... Form 10 for corporations ................................... Foms 10-K and 1-MD-Annual report forms ................ Forms 12-K &nd1ZAK-Annual report fom ................ 
TABLE OF CONTENTS

PART III

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COM- PANY ACT OF 1935

Integration and corporate simplification under section lL

Litigation arising under the act

Divestments under section 11-

Status of integration program-Major systems

American Water Works & Electric Co., Inc

Cities Service Co

The Commonwealth & Southern Corp Electric Bond &Share Co

Engineers Public Service Co

General Public Utilities Corp

International Hydro-Electric System The Middle West Corp

New England Public Service Co

The North American Co

Standard Power & Light Corp.-Standard Gas & Electric Co The United Corp

The United Light & Railways Co

Regulation of security issues

Volume of financing Newfinancing

Protective provisions for senior securities

Provisions relating to bond issues

Issuance of additional bonds

Maintenance and depreciation fund

Sinking funds

Dividend restrictions

Provisions relating to preferred stock

Default in dividend payments Issuance of unsecured debt

Issuance of prior ranking preferred stock

Issuance of equally ranking preferred stock

Merger or consolidation

Restriction on common stock dividends

Amendment of the articles of incorporation Competitive bidding

Exemptions from the provisions of the act

Regulation of utility accounts

Cooperation with State commissions

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PART IV

PARTICIPATION OF THE COMMISSION IN CORPORATE

REORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY ACT, AS AMENDED_________________________________ 95

Summary of aetivitiesc., , _________ _______ ___ _____ 95

Commission's functions under chapter X:________________________ 96

Problems in the administration of the estate __________________ 96

Responsibilities of flduciariesc; , ____ _________ _____ 97

Activities with respect to allowances_________________________ 98

Institution of chapter X proceedings and jurisdiction of the court____ 99

Plans of reorganization under chapter X__________________________ 100

Fairness and feasibility _ __ _ _____ ____ _ ____ 100

Modification of plan , ______________________ ___ __ 101

Advisory reports; _ __ ___________ _________ 102

PART V

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939_ 105 Scope of aet , _ ___ __ ____ __ __ ________________ 105

Statistics of indentures qualified__ _______ _____________________ 105

Problems encountered in administration of act____________________ 106

Examination procedure_________________________________________ 106

Significance of Commission's examination____________________ 108

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PART VI

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ADMINISTRATION OF THE INVESTMENT COMPANY ACT

OF 1940_______________________________________________________ 109

Scope of act ._ ____________________ __ _ _____ ___ 109

Advisory reports upon plans of reorganization_____________________ 109

New rules adopted under the act , 110

Rule N-5-Procedure with respect to applications_____________ 110

Rule N-17A-2-Exemption of transactions by banks___________ 110

Rule N-17A-3-Exemption of transactions with subsldiariesc c ; 110

Rule N-17D-1-Bonus, profit-sharing, and pension plans_______ 110

Statistics relating to registered investment companies; 110

PART VII

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT

OF 1940_______________________________________________________ 113

Registration statistdcs , _______ _ ____________ ___ ___ ___ 113

Litigation under the act., ______________ ____ _____________________ 113

PART VIII

OTHER ACTIVITIES OF THE COMMISSION UNDER THE VARI- OUS STATUTES

The Commission in the courts

Civil proceedings

Criminal proceedings

Complaints and investigations

Investigations of securities violations

Securities violations file

Activities of the Commission in accounting and auditing Examination of financial statements

Revision of regulation S-X

Some cases before the Commission

Changes in forms for registration Form 8-1

Form lo-Jr

Forms 10, A-I, and E-L

Form 8-7

Developments in accounting principles and procedures

Developments in auditing practices and professional conduct Statistics and special studies .Saving study ,_

Financial position of corporations

Survey of American listed corporations Investment company data

Brokers and dealers

Quarterly sales data

Stock market statistics

Opinion Writing Office-- Formal opinions Publications

Public releases

Other publications

Information available for public inspection Public hearings Personnel .

Fiscalaffairs

Confidential treatment of applications, reports, or documents

Advisory and interpretative assistance

International financial and economic matters

International Bank for Reconstruction and Development.

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TABLE OF CONTENTS

PART IX

APPENDIX-STATISTICAL TABLES

IX

Page

Table. 1. Registrations under the Securities Act of 1933 fully effective during the fiscal year ended June 30, 1947:

Part 1. Distribution by months; _____ ________ _____________ 147

Part 2. Break-down by method of distribution and type of security of

the volume proposed for cash sale for account of the issuers , 147

Part 3. Purpose of registration and industry of registrant__________ 148

Table 2. Classification by quality and size of new issues, exclusive of investment trust issues, registered under the Securities Act of

1933 for sale to the general public through investment bankers

during the fiscal years 1945, 1946, and 1947:

Part 1. Number of issues and aggregate value_____________________ 149

Part 2. Compensation of distributors____________________________ 150

Table 3. New securities offered for cash sale in the United States:

Part 1. Type of offering________________________________________ 151

Part 2. Type of security________________________________________ 152

Part 3. Type of issuer _________________ ______ ___ _ 153

Part 4. Private placements of corporate securities_________________ 154

Table 4. Proposed uses of net proceeds from the sale of new corporate

securities offered for cash sale in the United States:

Part 1. All corporate___________________________________________ 156

Part 2. IndustriaL 157

Part 3. Public utility _________ _________________ _______ 158

Part 4. Railroad; ___ ________ ____________________ 159

Part 5. Real estate and financiaL_______________________________ 160

Table 5. Brokers and dealers registered under section 15 of the Securities

Exchange Act of 1934-effective registrations as of June 30,

1947, classified by type of organization and by location of prin- cipal office_________ _______ __ ________ 161

Table 6. Data relating to resources and liabilities of registered brokers and

dealers-1946___________________________________________ 163

Table 7. Market value and volume of sales effected on securities exchanges for the fiscal year ending June 30, 1947__ 164

Part 1. On all registered exchanges; _____________________ __ 164

Part 2. On all exempted exchanges______________________________ 165

Table 8. Special offerings effected on national securities exchanges for

fiscal year ended June 30, 1947____________________________ 165

Table 9. Round-lot stock transactions effected on the New York Stock

Exchange for the accounts of members and nonmembers, weekly, July 1, 1946, to June 28, 1947_ 166

Table 10. Odd-lot stock transactions effected on the New York Stock Exchange for the odd-lot accounts of odd-lot dealers, specialists,

and customers, weekly, July 1, 1946, to June 28,1947______ 168

Table 11. Round-lot and odd-lot stock transactions effected on the New

York Curb Exchange for the accounts of members and non- members, weekly, July 1,1946, to June 28,1947___________ 170

Table 12. Basic forms used by issuers in registering securities on national

securities exchanges and, for each form, the number of secu- rities registered and the number of issuers involved as of June

30, 1946, to June 30, 1947-_ __________ ________________ J 72

Table 13. Classification by industries of issuers having securities registered on national securities exchanges as of June 30, 1946, to June

30, 1947_______________________________________________ 172

Table 14. Number and amount of securities classified according to basis

for admission to dealing on all exchanges as of June 30, 1947_ 173

Table 15:

Part 1. Number and amount of securities classified according to the

number of registered exchanges on which such issue was admitted to dealing as of June 30,1947_________________ 174

Part 2. Proportion of registered issues that are also admitted to

unlisted trading privileges on other exchanges as of June

30, 1947_____________________________________________ 174

Part 3. Proportion of issues admitted to unlisted trading privileges

that 1947 are also registered ~_____________________________________ on other exchanges as of June 30, 174

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x TABLE OF CONTENTS

Table 15: P/I&8

Part 4. Proportion of all issues admitted to dealing on registered

exchanges that are admitted to dealing on more than one registered exchange as of June 30,1947__________________ 175

Table 16. Number of issuers having securities admitted to dealing on all

exchanges as of June 30, 1947, classified according to the

basis for admission of their securities to dealing____________ 175

Table 17. Number of issuers having stock only, bonds only, and both

stock and bonds, admitted to dealing on all exchanges as of

June 30, 1947__________________________________________ 175

Table 18. Number of issuers and securities, basis for admission of securities to dealing, and the percentage of stock and bonds, for

each exchange, admitted to dealing on one or more other

exchanges as of June 30, 1947____________________________ 176

Table 19. Number of issues admitted to unlisted trading pursuant to

clauses 2 and 3 of section 12 (f) of the Securities Exchange

Act of 1934 and volume of transactions therein____________ 177

Table 20:

Part 1. Electric utility properties divested by registered holding

companies, July 1,1946, to June 30,1947________________ 178

Part 2. Gas utility properties divested by registered holding com- panies, July 1,1946, to June 30,1947___________________ 180

Part 3. Nonutility properties divested by registered holding com. panies, July 1, 1946, to June 30, 1947 ~_____ 181

Table 21. Utility and other properties subject to divestment under section

11 (b) (1) orders outstanding as of June 30, 1947__________ 182

Table 22. Public utility holding companies subject to dissolution or liquidation and subsidiaries subject to divestment under

section 11 (b) (2) orders outstanding as of June 30, 1947__. 185

Table 23. Number of applications and declarations received and disposed

of during the fiscal year ended June 30, 1947 under the

Public Utility Holding Company Act of 1935______________ 190

Table 24. Reorganization cases instituted under chapter X and section

77B in which the Commission filed a notice of appearance and

in which the Commission actively participated during the

fiscal year ended June 30, 1947:

Part 1. Distribution of debtors by type of industry________________ 190

Part 2. Distribution of debtors by amount of indebtedness__________ 190

Table 25. Reorganization proceedings in which the Commission participated during the fiscal year ended June 30, 1947____________ 191

Table 26. Statistical summary of all cases instituted by the Commission

under the Securities Act of 1933, the Securities Exchange

Act of 1934, the Public Utility Holding Company Act of

1935, the Investment Company Act of 1940, and the Investment Advisers Act of 1940_______________________________ 194

Table 27. Statistical summary of all cases instituted against the Commission, cases in which the Commission participated as inter- venor or amicus curiae, and reorganization cases on appeal

under chapter X in which the Commission participatedpending during the fiscal year ended June 30,1947 194

Tabel 28. Injunctive proceedings brought by Commission, under the

Securities Act of 1933, the Securities Exchange Act of 1934,

the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, and the Investment Advisers

Act of 1940, which were pending during the fiscal year ended June 30, 1947_______________ __ _______________ 195

Table 29. Indictments returned for violation of the acts administered by

the Commission, the Mail-Fraud Statute (sec. 338, title 18,

U. S. C.), and other related Federal statutes (where the Commission took part in the investigation and development of the

case) which were pending during the 1947 fiscal year________ 198

Table 30. Petitions for review of orders of Commission under the Securities

Act of 1933, the Securities Exchange Act of 1934, the Public

Utility Holding Company Act of 1935, and the Investment

Company Act of 1940, pending in circuit courts of appeals during the fiscal year ended June 30,1947____________________ 202

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TABLE OF CONTENTS XI

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Table 31. Contempt proceedings pending during the fiscal year ended June

30,1947: Part 1. Civil contempt proceedings , _________________________ _ 205

Part 2. Criminal contempt proceedings___________________________ 206

Table 32. Miscellaneous actions against the Commission or employees of

the Commission during the fiscal year ended June 30, 1947_ ___ 206

Table 33. Cases in which the Commission participated as intervenor or as amicus curiae, pending during the fiscal year ended June 30, 1947__________________________________________________ 208

Table 34. Proceedings by Commission, pending during the fiscal year

ended June 30, 1947, to enforce subpoenas under the Securities Act of 1933 and the Securities Exchange Act of 1934-_ 211

Table 35. Actions to enforce voluntary plans under section 11 (e) to com- ply with section 11 (b) of the Public Utility Holding Company ActofI935___________________________________________ 212

Table 36. Actions under section 11 (d) of the Public Utility Holding Company Act of 1935, to enforce compliance with Commission's

order issued under section 11 (b) of that acL_______________ 213

Table 37. Reorganization cases under chapter X, pending during the fiscal

year ending June 30, 1947, in which the Commission participated when appeals were taken from district court ordersc. , , 214

Table 38. Cases involving statutes administered by the Securities and

Exchange Commission-July 1, 1944 through June 30, 1947:

Part 1. Securities Act of 1933______________________________ __ 219

Part 2. Securities Exchange Act of 1934__________________________ 219

Part 3. Public Utility Holding Company Act of 1935 ______________ 220

Part 4. Trust Indenture Act of 1939 and Investment Company Act of 1940___________________________________ 222

SPECIAL TABLES

Table 39. A 13- year summary of data respecting securities registered under

the Securities Act of 1933 and the amount of proceeds for new money purposes-July 1933 through June 1947, by fiscal

year__________________________________________________ 223

Table 40. A 14-year summary of new securities offered for cash in the

United States, as to type of issuer, type of security, whether

publicly offered of privately placed, and the intended use of

the proceeds-1934 through 1947, by calendar year_________ 224

Table 41. A 14-year summary of corporate bonds publicly offered and

privately placed in each year-1934 through 1947, by calendar

year__________________________________________________ 225

Table 42. A 12-year summary of dollar amounts of divestments in each

year under the Public Utility Holding Company Act of

1935---from 1936 to July 1.1947_________________________ 225

Table 43. A 12-year summary of disciplinary proceedings under the

Securities Exchange Act of 1934 taken by the Commission

respecting over-the-counter brokers and dealers-1936 through 1947, by fiscal year_____________________________________ 226

Table 44. A 14-year summary of criminal cases developed by the Commission-1934.through 1947, by fiscal year________________ 227

Table 45. An ll-year summary of criminal cases developed by the Commission which are still pending-1937 through 1947, by fiscwyear_____________________________________________ 227

Table 46. A 14-year summary classifying all defendants in criminal cases developed by the Commission-1934 to July 1, 1947________ 228

Table 47. A 14-year summary of all injunction cases instituted by the

Commission-1934 to July 1, 1947, by calendar year________ 228
FOREWORD

This report is submitted pursuant to law to inform the Congress

about the work of the Commission, Of necessity, it is only a summary

and cannot do more than highlight the more prominent phases of the

Commission's activities under the various statutes which it administers. Equally significant are the many aspects of the Commission's

day to day activities which play such a large part in the carrying on of

its functions. Space does not permit an adequate presentation of such

matters, but in considering the totality of the Commission's activities

they should not be forgotten. The Commission is always ready to

give any additional information that may be sought concerning its

work, either by the Congress or by members of the public.

The year covered herein was marked by a continuation of high levels

of economic activity and of commensurate levels of Commission work.

Particularly significant was the fact that the volume of financing

during the 1947fiscal year for new money purposes exceeded even that

of 1946-when the total volume of financing was at its highest point.

Further substantial progress has been made toward completion of

the program of integration of the nation's electric and gas public

utility holding company systems and the simplification of their corporate structures pursuant to the requirements of Section 11 of the

Public Utility Holding Company Act of 1935. Thus, not only are

the holding company systems being brought into conformity with the

pattern set forth by Congress in the Act, but in addition the financing

of the industry's present extensive expansion program is greatly facilitated. In the latter connection it is significant that the public utility

industry has done more new money financing during the 1947 fiscal

year than the aggregate of all such financing for the twelve preceding

years.

The continued effort of the Commission to simplify its procedures

and forms, and to avoid unnecessary duplication in its disclosure

requirements is manifest throughout the report. In this connection,

we may note the adoption of rules and forms to facilitate the operations of the International Bank for Reconstruction and Development;

the promulgation of rules eliminating unnecessary hearing procedures

under the Investment Company Act; and the simplification of basic

Securities Act registration forms and the elimination of other forms.

One of the significant activities of the Commission during the past

year was its undertaking of a program of study of the operations of

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

with a view to an ultimate recommendation to the Congress of desirable and workable amendments to these statutes. Conferences have

been held with representatives of all groups directly concerned with

the operations -of these statutes. DIscussions were had with and

comments were solicited frcm investors, large and small, and representatives of underwriters, dealers, securities exchanges, State regulatory bodies, and professional groups of attorneys and accountants.

The Commission expects that, before the close of the current fiscal

year, its officeswill have been returned from Philadelphia to Washington. It is hoped that the move will facilitate contact between the

Commission and the Congress.

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COMMISSIONERS AND STAFF OFFICERS

Commissioners T';,~:~pireB

JAMES J. CAFFREY,of New York, Chairman ,________________________ 1950

ROBERTK. MCCONNAUGHEY,of Ohio________________________________ 1949

RICHARDB. McENTIRE, of Kansas__________________________________ 1948

EDMONDM. HANRAHAN, of New York 3_____________________________ 1952

I!AnRy A. McDoNALD, of Michigan 3________________________________ 1951

Secretary: ORVALL. DuBoIS

Staff Officers

BALDWINB. BANE, Director, Corporation Finance Division. ANDREWJACKSON,Associate Director.

MORTONE. YOHALEM,Director, Public Utilities Division. RORERTF. KRAUSE,

Associate Director.

JAMES A. TREANOR,Director, Trading and Exchange Division.

ROGERS. FOSTER,Solicitor.

EARLEC. KING, Chief Accountant.

IIERBERTB. COHN, Director, Opinion Writing Office.

WALTERC. LoUCHHEIM,JR., Adviser on Foreign Investments.

NATHAN D. LoBELL,Adviser to the Commission.

SHEBRYT. MCADAM,JR., Assistant to the Chairman.

HASTINGS P. AVERY,Director, Administrative Division.

WILLIAM E. BECKER,Director of Personnel.

JAMES J. RIORDAN,BUdget and Fiscal Officer.

REGIONAL AND BRANCH OFFICES

Regional Offices

Zone I-PETER T. BYRNE, Equitable Building (Room 2006), 120 Broadway,

New York 5, N. Y.

Zone 2-PAUL R. ROWEN, Post Office Square Building (Room 501), 79 Milk

Street, Boston 9, Mass.

Zone 3-WILLIAM GBEEN,Atlanta National Building (Room 322), Whitehall

and Alabama Streets, Atlanta 3, Ga.

Zone 4---CHABLES J. ODENWELLEB,JR., Standard Building (Room 1608) J

1370 Ontario Street, Cleveland 13, Ohio.

Zone 5-THOMAS B. HART, Bankers BUilding (Room 630),105 West Adams

Street, Chicago 3, Ill.

Zone 6-ORAN H. ALLRED,United States Courthouse (Room 103), 10th and

Lamar Streets, Forth Worth 2, Tex.

Zone 7-JOHN L. GERAGHTY,Midland Savings Building (Room 822), 444

Seventeenth Street, Denver 2, Colo.

Zone 8-HOWARD A. JUDY, Appraisers Building (Room 308), 630 Sansome

Street, San Francisco 11, Calif.

Zone 9-DAY KABR, 1411 Fourth Avenue Building (Room 810), Seattle I,

Wash.

Zone lo-E. RUSSELLKEILY, O'Sullivan Building (Room 2410), Baltimore 2,

Md.

Branch Offices

Federal Building (Room 1074), Detroit 26, Mich.

United States Post Office and Courthouse (Room 1737), 312 North Spring

Street, Los Angeles 12, Calif.

Pioneer Building (Room 500), Fourth and Roberts Streets, St. Paul L, Mlnn,

Drew Building (Room 202), Third and Boston Streets, Tulsa 3, Okla.

United States Courthouse and Custom House (Room 1006), 1114 Market

Street, St. Louis I, Mo.

1Elected chairman on July 23, 1946, resigned December 31, 1947. 3Appointed July :'i, 1946, to the vacancy created by the resignation of GANSON PURCELL.

aAppointed March 18, 1947, to succeed the late ROBERT E. HEALY.

XIII
COMMISSIONERS APPOINTED DURING FISCAL YEAR

EDMOND M. HANRAHAN

Mr. Hanrahan was born in the city of Cortland, N. Y., August 14,

1905. He was graduated from Cortland High School, attended Fordham University, graduated from Fordham University Law School in

1928with an LL. B. degree and was admitted to the Bar of the State

of New York in 1929.

In 1933 Mr. Hanrahan became a partner in the firm of Sullivan,

Donovan & Heenehan and practiced law with that firm until his appointment to the Commission.

Mr. Hanrahan served for 4 years as a member of the committee

on State legislation of the Association of the Bar of the City of New

York and has been special counsel to the superintendent of banks of

the State of New York. On July 5, 1946, he was appointed to the

Securities and Exchange Commission for a term of officeending June

5,1947, and has since been reappointed for a full 5-year term.

HARRY A. McDONALD

Mr. McDonald was born in Cherokee, Iowa, June 17, 1894. He

attended public schools in Cherokee County, graduated from high

school in Cedar Falls, Iowa, attended Iowa State Teachers College

for 3 years and received a Ph. B. degree from the University of Chicago in 1917.

Mr. McDonald served in the United States Navy from 1917 to 1919

and then entered business in Cleveland, Ohio. In 1923 he moved to

Detroit, Mich., and was actively engaged in the dairy industry until

1932. In 1932 he formed McDonald, Moore & Hayes, Inc., an investment firm which became McDonald, Moore & Co. in 1936. He resigned

from that firm to accept his present appointment.

Mr. McDonald served as chairman of the Michigan Unemployment

Compensation Commission for 3 years and was a member of the

Michigan State Fair Board for 6 years, 1 as chairman. On March 18,

1947,he was appointed to the Securities and Exchange Commission for

a 5-year term of officeending June 5, 1951.

XIV
PART I

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The primary purpose of the Securities Act of 1933is to prevent fraud

in the sale of securities. To accomplish this purpose the act requires

the fair disclosure of information about securities by means of the

registration statement and prospectus before the securities are publicly

offered for sale to the investor. In addition, certain practices in connection with the sale of securities are defined as fraudulent and made

unlawful. The requirements as to the registration of a security and

the use of a prospectus are designed to provide the investor with sufficient facts about the security to enable him to make an informed

judgment of the merits of the investment before he buys the security

offered to him. The provisions defining and prohibiting certain

fraudulent practices are aimed at the prevention and punishment

of active fraud, misrepresentation, and deceit. The Commission

neither makes any determinations as to the merits of any security

nor passes upon the value of any investment. The act does not aim

at the elimination of risk in investment, but only at the disclosure

of sufficient information to enable the investor to measure the risk.

THE REGISTRATION PROCESS

The Registration Statement and Prospectus

The principle of full and fair disclosure of material facts about

a security is applied in practice by means of the registration statement and the prospectus. The registration statement is filed with the

Commission and must become effective before the security being

registered may be publicly offered for sale in interstate commerce or

by use of the mails. The registration statement becomes a public

document when filed (except where the act provides for confidential .

treatment) and is available for inspection by the public. Financial

houses, financial writers, the investment services, and newspapers

make major use of the registration statement as a source of information and publicize the facts which it contains.

The prospectus serves to bring pertinent information contained in

the registration statement directly to the attention of the investor.

It is unlawful to offer a registered security for sale by means of a

prospectus unless the prospectus contains the information required

by the act.

The act sets forth the information required to be contained in

the registration statement and prospectus. This includes, for example, information about officers and directors of the issuer of the

security; the nature, size, and degree of success of the business; the

issuer's capitalization; the purpose of the financing and the use to

which the proceeds will be put; the compensation which the under1
2 SECURITIES AND EXCHANGE COMMISSION

writer is to receive; options outstanding against securities of the

issuer; bonus and profit-sharing agreements; and :pending or threatened legal proceedings against the issuer. In addition, certified financial statements are a part of every registration statement.

Effective Date of Registration Statement

In order to permit the information contained in a registration

statement to become known to the investing public, the act provides

a 20-day waiting period after the filing of the registration statement

before the registration statement becomes effective and the security

may be offered for sale. If the registration statement is amended

after it is filed but before it has become effective, the 20-day waiting

period starts anew from the time of the amendment, unless the amendment is filed with the consent of or by order of the Commission.

The Commission is empowered at its discretion to accelerate the

effective date of a registration statement, in cases where the facts

justify such acceleration, so that the full 20-day period need not

expire before the securities may be offered for sale. The act directs

that, in the exercise of this power, the Commission must give due regard to the adequacy of the information about the security already

available to the public, to the complexity of the particular financing,

and to the public interest and the protection of investors.'

One of the main functions of the Commission under the act is the

examination of registration statements to determine compliance with

the requirements of the act and its standards of full and fair disclosure. In view of the fact that a registration statement may become

effective on the twentieth day after filing, the examination by the

staff must be completed with a maximum speed consistent with

thoroughness and a full consideration of all the facts. Neither the

Commission, the issuer, nor the underwriter desires a statement to become effective unless it fully complies with the act. It is often the

case that the staff will ascertain that deficiencies exist in the registration statement, or the issuer or underwriter may wish to amend the

statement or delay its effectiveness for business reasons. In such

cases, if there is a danger that the registration statement may become

effective in defective form or prematurely for the purposes of the

issuer or underwriter, it is customary for the issuer to file a minor

amendment to the registration statement, thereby starting the 20-day

period running anew.

In order to speed the registration process, and at the same time to

make available to the registrant the assistance of the Commission's

staff of experts, the Commission has adopted the procedures of the

prefiling conference and the "letter of comment." The prefiling conference enables the re~istrant to discuss with the staff, prior to the

filing of the registration statement, any special problems involved

with respect to the particular registration statement. The letter of

comment is an informal device by which the registrant is informed of

any deficiencies found to exist in the registration statement as filed.

The registrant can therefore make the necessary amendments and

1 In the 1947 fiscal year, acceleration was requested and granted with respect to 98 per- clint of the registration statements which became elfective in that year.
THIRTEENTH ANNUAL REPORT 3

thereby prevent the registration statement :frombecoming effective in

deficient form.

Time Required for Registration

The Commission, with the cooperation of persons in the securities

industry, constantly studies and adopts ways to cut down the elapsed

time from the day the registration statement is filed to the day when

it is in proper form and becomes effective. The prefiling conference

and deficiency letter are two of the results of this continuous study.

The Commission's staff has by and large been able to supply the

registrant with a deficiency' letter before the 20-day waiting period

expires. It is rarely possible, however, for the registrant to make

corrections within that 'time. Further, as has been pointed out, the

registrant often desires to delay the effective date of the registration

statement, particularly in a period of a declining market.

The Commission has recently made two studies to determine the

median elapsed time for completion of the registration process. For

convenience and simplicity, the elapsed time has been broken down

into three periods: (1) the time required after filing for the staff to

prepare a deficiency letter; (2) the time consumed by the registrant

in filing necessary amendments; and (3) the elapsed time thereafter

until the statement became effective. These two studies are described

and their results tabulated below.

First Study

This study was based on 665 registration statements, involving

offerings of securities aggregating more than $6,600,000,000,which

became effective during the 1946 calendar year. The 1946 calendar

year covers a period in which there was a considerable volume of

public financing. During that year, a total of 803 registration statements were filed for proposed offerings aggregating $7,900,000,000,the

largest dollar amount of offerings for any single year since adoption

of the Securities Act. The results of the study follow: Median number Elapsed, time 0/ dallS

From date of filing the registration statement to the staff's first letter

of comment__________________________________________________________ 15

From date of letter of comment to date of final amendment by the regis- trant________________________________________________________________ 13

From date of last amendment to date when registration statement be- came effective________________________________________________________ 1

Total median elapsed time______________________________________ 29

Second Study

The second study was made, in somewhat different detail, for each

of the 10 months from August 1946 to and including June 1947. It

covers 423 registration statements which became effective during the

period. The elapsed periods of time shown in the table below are given

in days and are for the median registration statement. In examining

the results of this study, it is to be recalled that there was a precipitous

decline in the stock market beginning in September 1946. This re767629--4S--2
4 SECURITIES AND EXCHANGE COMMISSION

suIted in the voluntary delay of effectiveness of registration state.

ments by many registrants. '

1946 1947

Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June

---------- -- -- Total regtstration statements effectiveduring month 54 29 29 43 38 30 29 50 44 32 45 Elapsed time (median number

of days).

From date of filing registra- tion statement to first letter ofcomment. 16 15 15 13 12 12 10 10 10 11 10 From date of letter of com- ment to first amendment by registrant. ._ 10 10 14 8 17 15 8 8 7 11 9 From date of first amend. ment to the effective date ofregistration 7 9 11 7 13 7 6 5 6 7 6

---- -- Totalmedlanelapsedtlme; 33 34 40 28 42 34 24 23 23 29 25

THE VOLUME OF SECURITIES REGISTERED

Volume of All Securities Registered in Fiscal Year

1947 1946 Total registered $6,732,447,000 $7,073,280,000

The amount of securities effectively registered during the 1947 fiscal

year was 5 percent less than the amount registered in the 1946 fiscal

year, which was the peak year.

The volume registered III the 1947 fiscal year was distributed over

4932 registration statements covering 686 issues, as compared with 661

statements covering 1,015 issues for the 1946 fiscal year.

Volume of Securities Registered for Cash Sale

A. ALL SECURITIES

1947 1946

Registered for

cash sale for

accountsof is- suers $4,874,141,000 $5,423,593,000

Registered for

cash sale for

accounts of

othersthan issuers________ 397,029,000 472,247,000

Total registered

forcash sale $5,271,170,000 $5,895,84O,0Q{)

Totalregistered

for oth- er than

cash

sale 1,461,277,000 1,177,440,000

Total of

all registered

securities $6,732,447,000 $7,073,280,000

----- Tbis figure dift'ers from the 489 shown in the tahle on p. 8 due to dift'erence in the

classification as to the time of eft'ectiveness of registration statements. See footnote 2 to appendix table 1 for details.

-- -- --

________

_________

___•_______

___•________•

-- -- -- -- -- -- -- --

•
THIRTEENTH ANNUAL REPORT 5

B. STOCKS AND BONDS REGISTERED FOR CASH SALE FOR THE ACCOUNTS 01'

ISSUERS

1947

Equity securities other

than preferred stocks $1, 150, 330, 000

Preferred

stocks 786, 866, 000

1946

$1,330,625,000

990,699,000

Total all

stocka.; $1, 937, 196, 000 $2, 321, 324, 000

All

bonds.,., 2, 936, 945, 000 3, 102, 269, 000

Total $4,874,141,000 $5,423,593,000

The volume of bonds registered for cash sale for the accounts of

issuers in the 1947 fiscal year was only slightly less than the volume

for the prior year. There was a more substantial decrease in the volume of stocks registered in the 1947fiscal year for cash sale for the accounts of issuers. But this volume was half again as great as the next

highest volume of stocks registered for cash sale for the accounts of

issuers registered in the 1937 fiscal year.

From September 1934through June 1946,new money purposes represented 20.67 percent of the net proceeds expected from the sale of

issues registered for the accounts of the issuers. In the 1947 fiscal

year, new money purposes were 54.48l?ercent of the expected net proceeds for the year-large enough to raise the 13-year average over five

points to 25.84 percent,"

C. ALL SECURITIES REGISTERED FOR CASH SALE FOR THE ACCOUNTS OF

ISSUERS--BY TYPE OF ISSUER

Type of issuer 1947

~Ianufacturing companies $1,266,055,000

Electric, gas and water companies____________ 1,214,346,000

Transportation and communication companies '_ 1,190,814,000

Financial and investment companies__________ 714,529,000

Foreign governments_________________________ 247,105,000

Merchandising companies___________________ 201, 373, 000

Service companies :.______________ 16, 109, 000

Extractive companies________________________ 15,685,000

Oonstruetlon and real estate companies_______ 8, 125, 000

1946

$1,749,852,000

1,661,274,000

800,381,000

902, 344, 000

30,212,000

174,511,000

24,705,000

72,082,000

8,232,000

Total $4,874,141,000 $5,423,593,000

1Does not Include companies subject to regulation by the Interstate Commerce Commis- sron and therefore exempted from registration. The transportation group no longer includes wholesale gas pipeline companies, now elasstfled in the electric, gas, and water group. An adjustment of $164,414,000 has been made in the respective figures for 1946 to compensate for tills change in classification.

Registrations for cash sale by transportation and communication

companies in the 1947 fiscal year established a record, exceeding by

almost 50 percent the previous high established in the 1946 fiscal year.

The amount of such registrations by manufacturing companies was

28 percent less than that for the 1946 fiscal year, but was the second

largest amount in any fiscal year. Foreign governments registered

over eight times the amount registered in the 1946 fiscal year and exSee also appendix table I, part 3, and tables 39 and 40.

•

•
6 SECURITIES AND EXCHANGE COMMISSION

227,726,000

$5,195,867,000

ceeded the previous peak of $229,005,000established in the 1937 fiscal

year. Merchandising companies exceeded by 6 percent the previous

peak of $190,104,000established in the 1937fiscal year.

D. USE OF INVESTMENT BANKERS AS TO SECURITIES REGISTERED FOR OASH

SALE FOR THE AOCOUNTS OF ISSUEHB

19'7 19'6

Amountregisteredto be soldthroughinvestmentbankers:

Under

agreements

to purchase for resale__ $3, 333, 621, 000 $4, 445, 915, 000

Under

agreements

to use "best

efforts" to

sell________ 697,123,000 749,952,000

Total registered to be

soldthroughinvestment bankers $4,030,744,000

Total registered to be

sold directly to investors

by issuers______________ 843,397,000

TotaI $4,874,141,000 $5,423,593,000

In the 1947 fiscal year, investment bankers were used for the sale

of 83 percent of the total securities registered for cash sale for the accounts of issuers, as compared with 96 percent in the 1946 fiscal year.

Commitments by investment bankers to purchase for resale involved

68 percent of the total registered for cash sale for the accounts of issuers, as compared with 82 percent in the 1946 fiscal year.'

E. COST OF FLOTATION OF SECURITIES REGISTERED FOR OASH SALE FOR THE

ACCOUNTS OF ISSUERS

The cost of flotation of securities registered for primary cash distribution, as reported in the registration statements for such securities,

amounted to 5.5 percent of the aggregate dollar volume of such securities. A further breakdown of this 5.5 percent indicates that 5.0

percent was to be paid as commissions and discounts and 0.5 percent

for all other expenses incidental to the flotation of the securities, including all costs relative to registration. A study of the portion of'

aggregate gross proceeds paid as commissions and discounts to investment bankers on securities registered for sale to the general public

through such bankers reveals a downward trend in recent years, as

may be noted from the table below: 5

See appendix tables 1 through 4 for a more detailed breakdown of the dollar volume of

Securities Act registrations. This table does not include investment trust issues, whose costs are not reported on a basis comparable to that of other issues.

•

•
THIRTEENTH ANNUAL REPORT

Oompensation-Percent of gross proceeds

7

Year ended June 30 Bonds Preferred Common

stock stock

1939_ _. . _. ._ 2.0 6.4 16.9 1940 _. _. .•• .• •. 1.9 7.2 16.4 1941. .• .• . 1.8 4.1 14.4 1942 _. _. •. . 1. 5 4. 1 10. 1 1943••••. _. _. _. _. . ._. •. "_ 1.7 3.6 9.7 1944 .'. .• _. . . . 1.5 3. 1 8. 1 1945 _. . 1. 3 3. 1 9. 3 1946 ._. . . .9 3.1 8.0 1947 . . _. .9 2.8 9.3

A trend similar to that noted in the table may be noted with respect

to bonds, subdivided on the basis of the investment risk involved."

THE VOLUME OF UNREGISTERED SECURITIES

Total of Unregistered Corporate Issues

Some $2,370,000,000 of unregistered new corporate securities are

known to have been offered for cash sale by issuers in the 1947 fiscal

year, as compared with $2,696,000,000in the 1946 fiscal year.' The

basis for exemption of these securities from registration is broken

down as follows: 8

292,000,000

27,000,000

9,000,000

143,000,000

Basis for exemption from registration 1947

Privately placed issues $1,899,000,000

Issues under the jurisdictionof the Interstate

Commerce Commission _ Issues of bank securities _ Intrastate offerings _

Offeringsunder regulationA ' _

19,f6

$1,189,000,000

1,317,000,000

74,000,000

4,000.000

112,000,000

Total $2,370,000,000 $2,696,000,000

, Includes only ofl'erlngs between $100,000 and $300,000 in size. See p, 19 for a more detailed discussion of regulation A ofl'ers.

Total of Unregistered Governmental and Eleemosynary Issues

The total of unregistered governmental and eleemosynary securities

offered for cash sale in the United States was $ 12,385,000,000,as compared with $28,795,000,000in the 1946fiscal year. These totals consist

of the following: 9

Issuer 1947

United States GovernmenL . $10,264,000,000

Federal agencies__________________________ 140,000,000

States and munlclpalitles__________________ 1,975,000,000

Miscellaneous nonprofit organlzations______ 6,000,000

19,f6

$27,258,000,000

608,000,000

928,000,0001

Total 12,385,000,000 28,795,000,000

1Less than $1,000,000.

Volume of All Unregistered Issues Offered for Cash Sale'

19,f7 19,f6

Corporate Issues $2,370,000,000 $2,696,000,000

Noncorporate issues 12,385,000,000 28,795,000,000

Total $14,755,000,000 $31,491,000,000

----- oCompare part 2 of the appendix table 2 with the same table in the Twelfth, Eleventh,

and Ninth Annual Reports

ThIs does not include oll'ers of securities of $100,000 or less.

the Where a security may have been exempted from registration for more than one reason, e security was counted only once. See appendix table 3 for a more detailed statistical break-down of the volnme of all

Becurlt1eB o1feredfor cash sale in the United States.

•• __• ___• _____• ____•• ___••• __•• __ ____•• ____•••• __• __• ____ ••• __• ___• ___• _________• _____• _________• ____ __•• ___ ___

___•______•• ____• ___•• ____•____ ____••• ____• ____•• ___• ____ __ ___•• __•• _•• ____•• ___•• __• ___ ______•_____•__•• ____•____•__ ____•___•• _________•• __ _____________ ___ ____ __•__•• __ _____•___• ____ _____• _____• ___• ____ _______ _____ __•____•• __• ___•_____• ____' ____•• ____•• _____• ______________• __ __•• ____ __• _________•• ____•• __• _______• _____•____________ ___

•••• ____••• __• ____•• ____ _____•• _•• _••• __•• _____•___•_____ ___•

•

•
8 SECURITIES AND EXCHANGE COMMISSION

THE VOLUME OF ALL SECURITIES OFFERED FOR CASH SALE ..

Total of Registered and Unregistered Securities Offered for Cash Sale:

Registered securities: 1947 19"6

Corporate (excluding Investment eos.) $3,833,000,000 $4,626,000,000

Noncorporate (foreign government) 247,000,000 30,000,000

Total registered securities $4,080,000,000 $4,656,000,000

Unregistered securities : Corporate $2,370,000,000 $2,696,000,000

Noncorporate 12,385,000,000 28,795,000,000

Total unregistered securities $14,755,000,000 $31,491,000,000

Total all securities $18,835,000,000 $36,147,000,000

New Capital and Refinancing

Proceeds from corporate securities flotations, both registered and

unregistered, applicable to expansion of fixed and working capital

amounted to $3,965,000,000 compared with the peaks of $1,617,000,000

in the 1946 fiscal year and $1,196,000,000 in the 1937 fiscal year.

While entirely comparable figures for the years prior to 1934, the date

when this statistical series began, are not available, it appears that the

new money volume in the 1947 fiscal year was as large as the high levels

reached in the twenties. Industrial and miscellaneous firms accounted

for 58 percent of the new money financing, public utility companies

(including telephone companies) for 37 percent and railroad companies for 5 percent. The volume of refinancing through new issues

of securities declined to $2,011,000,000 compared with the 1946 record

high of $5,297,000,000.11

STATISTICS OF SECURITIES REGISTERED UNDER THE ACT

The aggregate dollar amount involved in registration statements

filed in the 1947 fiscal year exceeds that for any fiscal year except the

preceding year 1946. As shown in the table below there were 567

statements filed in the 1947 fiscal year covering proposed offerings in

the aggregate amount of $6,934,388,303, as compared with the amount

of $7,401,260,809 for the 1946 fiscal year.

Number and disposition of registration statements filed

Prior to July I, July I, 1946,to Total as of

1946 June 30, 1947 June 30, 1947

Registration statements: Filed 6,572 567 7,139

EIfective-net. ____________________________________ 15,339 , 489 5,825

Withdrawn Under stop or refusal order-net. 182 1 '181 _______________________________________ 913 123 1,036 Pending at June 30,1946 1138

A~e:t~.fo~~~eo~l947 -------.---.--------------- ------- 97

Aa filed____________________________________________ $39,754,139,439 $6, 934,388,303 $46,688,527,742 As effective, ._. _____________________________ $35, 643,256,162 $6, 732,446,684 $42, 375,702,846

1Adjusted figure. (Previously published figures were 5,341and 136,respectively.) , Excludes 10registration statements which became e1Iective and were subsequently withdrawn . Three registration statements which became e1Iective prior to July 1, 1946,were withdrawn during the

year and are counted in the number withdrawn.

Two registration statements which were under stop order prior to July 1, 1946,were withdrawn during the year and are counted ill the number of withdrawn statements .

.. The figures given in this section exclnde secnrlties of investment companies because

complete data on cash sales of these securities are not available. See footnote 1 to appen- dix table S for a complete description of the securities included in these figures. axSee appendix tables 4, 39, and 40 for statistics in greater detail as to the use of net proceeds from the sale of securities.

______•• __•• _•• _______________________________

•

• __________________

_______________ •___________ ---------------- --------- ------- ----------~------ - --------

__• • •__

•

•
THIRTEENTH ANNUAL REPORT

Additional documents fiZed in the 1941 fiscaZ year under the act

9

Nature of document: Number

Material amendments to registration statements filed before the effec- tive date of registration 1,106

Formal amendments filed before the effective date of registration for

the purpose of delaying the effective date 2,030

Material amendments filed after the e1l'ective date of reglstratlon.L,., 555

Total amendments to registration statements 3, 691

Supplemental prospectus material, not classified as amendments to registration statements- 1, 231

Reports filed under section 15 (d) of the Securities Exchange Act of

1934 pursuant to undertakings contained in registration statements under the Securities Act of 1933 : Annual reports_____________________________________________ 601

Current reports____________________________________________ 296

EXEMPTION FROM REGISTRATION UNDER THE ACT

The Commission is empowered under section 3 (b) of the act to

exempt from registration, subject to such terms and conditions as it

might prescribe by rule and regulation, issues of securities not exceeding an aggregate offering price to the public of $300,000. Five regulations have been adopted pursuant to this authority: regulation A,

a general exemption for small issues; regulation A-R, a special exemption for notes and bonds secured by first liens on family dwellings; 12

regulation A-M, a special exemption for assessable shares of stock

of mining companies; regulation B, an exemption for fractional undivided interests in oil or gas rights, and regulation B-T, an exemption for interests in oil royalty trusts or similar types of trusts or unincorporated associations.

The availability of an exemption under anl of these regulations

does not include any exemption £rom civil Iiabilities under section 12

or from criminal liabilities for fraud under secton 17. In order to

insure the proper enforcement of these sections, the conditions for the

availability of the exemptions provided by these regulations, with

the exception of regulation A-R, mclude the requirements that certain

minimum information be filed with the Commission and that disclosure of certain information be made in sales literature.

Exempt Offerings Under Regulation A

Inthe 1947 fiscal year business made greater use of public offerings

under the general exemption provided by regulation A than in the

prior year. Thus~ the number of letters of notification received and

examined thereunder rose £rom a total of 1,348 in the 1946 fiscal year

to 1,513 in the 1947 fiscal year; and the aggregate offering price increased at the same time from $181,600,155 to $210,791,114. Included

in the 1947 fiscal year's offerings were 68 letters of notification relating

to oil and gas leases. Securities of companies engaged in various

phases of the oil and gas business totaled an aggregate offering price of

$8,660,26l.

The distribution of the 1,513 letters of notification by size of offering

show:s that 761 covered proposed offerings of $100,000 or less; 298

offerings of more than $100,000 but less than $200,000; and 454 inU Inasmuch as no reports or filings are required under this regulation, no statistical

data as to its application and use are available.

-
10 SECURITIES AND EXCHANGE COMMISSION

volved offerings in excess of $200,000but not more than the statutory

maximum of $300,000.

The regulation makes provision for the filing of the requisite letter

of notification at the appropriate regional officeof the Commission for

the greater convenience of small businesses making use of this regulation. The letters of notification and the related sales literature are

examined in the regional officewhere filed and then reviewed by a staff

of experts at the Commission's central office. This review involves

a search for pertinent information in the Commission's extensive files

and an examination to determine whether the exemption of the regulation is applicable in the particular case and whether the information

filed discloses any violations of any of the acts administered by the

Commission. The results of this review are made available promptly

to the regional officeinvolved. 1,800 letters were written in this con-:

nection during the fiscal year. In addition, the Commission cooperates with the proper authorities in the States in which the securities are proposed to be offered by informing them of the fact that

the offering is to be made and giving them a summary of pertinent

data concerning the proposed offer.

It should be emphasized that, as suggested above, the exemption

from registration provided by regulation A, as well as by the other

exemptions granted under section 3 (b), does not constitute complete

exemption from all provisions of the act. Thus these exemptions are subject to the express provisions of section 12 imposing

civil liability on persons who sell securities in interstate commerce or

through the mails by means of untrue statements or misleading omissions, and to the provisions of section 17, which makes it unlawful

to sell securities by such means or by other types of fraud. By their

express terms, each of these sections is applicable whether or not the

transactions involve securities which have been exempted under section 3 (b). Accordingly, the principal effect of a section 3 (b) exemption is to permit the sale of securities on the basis of a less complete

formal filing than that required by the act in the case of a registered

security.

Exempt Offerings Under Regulation A-M

The Commission received and examined during the year a total

of three prospectuses covering an aggregate offering price of $150,000

for assessable shares of stock of mining corporations conditionally

exempt from registration pursuant to rule 240 of regulation A-M.

Exempt Offerings Under Regulation B

Pursuant to regulation B, which provides for the conditional

exemption from registration of fractional undivided interests in oil

or gas rights where the aggregate offering price does not exceed

$100,000,the Commission last year received and examined 135 offering

sheets, and 161 amendments to such offering sheets, with respect to

which the following actions were taken:
THmTEENTH ANNUAL REPORT 11

Various actions on filings under regulation B

Temporary suspension orders (rule 340 (a» 53

Orders terminating proceedings after amendmenL______________________ 41

Orders consenting to withdrawal of offering sheet and terminating proceeding___________________________________________________________ 10

Orders terminating effectiveness of offering sheet (no proceeding pendlng)__ 11

Orders consenting to amendment of offering sheet (no proceeding pending) __ 56

Orders consenting to withdrawal of offering sheet (no preceedlng pending) __ 8

Totalorders 179

Oonfidential written reports of sales under regulation B.-The

Commission also received and examined during the year 2,698 confidential written reports required pursuant to rules 320 (a) and 322

(c) and (d) of regulation B concerning sales made by broker-dealers

or offerors to investors and by dealers to other dealers. This total

consisted of 1,100 reports on Form I-G and 148 on Form 2-G representing sales in the aggregate of $897,573 and $738,798,respectively.

If examination of these reports indicates that a violation of the law

may have occurred, the Commission makes appropriate investigations,

and, in instances where the facts are deemed to warrant it, appropriate

action is taken.

Oil and gaB investigations.-Twenty-two investigations involving

oil and gas securities were instituted by the Commission during the

1947 fiscal year to determine whether there had been any violations of

sections 5 (requirin8' registration) or 17 (prohibiting fraudulent

sales) of the Securities Act or section 15 of the Securities Exchange

Act of 1934 (regulating the conduct of brokers and dealers). The

total of such investigations current during the year was 161. As part

of these investigations, some 1,500 letters were written and approximately 200 personal and telephone conferences were held during the

fiscal year by the experts of the Oil and Gas Unit of the Commission's

staff. In addition, engineer and geologist members of the staff prepared a number of technical memoranda or valuation estimates and

conducted scores of conferences in the oil and gas producing regions

and other locations in the field. Thirty-one of these investigations

were closed during the year, leaving 130 pending at the end of the

year. A summary of these investigations is tabulated below:

Oil and gas investigations

- Prelim. Informal Formal Total Inary

--------- Pending at June 30,1946 .• _. •...• _. 28 81 30 139 Opened July 1, 1946 to June 30, 1947: New cases.... ._._. ,_,_",_, .,. _. ., 6 16 22 TranSferred from preliminary or Informal.• .•••• ._. .-_ ..._--- --------.-- 4 4

Total number of cases to be accounted for. .• . --- --- ------ 34 97 34 165

~lE;'~tf~'fo ~ri,~~~~~:=:::::::::::=:=:===:==: ::=: :==:=:::

--- --- --- 9 17 5 31 .---.-._.- ---------~ 4 4 Pending at June 30.1947 .••• ._ .••• _. ._. 25 76 29 130

During the fiscal year, an investigation was undertaken with respect

to a number of letters of notification, .filed under regulation A, relating to many oil and gas properties located in the Rangely Field,

hCUfltlea ~Dri l%ch&ll(1

OommiHioa

__ __••• _______•••• __• ___•• __

___•__ __ __ __

_ __••••• _"' _•• • __ __ __

____ __ __••__

---

__•• ____ ••••• _•• _ ____ ___
12 SECURITIES AND EXCHANGE COMMISSION

Colorado, which was then being actively developed. The investigation

showed that practically all of the prospective acreage on the Rangely

structure was under lease to major or strong independent companies

and that the field was defined in several directions by dry holes or by

wells making a considerable quantity of water. A number of companies which had filed letters of notification under regulation A owned

leases beyond the indicated productive limits of the field, or held such

leases under option. Several of them were circulating highly misleading statements through the mails with reference to the possibilities

of finding oil. The results of this investigation have helped to prevent

the continued use of sales literature containing misleading statements

about the Rangely Field.

As a result of another investigation, George C. Reining was tried at

Tampa, Fla., for violation of the mail fraud ana conspiracy statutes

in connection with the sale of various oil and gas leases in Terrell and

Presidio Counties, Tex. He was found guilty on six counts and

sentenced to 6 years in the penitentiary.

FORMAL ACTIONS UNDER SECTION 8

The Commission makes every effort to insure that a registration

statement shall be complete and comply fully with the requirements

of the act before the statement becomes effective. As has been pointed

out, where a registration statement is found to be deficient, the registrant is informed in order that proper corrections may be made. It

is sometimes necessary, however, for the Commission to invoke its

powers under section 8 to prevent a registration statement from becoming effective or to suspend the effectiveness of a registration statement which has already become effective.

Under section 8 (b), the Commiit may institute proceedings

to determine whether itshould issue order to prevent a registration from becoming effective. Such proceedings are authorized if

the registration statement as filed is on its face inaccurate or incomplete in any material respect. Under section 8 (d), proceedings may

be instituted to determine whether the Commission should Issue a

stop order to suspend the effectiveness of a registration' statement,

which has already become effective, if it appears to the Commission

that the registration statement includes any untrue statement of a

material fact or omits to state any material fact required to be stated

or necessary to make the statements included not misleading. Under

section 8 (e) the Commission may make an examination to determine

whether to issue a stop order under section 8 (d).

The Commission tries to avoid the use of its powers under section

8, and will institute an examination under section 8 (e) or a proceeding under section 8 (d) only where necessary for the protection of

investors and to prevent fraud. The 1947 fiscal year was unusual in

that the Commission was required to institute seven section 8 (e)

examinations and five section 8 (d) proceedings.

Examinations Under Section 8 (e)

Examinations made pursuant to section 8 (e) may be held in public.

The Commission, however, to insure that no injury shall be done to a

registrant by means of bad publicity if the examination should reveal

no violation of the law, makes it a practice to hold such preliminary
THIRTEENTH ANNUAL REPORT 13

examinations in private. Where the facts revealed by the examination

warrant the institution of proceedings under section 8 (d), such latter

proceedings are held in public. During the 1947 fiscal year, the Commission authorized the conduct of seven examinations under section 8

(e) . Six of these were held in private and one in public. Of the

six held in private, the records of examination in two cases remained

private after completion of the examination and the other four were

made public. Intwo of the five cases in which the records of examination are now public the Commission authorized the institution of proceedings under section 8 (d), and those cases are discussed hereinafter.

The nature of and the results in the three remaining cases are:

Oonsolidated Hotels, I'TW.-File No. ~-6668.-This registrant is engaged principally in the operation of hotels and apartment houses.

Substantially all its proposed offering covered securities owned by the

controlling stockholder, a large part of which had been acquired from

the registrant in exchange for certain properties.

It appeared from a preliminary examination of the registration

statement that there was a failure to disclose, amon~ other things:

(1) The commingling of activities of the registrant WIth those of the

controlling stockholder; (2) that the controlling stockholder was the

promoter of the registrant and an underwriter of the securities; (3)

the profits to the controlling stockholder as such promoter and underwriter; (4) the effect of a write-up in unrealized values of properties

recently acquired from the controlling stockholder; and (5) the absence of arm's length dealings between him and the company.

Since it was impossible to determine from the registration statement the cost to the controlling stockholder of properties transferred

by him to the company in return for securities which it was proposed

to offer to the public, as well as other material facts as indicated above,

it was decided that the true status of the case could be determined

only through a section 8 (e) proceeding. Before an opinion was

rendered by the Commission in respect of the proceeding, the registrant requested withdrawal of the registration statement on the basis,

in part, that "withdrawal is consistent with the public interest and the

protection of investors." The application for withdrawal was

granted.

Health Institute, Inc.-File No. ~-6864.-This registrant proposed

to build and equip hotel and health facilities and to acquire a mineral

water supply at a spa in the southwest.

It appeared from preliminary investigation that no serious effort

had been made to determine the practicability of the enterprise with

respect to cost of construction, demand for proposed facilities, cost

of operation or method of financing. In the face of this situation the

prospectus nevertheless contained no hint of the hazards involved and

implied that the enterprise would be successful and profitable .

.A. section 8 (e) examination was ordered to determine the true

status of the case. After the hearings were conducted, but before any

subsequent action was taken by the Commission, the registrant withdrew the registration statement.

Oro Yellowknife Gold Mines, Ltd.-File No. ~-6881.-The registrant, of Toronto, Canada, filed a registration statement covering

2,000,000 shares of common stock which were to be offered for an

aggregate of $1,200,000. The company was to receive a net of $900,000.
14 SECURITIES AND EXCHANGE COMMISSION

The Commission authorized a private examination under section

8 (e) to determine whether a stop order should issue under section

8 (d). At the conclusion of the examination, the Commission received a request for the withdrawal of the registration statement, giving as the reason therefor that "the company desires to make further

inquiry into the geological facts affecting its properties." The Commission granted the request for withdrawal and made public the

record of the examination.

Among the matters. considered at the private examination were

the adequacy and accuracy of the disclosure in the registration statement concerning the independence of the registrant's consulting

engineer and the proposed use of the proceeds of the offering. The

engineer stated in his report that he had no direct or indirect interest

in the property, that he was "an independent consulting mining engineer," and the registrant made the same representation in the prospectus. According to evidence adduced, however, the engineer was

a son of one of the officials of the registrant, he was a brother of

another who acted as general manager of the company, and he understood that his services "will be sought" to act as an engineer on a

retainer basis for the registrant in the future. These facts were not

disclosed in the registration statement.

The registration statement showed that of the $900,000 net proceeds of the proposed offering, $115,000 were to be expended for exploratory work as recommended by the engineer. He also recommended that the financing should include "ultimate monies required to

pursue underground development through a standard shaft with

modern mining plant, and should make provision finally for construction of a treatment plant." The registration statement did not disclose either that the sampling done on the various geological structures

investigated gave gold assay values well below a commercial grade

or the bearing of these low values on the probability of requiring

jIDorethan $115,000 for exploration.

,Stop-Order Proceedings Under Section 8 (d)

Two stop-order proceedings were pending at the beginning of the

fiscal year. The Commission authorized the institution of five additional proceedings during the year. Two of these five proceedings

were instituted after the completion of examination under section

8 (e). The nature of and the results in the seven stop-order proceedings are:

Midas Yellowknife Gold Jlines Ltd.-File No. ~781.-0n October

21, 1946, registrant filed a registration statement covering 1,250,000

shares of common stock, $1 par value, to be offered to the public at $0.60

per share for an aggregate offering price of $750,000. It was stated

that the net proceeds to the registrant, estimated at $450,000, were

to be utilized in the exploration of some 68 gold-mining claims located

in the Yellowknife area of Canada.

The examination under section 8 (e) revealed the following, among

other circumstances, none of which had been disclosed in the registration statement: (1) That Gordon Jones, the promoter and dominant

stockholder of the registrant, had options on other mining claims

located in Canada which he intended to transfer to the registrant

and that approximately $790,000 over and above the estimated pro-
THIRTEENTH ANNUAL REPORT 15

ceeds from the contemplated offering would be required to explore

such additional claims; (2) that under existing contractual arrangements the stockholders' equity in the various mining claims owned and

to be acquired by the registrant could be diluted up to 90 percent;

and (3) that Jones had been appointed general manager of the registrant, that he determined in general the entire conduct of its business,

and that he had received and was to receive substantial payments as

fees and expenses.

Based on the result of this examination the Commission authorized the institution of stop-order proceedings and scheduled a

hearing under section 8 (d) at which the prior section 8 (e) record was

introduced. The registrant thereupon filed a request for withdrawal

of the registration statement, stating that no sales or offering of the

securities had been made and that the financing would be undertaken

in Canada. Its request was granted by the Commission.

Tucker Oorporation.-File No. 2-7057.-The Tucker Corp. filed a

registration statement relating to a proposed public offering of

4,000,000 shares of class A common stock, par value $1 per share, to

be offered at $5 a share for a total of $20,000,000. The proceeds were

to be used to develop and produce a medium-priced automobile, to

be known as the "Tucker," featuring a rear engine and other innovations substantially departing from present day conventional

design.

Upon examination of the registration statement, the Commission

first authorized a private examination under section 8 (e), and later

instituted stop-order proceedings under section 8 (d), alleging misstatements and omissions to state material facts in regard to numerous

items of required information, financial statements, the accountants'

certificate, certain exhibits and the prospectus.

As a result of these hearings, it appeared that the prospectus and

registration statement as originally filed had failed to disclose adequately and accurately the names of all promoters and the amount of

consideration received directly or indirectly from the company by each

promoter, officer, and director; the stage of development of the mechanical features of the proposed automobile; the status of the company's

patent position; the application of the proceeds of the proposed offering, and the company's working capital requirements; the business experience of the executive officers; the nature and the extent of the interest of Preston Tucker in Ypsilanti Machine & Tool Co. ; the interests

of affiliates and other persons in property acquired by the company;

material litigation ; the scope of the audit and the auditing procedures

followed by the certifying accountants; and the failure of the accounts to reflect all liabilities of the company.

During the course of and after the close of the hearings in the section 8 (d) proceedings, the registrant filed material amendments which

appeared to correct satisfactorily all material deficiencies previously

contained in the registration statement. The Commission thereupon

dismissed the proceedings and issued an opinion commenting, in the

public interest and for the protection of investors, upon certain facts

developed in the proceedings and discussing the Commission's action

in this case and the limitation of its jurisdiction." Inthis opinion the

Commission also warned the prospective investor of the danger of

IS Securities Act Release No. 3236 (1947),

-
16 SECURITIES AND EXCHANGE COMMISSION

relying upon past judgments based on prior literature concerning the

Tucker Corp. inasmuch as there had been grossly misleading and, in

many cases, false statements publicized as to the radical features of the

proposed automobile, the accomplishments and the performance of

such automobile, and the funds invested by the management. The

registration statement was permitted to become effective after adequate dissemination of the corrected prospectus had been made and

sufficient time had elapsed since the release of the Commission's

opinion.

Globe Aircraft Oorporation.-File No. U~4.-Globe Aircraft

Corp. filed a registration statement covering 150,000 shares of 5% percent cumulative convertible preferred stock and sufficient common

shares for conversion purposes. The statement became effective and

the company received the entire proceeds from the sale of the securities. It was represented in the prospectus that the net proceeds of

$1,275,000 to the company would be used for the payment of a $960,000

loan from the Reconstruction Finance Corporation, for the purchase

of a factory building and equipment for $250,000, and the remainder

for working capital and expenses of the issue.

In July 1946 the registrant filed a post-effective amendment which

stated that the company had been negotiating for a commercial loan,

and that the then outstanding RFC loan of approximately $500,000

would be increased to $960,000. The prospectus filed as a part of the

amendment stated that since the effective date of the registration

statement the company had agreed to purchase a factory from the War

Assets Administration for $276,000, and that funds for this purchase

were to be borrowed from the RFC.

On December 27, 1946, certain creditors filed an involuntary petition in bankruptcy against the company and on December 31, 1946,

the company filed an answer in the form of a petition for reorganization. The latter petition was dismissed on April 15, 1947, with the

result that the petition for involuntary bankruptcy was reinstated

and receivers were appointed.

The Commission participated in the reorganization proceedings

under chapter X of the Bankruptcy Act. During these proceedings

information was secured which raised serious questions concerning

certain representations made in the registration statement. Stoporder proceedings were initiated on March 25, 1947, pursuant to section 8 (d) of the Securities Act of 1933. The hearing officer in his

recommended decision found that the registration statement included

untrue statements of material facts and omitted material facts required

to be stated therein and material facts necessary to make the statements therein not misleading, in respect of: (1) The company's losses

for January 1946; (2) the mcrease in note liabilities after December

31, 1945; (3) the stated purpose of the financing, in particular the

payment of the outstanding RFC loan of $960,000 and the purchase of

the factory building and equipment; and (4) the working capital needs

of the company.

Exceptions to the recommended decision were taken by counsel for

the registrant and by certain other persons granted leave to be heard

in the proceedings. Oral argument was heard by the Commission

June 25, 1947, on the exceptions. A decision by the Commission had

not been rendered by the close of the fiscal year. Investors have
THffiTEENTH ANNUAL REPORT 17

manifested much interest in this case. A civil suit in the nature of a

class suit was instituted against the underwriters in April 1947, alleging misrepresentations in the registration statement.

Haye8 ManujMturing Oorp.-File No. ~-6179.-The company filed

a registration statement covering 215,000 shares of its $2 par common

stock (later reduced to 185,000 Shares). The stock was to be issued

first to Eli I. Kleinman, Jennis M. Doroshaw, Johann S. Ackerman

and associates in exchange for all the outstanding 432,000 shares of

common stock of American Engineering Co. The Commission directed that a public examination be held under section 8 (e) and later

instituted stop-order proceedings under section 8 (d), alleging misstatements and omissions of material facts in numerous items, the

financial statements, the accountants' certificate, certain exhibits, and

the prospectus. By successive material amendments filed after institution of proceedings, the registrant corrected the existence of substantial deficiencies in the registration statement. Inasmuch as the

amendments corrected substantially all of the material deficiencies, the

Commission determined it was unnecessary to issue a stop order and

the registration statement was permitted to become effective,"

Kleinman, Doroshaw, and Ackerman and their associates planned

to sell the 185,000 shares of Hayes stock to the public and, since they

were acquiring securities of the issuer with a view to immediate distribution, they were underwriters as defined by section 2 (11) of the

Securities Act of 1933. This fact was not disclosed in the original

filing. Furthermore, the costs and profits of these individuals as

well as other pertinent items of information were not disclosed. As

a result of the proceedings instituted by the Commission, the registration statement was amended to set forth numerous transactions as

a result of which Kleinman and his associates were shown to have

acquired the 432,000 shares of capital stock of American Engineering

for a total of $17,000. Through various transactions between January 1943 and March 1946 they realized gross profits in the amount

of approximately $585,000, and the value of the Hayes stock, based

on an assigned value of $12 a share, amounted to an additional

$2;580,000, reflecting a total of $3,148,000 which they stood to profit by

the transactions. With the reduction in the number of shares to be

received to 185,000, their total realizable profits were reduced by

approxirnately $360,000.

The registration statement as filed also failed to disclose certain

material facts with respect to Federal income tax liabilities of American Engineering and agreements with respect thereto. The original

filing moreover did not disclose that American Engineering and its

subsidiary would need approximately $1,600,000 within the ensuing

6 months to meet current obligations and provide additional working

capital, which funds were to be obtained primarily from Hayes. Information concerning remuneration payments to Clark, president of

Hayes, and certain disputes and a settlement relating thereto, as well

~s the need of Hayes for approximately $2,000,000 of additional workmg capital for its own operations before the end of 1946, were inadequately set forth in the original registration statement. Besides,

that document did not indicate that since the date of the latest profit

and loss statements filed both Hayes and American Engineering had

14 Securities Act Release No. 3151 (1946).
18 SECURITIES AND EXCHANGE COMMISSION

been operating at a loss. Itfailed to reveal a possible contingent liability of Hayes for the sale of 100,000 shares of its stock in violation

of section 5 (b) of the Securities Act. Other deficiencies of lesser

importance also existed in the registration statement as originally

filed.

Kiwago Gold Mines Limited-File No. ~85~.-The registration

statement filed by Kiwago Gold Mines Limited (a Manitoba corporation) on December 3, 1946, became effective on February 4, 1947, as

of January 7, 1947. The 1,000,000 shares of common stock covered

by the statement were offered to the public at 70 cents per share

through an underwriter (Jack Cohn Co. of New York City) acting

as agent for the registrant on a "best efforts" basis. The registrant's

capitalization as of October 1, 1946, consisted of an authorized 3,000,-

000 shares of no par value common stock of which 2,000,000 shares

were outstanding.

The registrant is controlled by Transcan Investors Limited (an Ontario corporation) which owns approximately 31 percent of its voting

securities. In addition, as of September 28, 1946, C. E. Hepburn

& Co. (of which Louis Cadesky is the sole owner) owned beneficially

approximately 14 percent of the registrant's voting securities.

Messrs. A. J. McLaren, Louis Cadesky, and H. T. Leslie, who comprise

a majority of the registrant's board of directors, also promoted Transcan and control it by their ownership of 57.47 percent of that corporation's voting securities, Louis Cadesky being the largest holder with

28.91 percent. Within the preceding 2 years 779,000 shares of the

registrant's common stock had been purchased by Transcan at an

average price of approximately 12lh cents per share and sold to C. E.

Hepburn & Co. at cost.

On April 16, 1947, the Commission's attention was directed to an

advertisement in The Northern Miner, a Canadian publication which

is circulated in this country, with respect to an offering of shares of

the registrant by C. E. Hepburn & Co. The advertisement contained

the statement that "1,000,000 shares of Kiwago Gold Mines, Limited

have been registered with the SEC in the United States for sale to the

American public." No statement was made as to the offering price

of the registrant's stock. At the same time the Commission was informed that it was believed that the shares were being offered in

Canada at a price substantially below the 70 cents per share offering

price in the United States.

As a result of inquiries then made by the Commission, it was ascertained that only two sales of the registered stock had been made

in the United States, each involving 1,000 shares at the stated offering

price of 70 cents per share, whereas from December 17, 1946, to May

10,1947, C. E. Hepburn & Co. had sold in Canada 178,000 shares of

the registrant's stock at prices ranging from 10 cents to 40 cents per

share. It was also noted that between December 3, 1946, the day the

statement was originally filed, and February 4, 1947, the date on

which it became effective, approximately 40 separate sales involving

70,000 of these shares were made in Canada at prices ranging from 10

cents to 35 cents per share. During this period the registrant apparently had in mind offering the shares in this country at 70 cents per

share, since this price was indicated in the original filing.
THIRTEENTH ANNUAL REPORT 19

The prospectus in the registration statement as of its effective date

contains no reference to actual or proposed sales of the registrant's

stock in Canada by C. E. Hepburn & Co. or by any officer, director

or associate of the registrant. Since it appeared that the omission

of such information was materially misleading, the Commission instituted stop-order proceedings under section 8 (d).

Red Bank Oil Oompany-File N 08. ~-5754 and 1-34J3.-A stop-order

proceeding under section 8 (d) relating to the registration statement

of Red Bank Oil Co. was consolidated with a proceeding with regard

to the termination of exchange listing under section II) (a) (2) of

the Securities Exchange Act of 1934 because of numerous common

questions of fact involved. On January 4, 1946, the Commission

found that the auditor was not independent and the audits had not

been made in accordance with generally accepted auditing standards

applicable in the circumstances," The financial statements originally

filed were the subject of the Commission's findings and opinion dated

January 3, 1947, in which it was found that numerous inaccuracies and

omissions were present in financial statements for the years 1940-44.16

The deficiencies found were principally the failure to disclose transactions between Frank W. Bennett and interests affiliated with him on

the one hand, and Red Bank and its subsidiaries on the other j failure

to disclose the amounts owing to and from the affiliated Bennett interests j failure to disclose the materiality of l?ledges and other liens

to which assets were subject; and numerous misstatements of income,

the most outstanding example occurring for the year 1943, when various inaccuracies produced an apparent consolidated profit of $173,401)

although revised statements subsequently filed by amendment showed

a net loss of $4,436.

A stop-order was issued by the Commission on February 27, 1947,

based upon the financial statements referred to above and upon

numerous other omissions, inaccuracies, and inconsistencies in the

registration statement and prospectus," The findings and opinion

which accompanied the stop-order found that omissions, inaccuracies,

and inconsistencies concerned, among other things, control of the

company j the business and property of the company and its subsidiaries j the capital stock j the underwriting and distribution of the

securities sought to be registered j acquisitions of various properties j

remuneration of officers; principal holdings of securities j the interest

of affiliates in property acquired j and recent sales of securities. It

was concluded that the registration statement as a whole was materially misleading. The stop-order was still in effect at the close

of the fiscal year.

Western Tin Mining Oorp.-File N 0.13-6679.- This case is described

below at p. 20 under the heading "Gross Omission of Material Facts."

]I Securities Act Release No. 3110. Described In the Commission's Twelfth Annual

Report, n. 120. ,. Securities Act Release No. 3184. If Securities Act Release No. 3191.

161629-48--3
20 SECURITIES AND EXCHANGE COMMISSION

DISCLOSURES RESULTING FROM EXAMINATION OF

REGISTRATION STATEMENTS

The following brief histories are illustrative of disclosures that

were made after the staff had examined the registration statements

and prospectuses involved.

Profitable Inside Dealings With Aftiliated Companies

Two affiliated companies owned a controlling interest in a registrant,

a manufacturer of automobiles, and the controlling persons of such

affiliated companies were also officers and directors of the registrant.

The registration statement disclosed that the registrant had: (1)

Entered into an agreement to purchase from one of the affiliated companies all of the stock of a subsidiary of that affiliate, and (2) proposed

to purchase certain land and buildmgs from said affiliate. The staff

of the Commission requested that disclosure be made in the registration statement of the contract sale price of the stock, land, and buildings to the registrant, their cost to the affiliate, the date of acquisition by the latter, and the profits to be realized by the affiliate from the

transaction. As a result, it was disclosed that the controlling affiliate

realized a profit of $2,893,270.17 on an investment of $770,000 allocated

cost from the sale of the stock of its wholly owned subsidiary, and

$297,082.37 from the sale of the land and buildings.

Gross Omission of Material Facts

Some months prior to the filing of a registration statement by a

mining company, the registrant had filed a letter of notification and

sales literature under the conditional exemption from registration provided by regulation A for issues of not more than $300,000. The

representations in the sales literature were of such character that an

investigation was made. The company's engineer testified that no

known tin or other ore bodies existed on the property and that a gold

assay referred to in the literature was taken from a property other

than that belonging to the registrant. Shortly after this testimony

was given, the principal promoter of the registrant advised the Commission that he had been misled by the engineer and was discharging

him immediately. Despite the foregoing, the registration statement as

subsequently filed contained reports by the same engineer and the same

failure to make adequate disclosure of the material facts referred to

above. Among numerous other discrepancies was a statement to the

effect that a certain accountant had gone over the financial schedules

submitted. The Commission brought injunction proceedings in this

case, and the accountant in question testified that he had not reviewed

such schedules. Stop-order proceedings under section 8 (d) were

instituted and hearings commenced. The registrant thereafter requested withdrawal of its registration statement.

Importance of Disclosure to Underwritel'8

Inone case the registrant was only in the promotional stage, having

no physical plant, no production machinery, and no established commercial acceptance for its proposed products. After allowing 25

percent for discounts or commissions to an underwriter, it proposed

to use the funds obtained to erect a plant and equip it with the necessary machinery. The staff's letter of comment resulted in the amend-
THffiTEENTH ANNUAL REPORT 21

ment of the prospectus to disclose, first, that governmental wartime

tests of certain of the proposed products cast considerable doubt upon

the feasibility of the venture, and, second, that the nature of the

underwriting arrangements was such that it was wholly conjectural

whether the company would obtain enough funds from the financing

to commence business properly. Although the registration statement

became effective, the underwriter on the following day informed the

Commission's staff in effect that when he became aware of hitherto

unknown facts disclosed in the company's final prospectus, he decided

to abandon the underwriting. The registration statement was withdrawn. The underwriter stated in a letter to the Commission: ''This

incident confirms my opinion that the SEC is as much a help to the

dealer as it is to the public."

Relative Investment Positions of Public and Promoters

The significance of disclosure is often lost in lengthy and complex

presentations of adverse facts. The Commission frequently obtains

a sharpening of disclosure by requesting that information be stated

simply, summarized, or presented in tabular form. The following

table was substituted, at the request of the Commission, for lengthy

textual material which tended to conceal the information so clearly

brought out in the table:

Nnmberof Cost per Aggregate Percent of

stock to be shares share cost outstanding

Original subscribers (or transferees) ____________________ Public _________________________________________________ lRO,OOO $0.125 $22, 500 44

230,000 4.375 1,006, 250 56

Maintenance of Insider Control-Restrictions on Stock Resales

A company manufacturing electrical J?arts registered 7,500 shares

of class A stock to be offered to the public at $101 per share. At the

same time it granted the promoters and managers the right to purchase, at $1 per share, a share of class B stock for each share of class A

outstanding, up to 20,000 shares. By amendment obtained by the

Commission it was pointed out in a prominent part of the prospectus

that

by the purchase of shares of Class B Stock under the above conditions, the members of the management of the Corporation will be given at a nominal cost the

opportnnity (1) "to maintain control of the Oorporattton, including the power to

sell, lease or exchange alI of the property and assets of the Corporation, (2) to

share equally in all profits in excess of the dividend requirements of the Class A

Stock, and (3) to share equally in all assets in excess of the Itquldattng preference of the Class A Stock.

In the same case proper prominence was required for disclosure of

the fact that the class A stock being offered to the public had a limited transferability. A stockholder wishing to dispose of any such

shares would be required first to offer them to the corporation for a

60-day period at the involuntary liquidation value of the stock. If

such offer were not accepted, the stockholder could then sell the shares.

However, if the shares were not sold within the next 30 days the cycle

of first offering the shares to the corporation would have to be repeated. Any purchaser of the stock would become subject to the same

restrictions on transfer. The company was required to point out that
22 SECURITIES AND EXCHANGE COMMISSION

the restrictions place a limitation on price appreciation of shares and

may prevent a quick sale by a stockholder needing immediate funds.

Speculative Hazards of Stock Issue

.Atthe request of the Commission a registrant manufacturing a food

products specialty disclosed the following information under a headmg which it labeled "Speculative Nature and Hazards of the Offering": (1) Although founded in 1943 it was seeking working capital

for what amounted to a new peacetime enterprise, since substantially

all of its sales up to the time it filed its registration statement had been

made to agencies of the Government and such sales had terminated;

(2) the business was not subject to patent protection and anyone could

employ its processes; (3) simultaneously with the offering of shares

to raise working capital for the company, its two stockholders were

selling to the public for $600,000one-third of their own holdings (with

a book value of $13,803) at a profit of $583,000, and their total profit,

including retained stock at the public offering price, would be $1,749,-

000; (4) solely as a result of the financing, the book value of the stock

would be increased from 14 cents a share to $2.72 a share, the increase

inuring to the benefit of the selling stockholders with respect to the

200,000shares of stock to be retained by them; and (5) the two selling

stockholders, constituting two of the four directors, also occupied the

positions of president and vice president of the company, the latter

officerwas additionally the president of the underwriting firm which

was offering the issue, and the former had entered into a management

contract with the registrant.

Speculative Nature of Venture Spelled Out

Factors relating to the speculative nature of the securities of a

company proposing to produce and sell a special type of fuel were

summarily stated in the registration statement. It was brought out

at the instance of the Commission that: (1) The company was in the

development stage, that production was not possible until completion

of its plant, and that there would be no assurance of the date of completion, particularly inasmuch as the underwriter had not contracted

to purchase the entire stock issue but only to use his best efforts to

sell it for the company; (2) the company proposed to use a process

that had not been demonstrated to be feasible on a commercial basis

as applied to the raw material which it would use, and the only other

company in the United States using this process was an admitted

financial failure; (3) as to the process it would use, the company was

nothing more than a nonexclusive licensee of six patents, four of which

had expired; (4) the company would be in competition in a limited

geographical market with other fuels sold by established companies

possessing greater financial resources; (5) the company had net

tangible assets of less than $10,000 and no prospect of Income at least

until the completion of the contemplated construction program, yet

it was offering a fixed interest security as well as common stock;

(6) the promoters paid $1.25 a share Tor their common stock shortly

before the proposed offering to the public to be made at $3.75 a share;

(7) the net tangible asset value of the promoters' stock would be

increased, solely as a result of the public financing, from 20 cents per

share immediately preceding such financing to $5.09 per share Immediately thereafter; and (8) the company had entered into ali engi-
THffiTEENTH ANNUAL REPORT 23

neering contract and a 5-year management contract with a firm with

which two of the promoters of the company were associated, under

which contracts the company agreed to pay $90,000 as a maximum

engineering fee and $50,000 as a minimum annual management fee.

Impact of Domestic and Foreign Law on Company's Operations

In order to clarify the more important elements of risk in a proposed offering of securities, the Commission requested a foreign airline corporation to disclose in an introductory section to the prospectus,

among other factors, that: (1) A permit to operate in the United

States would not be issued until after a determination by the Civil

Aeronautics Board that the registrant had met the required standards

as to operational ability and percentage of ownership of the registrant's shares by citizens of the foreign country; (2) failure to obtain

any of the necessary operating permits would adversely affect the

competitive position of the registrant and, in addition, that substantial competition existed or was to be expected in an important

segment of the registrant's route; and (3) based on the number of

shares being offered and already sold, it would be necessary to sell

large additional amounts of the registrant's capital stock in order that

the required percentage of its capital should be owned by citizens of

the foreign country. In the event that the required percentage was

not secured thereby, it would be necessary to curtail sales of capital

stock in the United States and Canada with the consequent curtailment of proposed operations.

Liabilities Under Employees' Retirement Plan

A leading oil refining and distributing enterprise filed a registration

statement for a public distribution of some 400,000shares owned by

certain of its controlling stockholders. The offer, to be made at the

market price, amounted to some $27,000,000. The statement failed to

show the inescapable liability already incurred by the company under

its employees' "Annuities and Benefits Plan," adopted in 1944, to

the extent of about $4,000,000on account of retired employees, and

also omitted any disclosure of an actuarial deficiency in the plan to

the even greater extent of about $40,000,000on account of employees

still working for the corporation. The $40,000,000liability of the

company could be avoided only if its employees left their jobs otherwise than by retirement, or through action by the company abolishing

the plan. As a result of questions raised by the Commission and conferences held by the staff with representatives of the registrant, it was

disclosed by amendment that, as of December 31, 1945, $44,018,153

remained unpaid on account of prior service annuities and that, if

payments were continued on the same basis followed since the inception of the plan, this amount would be paid in approximately equal

mstallments through 1953.

CHANGES IN RULES, REGULATIONS, AND FORMS

The necessity that rules, regulations, and forms adopted under the

Securities Act be flexible to meet changing business conditions had

early been recognized by the Commission. Experience has also shown

that any procedure for compliance with a regulatory statute is made
24 SECURITIES AND EXCHANGE COMMISSION

most simple and expedient for those who must comply if each type

of situation is recognized and provision made for its particular need.

The Commission, therefore, has adopted many rules under the several acts which it administers, and has adopted numerous forms for

compliance with the requirements of these acts. Although these may

seem confusing at first glance, it has been amply demonstrated that a

specific registrant under the Securities Act, for example, finds that he

encounters the least problems and is best able to comply with the registration requirements because his situation has been anticipated and

covered by the rules. No one registrant must comply with all the rules

or use all the forms. .

Rules and forms must be changed, obsolete procedures rescinded

and new ones adopted as changing conditions require. Changes may

be made as a result of recommendations by the staff, and many changes

have been made at the suggestion of persons who must comply with

the requirements of a particular statute. No material change is made

without a series of conferences with all persons interested or who

might be affected by such change. Changes made during the 1947

fiscal year in the rules, regulations, and forms under the Securities

Act are described below.

Rule I3l-The Red-Herring Prospectus

As has been pointed out, the Securities Act provides a 20-day wait.

ing period before a registration statement becomes effective in order

to insure that the information contained in the registration statement

will become known to the investing public before the securities are

offered for sale. The degree to which this information is circulated

is of the utmost importance to the accomplishment of the purposes of

the act. Itis to be recalled, too, that one of the criteria to be observed

before acceleration of the effective date may be granted by the Commission is the adequacy of the information available to the public

at the time when acceleration is requested.

This need for the adequate dissemination of information about a

security during the waitin~ period was recognized both by the Commission and the securities industry early inthe history of the Securities Act, and a practice developed to make such dissemination of information. The prospectus which is to be used to offer the security

for sale is prepared and filed with the registration statement. It

cannot be used to offer the security for sale until the registration statement becomes effective, but if adequately prepared is an excellent

source of public information about the proposed issue.

The Commission approved this use of the prospectus in advance

of effectiveness as a source of information only and not as a method

of offering the security for sale. To insure that the nature of the

prospectus should not be misunderstood when used in this way, and

therefore possibly lead to a violation of the act, a legend was printed

across the facing sheet of the prospectus to the effect that the prospectus was being circulated at the time for information purposes

only and not to offer the security for sale. This legend was normally

printed in red ink, and the prospectus which was so used during the

20-day waiting period became known as the "red-herring" prospectus:

Within the recent past the use of "red-herrings" diminished substantially. Various reasons were ascribed. among others that the

liability of those who used red-herrings was doubtful, notwithstanding
THmTEENTH ANNUAL REPORT 25

repeated interpretations by the Commission as to the legality of their

use.

In order to remove this obstacle the Commission availed itself of

the provisions of section 19 (a). The pertinent part of that section is:

No provision of [the Securities Act] imposing any liability shall apply

to any act done or omitted in good faith in conformity with any rule or regulation of the Commission . .

The Commission adopted rule 131 under the Securities Act to afford

the protection of section 19 to the use of the red-herring prospectus."

In substance, the rule provides that the use of a red-herring prospectus shall not constitute an offer to sell the security under the followmg conditions:

(1) The red-herring prospectus must be a copy of the prospectus

proposed to be used to offer the security for sale and must have been

filed as part of the registration statement;

(~) The red-herring prospectus must contain substantially the information required by the Act and the rules and regulations to be

contained in a final prospectus except that it may omit certain specified

matters not ascertainable at the time the red-herring prospectus is

used;

(3) The red-herring prospectus must contain, on each page2 a

statement set forth in the rule to the effect that the red-herring

prospectus is for information purposes only, that the registration

statement has not yet become effective, and that an offer to sell the

security can and would be made only by use of the final prospectus

after the effective date of the registration statement.

In its announcement of the adoption of rule 131, the Commission

stated that the adequacy of distribution of the red-herring prospectus

would be considered in determining whether to grant a request for

acceleration of the effective date of the registration statement. At

the same time, the Commission reaffirmed its policy to refuse acceleration where a materially deficient or inadequate red-herring prospectus had been distributed until such time as corrected information

had been communicated to the persons who had received such redherring prospectuses,"

Forms 8-1, A-I, and A-2-Registration of Securities

Form 8-1 is the form most-generally used in registering securities.

It represents a simplification of Forms A-I and A-2, the forms

most generally used prior to the adoption of Form 8-1. On January

8, 19471a further simplified version of Form 8-1 was adopted.

Originally, Form 8-1 was divided into two parts. Part I called

for information required to be included in the prospectus and Part

II called for information required to be included in the

registration statement but which could, for the most part, be omitted

from the prospectus. The revision abolished this division and

eliminated from the form proper all items calling for information

not required to be set forth in the prospectus. The purpose of this

revision was, first, to eliminate a number of requirements which experience had shown did not produce information essential to the

prospective investor's appraisal of the security, and second, at the

.. SecUrities Act Release No. 3177 (1946). Originally adopted for a 6-month trial period beginning December 6, 1946, the rnIe was continued in e«ect shortl7 after the close of the

1947 fiscal year . .. Previously announced in Securities Act Release No. 3061 (19411).

•
26 SECURITIES AND EXCHANGE COMMISSION

same time to clarify the requirements of the form in certain limited

respects.

Some of the principal changes made were:

(1) Elimination of the description of capital securities other than

those being registered;

(2) Substitution of limited information as to underwriting contracts for the complete outline theretofore required;

(3) Elimination of information about patents as a separate item;

(4) Consolidation of the items as to information about security

holdings;

(5) Elimination of historical financial information from the prospectus, and from the registration statement if the information has

previously been filed with the Commission.

With this revision, Forms A-I and A-2 no longer served any useful

function ana they were rescinded.

Regulation C--Rules Governing Registration

Inthe last month of the fiscal year the Commission adopted a revised

regulation C, that portion of the General Rules and Regulations under

the Securities Act which deals with registration and the registration

procedure. This regulation is the complement of the various registration forms under that act. The revision eliminated a great deal of

material which had become obsolete and reorganized the remaining

rules in a manner intended to facilitate the registration of securities

according to the simplified procedure provided by the Commission's

recently revised Form S-1. In fact, the revised regulation extended

the simplified procedure to registration statements filed on any form

under the act, whether the form itself provides such procedure or

not. Certain rules which specify the items of information required to

be included in a prospectus were transferred from regulation C to the

respective forms to which they relate.

Rules Adopted in Connection With the International Bank

The formation of the International Bank for Reconstruction and

Development necessitated the adoption of special rules to facilitate

its operations and to clarify certain procedures under the several acts

administered by the Commission as they apply to the Bank. These

new rules are included in the discussion of the Bank which appears

on page 141.

Supplement S-T

During the year the Commission adopted various amendments of

a minor nature including two relating to Supplement S-T, the document containing special Items of information required in the case of

securities being registered under the Securities Act which are to be

issued under an indenture that must be qualified under the Trust

Indenture Act of 1939.

INJUNCTION ACTIONS INSTITUTED UNDER THE ACI'

Under the Securities Act the Commission's enforcement activity is

concerned generally with the obtaining of full disclosure, by means

of the registration process, of all pertinent data concerning securities
THIRTEENTH ANNUAL REPORT 27

publicly offered for sale, and with the prevention of fraud in the sale

of securities. Section 5 of the act, with certain exceptions," requires

registration with the Commission of all securities publicly offered for

sale, and section 17makes it unlawful by use of the mails or instrumentalities of interstate commerce to employ any fraudulent scheme or

device, to make any misrepresentation, or to omit to state any material

fact in connection with the sale of any security. During the past year

the Commission has instituted civil litigation in a number of cases to

prevent violations of the requirements of these provisions of the act.

A great part of the Commission's civil litigation has arisen through

the enforcement of these sections. In S. E. O. v. Slocaai Oharleston

Mining 00. Ltd., 21 S. E. O. v. Sterling, Inc., 22 S. E. O. v, Vindicator

Silver Lead Mining 00./3 S. E. O. v, Nevada lVabash Mining 00.,24

S. E. O. v, J. Stacy Henderson, Mid-Oontinent Development 00./" and

S. E. O. v, Bennett S. Dennison and W. W. Patty,26 the Commission obtained final judgments restraining the defendants from further violations of the registration provisions of section 5. In the cases of S. E. O.

v. Sandy Boy Mines and Lena M. Little 27 and S. E. O. v. Oarroll I,

Mitchell, Rangel,!! Petroleum, Inc.,23 the Commission obtained final

judgments restraming the defendants from further violations of the

fraud provisions of section 17.

In addition to the foregoing, in the cases of S. E. O. v. Walter J.

Porteous." S. E. O. v, Edward J. suu» and S. E. O. v. Western

Tin Mining Oorporatioa and Marion Allen,31 the Commission obtained

final judgments restraining the defendants from further violations of

both the registration provisions (section 5) and the fraud provisions

(section 17) of the Securities Act.

When consideration is given to the number and scope of the acts administered by the Commission it is not surprising to discover that

some of its civil litigation concerns itself with more than one of such

acts. For example, in the cases of S. E. O. v. Joseph J. LeDone 32 and

S. E. O. v. Standard Oil Oompany of Kansas and Oharles B. Wrigktsman,33both the Securities Act of 1933and the Securities Exchange Act

of 1934 were involved. In the LeDone case, the defendant was a

broker-dealer in securities and was duly registered with the Commission as such under the Securities Exchange Act of 1934. LeDone's

principal business consisted of the sale of oil royalties. It was developed that the price to purchasers exceeded the amount of the then

current value of the estimated recoverable oil by 50 percent, so that

%0 Secs. 3 and 4 contain the exceptions. %! U. S. D. C., Seattle. June 7, 1947. %2 U. S. D. C., S. D. N. Y., Apr. 11, 1947. eaU. S. D. C., Washington, Apr. 19, 1947. .. U. S. D. C., N. D. California, Jan. 20, 1947 .. U. S. D. C., E. D. Michigan, Feb. 14, 1947. 20 U. S. D. C., Nevada, Sept. 11, 1946. .. U. S. D. C., Colorado, Jan. 31, 1947. False and misleading statements regarding qual- ity and quantity of ore, past and future profits, size of shipments already made, and scale

of operattons . .. U. S. D. C., Colorado, Oct. 3, 1946. False and misleading statements that oil wells

would be drilled in proven area....concerning geological structure and ownership of acreage. %!J U. S. D. C., S. D. N. Y., 1'-eb.14, 1947. False and misleading statements concerning ownership of patents in a "coal carburetor." .. U. S. D. C., Iowa, Oct. 2, 1946 False and misleading statements that the companies Whose securities were being sold were producing ore in profitable quantities, that the com. panles' ore was worth $48,000,000 and that timber standing on mining claims was worth

$100,000. It was not disclosed that the companies did not own the timber. 11 U. S. D C., Va.• July 8, 1946. False and misleading statements regarding the develop- ment possibilities of a mine, profits to stockholders, and reports of engineers .. U. S. D. C.. S. D. N. Y., Mar. 26. 1947. .. U. S. D. C., Texas, Feb. 26, 1947. This case is discussed In detaU In part II of this

report.

•

•
28 SECURITIES AND EXCHANGE COMMISSION

in no event could the purchaser reasonably expect to recover even

the amount of the purchase price. The evidence disclosed that LeDone

had represented that these investments would return a sum substantially greater than the purchase price. Based on this evidence the

Oommission sought to enjoin LeDone from further violation of the

fraud provisions of both the Securities Act and the Securities Exchange Act,3~inasmuch as he was a registered broker-dealer under the

latter act.

During the past year litigation was concluded in Penfield v.

8.E.0.35 and in 8.E.0. v, Vaeuum Oan 00.,36which arose out of requests

by the Commission for enforcement of its subpenas. In the Penfield

case, the defendant refused to comply with the Commission's subpena

even after a district court had directed compliance, a circuit court had

affirmed the district court's order, and the Supreme Court had denied

certiorari/" On an appeal in contempt proceedings instituted by the

Commission, the Supreme Court held that the Commission was entitled

to such a decree holding the defendant in contempt as would coerce

the production of the records sought to be examined. In the

Vaewum Oan case the Circuit Court of Appeals for the Seventh Circuit dismissed an appeal from a district court order directing the

production of certain books and records in compliance with a subpena

issued by the Commission. The appeal was grounded upon an asserted constitutional right in the corporate defendant to refrain from

producing certain records whose relevancy to the investigation being

conducted by the Commission was questioned. The court held that

the appeal was so clearly without merit that it must have been taken

for the purpose of delay.

The appellate courts were also petitioned in Orooker v. 8.E.0.38 to

review a so-called order of the Commission consenting to the filing of

amendments to a registration statement as of an earlier date and thus,

by the automatic operation of section 8 (a) of the Securities Act,

accelerating the effective date of the registration statement. The

Circuit Court of Appeals for the First Circuit dismissed the petition

for review on the grounds that: (1) The petitioner was not a

"person aggrieved" since he appeared in the proceedings as attorney

for an undisclosed principal and declined to advance any substantial

basis for not revealing the name of his client; and (2) the action of

the Commission was not reviewable.

Data concerning civil. cases and appellate proceedings instituted

under this act as well as under the Securities Exchange Act of 1934,

together with a brief discussion of all civil proceedings commenced or

pending during the past fiscal year and their status at the close of the

year, are included in appendix tables 26 and 28.

.. Section 16 (c) (1) of the Securities Exchange Act. In e1l'ect.makes it unlawful for a broker-dealer to use the mall8 or means of Interstate commerce to e1l'ecta security transaction by means of fraud.

-157 F. (2d) 65 (C. C. A. 9. 1946). affirmed 880 U. S. 585.

"157 F. (2d) 580 (C. C. A. 7.1946). cert. den. 330 U. S. 820. .. See Twelfth Annual Report. p. 104-105.

-161 F. (2d) 944 (C. C. A.l. 1947).
PART II

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934

The Securities Exchange Act of 1934 is designed to eliminate fraud,

manipulation, and other abuses in the trading of securities both on

the organized exchanges and in the over-the-counter markets, which

together constitute the Nation's facilities for trading in securities;

to make available to the public information regarding the condition of

corporations whose securities are listed on any national securities

exchange; and to regulate the use of the Nation's credit in securities

trading. The authority to issue rules on the use of credit in securities transactions is lodged in the Board of Governors of the Federal

Reserve System, but the administration of these rules and of the other

provisions of the .Act is vested in the Commission.

The act provides for the registration of national securities exchanges, brokers and dealers in securities, and associations of brokers

and dealers.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration of Exchanges

Each securities exchange in the United States is required by section

5 of the act to register with the Commission as a national securities

exchange or to apply for exemption from such registration. Under

this section, exemption from registration is available to exchanges

which have such a limited volume of transactions effected thereon that,

in the opinion of the Commission, it is unnecessary and impracticable

to require their registration. During the fiscal year the number of

exchanges registered as national securities exchanges remained at 19

and the number of exchanges granted exemption from such registration remained at 5.

The registration or exemption statement of each exchange contains

information pertinent to its organization, rules of procedure, membership and related matters. In order to keep this information up to

date, the 24 exchanges filed a total of 90 amendments to their statements reflecting changes which had occurred therein during the year.

Each of these amendments was reviewed ~o ascertain that t~e change

involved was not adverse to the public mterest and that It was m

compliance with the relevant regulatory provisions of the act. The

nature of the changes effected by the exchanges in their constitutions,

rules and trading practices varied considerably. Some of the more

significant of these changes are briefly outlined below:

Philadelphia Stock Exchange adopted a more comprehensive form

of financial questionnaire to be .filedby its member firms doing business

with the public. It amended its rules to include a requirement that

, 29
30 SECURITIES AND EXCHANGE COMMISSION

the answers to this questionnaire be prepared by an independent public

accountant based upon the results of an annual audit of its affairs made

by such an accountant, and that the annual audit be made on a date

selected by the accountant and without prior notice to the member firm.

At the suggestion of the Commission, Boston Stock Exchange,

Philadelphia Stock Exchange, and San Francisco Mining Exchange

each adopted a rule requiring members and member firms to report

to the exchange information regarding substantial options relating

to securities dealt in on their respective exchanges. This action

brought to a total of ten the number of exchanges which have such

a rule in effect.

New York Stock Exchange revised its requirements for listing

shares of companies organized under the laws of countries other than

the United States. The revised requirements incorporate many suggestions which had been received from investment banking, legal, and

accounting firms. This exchange also revised its schedule of listing

fees by eliminating the optional lump-sum method of paying for new

stock issues, and by a reduction of the fee for issues over 2,000,000

shares. Under the revised fee schedule, issuers are charged a small

initial fee and an annual continuing fee for 15 years. During the year

the exchange's board of governors took under consideration a proposal

to permit corporations to become members of the exchange. This was

submitted for membership vote and was rejected on November 20,

1947. The constitution of this exchange was amended to permit.

a group of members by petition to present a desired constitutional

amendment to the exchange's board of governors and whereby such

amendment, within a stated period of time, would be referred to the

membership for vote regardless of whether it had the board's approval. In connection with its efforts to keep holders of securities

and the investing public informed as to the status of listed companies,

this exchange initiated the practice of having the letter "Q" printed

preceding the ticker symbols for securities of companies reported to

the exchange as being in receivership or bankruptcy proceedings.

The recommendation of a special committee of the Association of

Stock Exchange Firms for higher rates of commission was under

consideration by the board of governors of this exchange at the close

of the fiscal year. This recommendation was contained in a report

of the results of a survey of costs and revenues of a group of New York

Stock Exchange member firms which had been prepared by the special

committee and submitted to the board of governors of the exchange

by the Association of Stock Exchange Firms.

New York Curb Exchange's committee on listing modified its policy in considering applications for the listing of stock issues from the

viewpoint of voting rights. Under this modified policy this committee

will not, in broad principle, view favorably applications for the listing of common stocks which are nonvoting or which have unduly restricted voting rights, and nonvoting preferred stocks which do not

acquire voting rights upon specified defaults in the payment of fixed

dividend requirements. This exchange also revised its requirements

for listing shares of companies organized under the laws of countries

other than the United States or the Dominion of Canada, following

similar action taken by New York Stock Exchange as mentioned

above. - /
THIRTEENTH ANNUAL REPORT 31

San Francisco Stock Exchange revised its rules to permit members

to effect on the exchange principal transactions wherein the member

or member firm may buy a security from or sell a security to a ciistomer, provided the price is consistent with the exchange market and

that a member of the floor trading committee approves the transaction. Previouly, if a member were offering stock for his account or

for a partner of the firm and an order was received from one of his

customers, the exchange did not allow this transaction to be executed

and recorded on the exchange.

New York Stock Exchange and New York Curb Exchange, following consultations with the Commission, effected modifications in the

rules designed to regulate floor trading on these exchanges.

Standard Stock Exchange of Spokane changed its name to Spokane

Stock Exchange. This change did not effect its status as a registered

exchange.

Disciplinary Actions by Exchanges Against Members

Pursuant to a request of the Commission, each national securities

exchange reports to the Commission whenever it takes action of a

disciplinary nature against one of its members or an employee of a

member for violation of the Securities Exchange Act, any rule or

regulation thereunder, or of any exchange rule. Five exchanges reported having taken such action against a total of 46 members,

member firms, and partners or employees of member firms during the

year.

In a number of these cases the disciplinary action involved merely

censuring an individual or firm for an infraction of the rules and

issuing a warning that a further infraction would be dealt with more

severely. The more important of the other actions taken included

fines ranging from $25 to $2,500 in 22 cases, with total fines imposed aggregating $19,875; the cancelation of the registration of a specialist;

the cancelation of the registration of a registered representative of a

member firm; and the temporary suspension of a partner of a member

firm. These disciplinary actions resulted from violations of various

exchange rules, principally those pertaining to margin trading, floor

trading, handling of orders, partnership agreements, capital requirements, registered employees and specialists,

Market Value and Volume of Exchange Trading

The market value of total sales on national securities exchanges for

the 1947 fiscal year, as shown in appendix table 7, amounted to $14,-

790,928,000, a decrease of 27.4 percent from the market value of total

sales for the 1946 fiscal year. Of this total, stock sales had a market

value of $13,733,163,000 (excluding sales of rights and warrants),

a decrease of 27.5 percent from 1946, and bond sales that of $973,-

725,000, a decrease of 28.3 percent from 1946. The market value of

sales of rights and warrants totaled $84,040,000, involving 44,203,000 . The volume of stock sales, excluding right and warrant sales, for

the 1947 fiscal year totaled 552,774,000 shares, a decrease of 33.1 percent from 1946. Total principal amount of bond sales was $1,350,-

158,000,a decrease of 24.3 percent from 1946.

~~
32 SECURITIES AND EXCHANGE COMMISSION

The market value of total sales on all exempted exchanges for the

11147fiscal year amounted to $11,437,000, a decrease of 22.6 percent

from 1946. Further details are given in appendix table 7.

Special Offerin&ts on Exchanges

Under rul'e X-10B-2, special offerings of blocks of securities are

permitted to be effected on national securities exchanges pursuant

to plans filed with and declared effective by the Commission. Briefly

stated, these plans provide that a special offering may be made when

it has been determined that the auction market on the floor of the

exchange cannot absorb a particular block of a security within a

reasonable period of time without undue disturbance to the current

price of the security. A special offering of a security is made at a fixed

price consistent with the existing auction market price of the security

and members acting as brokers for public buyers are paid a special commission by the seller. Buyers are not charged a commission on their

purchases and obtain the securities at the net price of the offering.

There were no new special offering plans filed or declared effective

during the year. The plans of 7 exchanges, which had previously

been declared effective, remained in effect throughout the year.'

During the year a total of eight special offerings were effected, all

on the New York Stock Exchange and the Chicago Stock Exchange.

These offerings involved the sale of 104,814 shares of stock with an

aggregate market value of $2,852,000; $68,000 in special commissions

were paid to brokers participating in the offerings. During the precedin~ fiscal year, 49 special offerings involving 622,629 shares of

stock were effected on 4 exchanges. The aggregate market value of

offerings in the preceding year was $21,673,000 and special commissions paid totaled $340,000. Further details are given in appendix

table 8.

REGISTRATION OF SECURITIES ON EXCHANGES

Purpose and Nature of Registration of Securities on Exchanges

Section 12 of the Securities Exchange Act forbids trading in an,y

security on a national securities exchange unless the security is registered or exempt from registration. The purpose of this provision is

to make available to investors reliable and comprehensive information

regarding the affairs of the issuing company by requirin~ an issuer

to file WIth the Commission and the exchange an application for

registration disclosing pertinent information regarding the issuer and

its securities. A companion provision contained in section 13 of the

act requires the filing of annual, quarterly, and other periodic reports to keep this information up-to-date. These applications and

reports must be filed on forms prescribed by the Commission as appropriate to the class of issuer or security involved.

Examination of Applications and Reports

All applications and reports filed pursuant to sections 12 and 13

are examined by the staff to determine whether accurate and adequate

disclosure has been made of the specific types of information required

These exchanges are: Chicago Stock Exchange, Cincinnati Stock Exchange, Detroit

Stock Exchange, New York Curb Exchange, New York Stock Exchange, Philadelphia Stock

Exchange. and San Francisco Stock Exchange.

-

•
THIRTEENTH ANNUAL REPORll' 33

by the act and the rules and regulations promulgated thereunder.

The examination under the Securities Exchange Act, like that under

the Securities Act of 1933, does not involve an appraisal and is not

concerned with the merits of the registrant's securities. When examination of an application or a report discloses that material information has been omitted, or that sound principles have not been followed

in the preparation and presentation of accompanying financial data,

the examining staff follows much the same procedure as that developed

in its work under the Securities Act in sending to the registrant a

letter of comment, or in holding a conference with its attorneys or

accountants or other representatives, pointing out any inadequacies in

the information filed in order that necessary correcting amendments

may be obtained. Here again, amendments are examined in the same

manner as the original documents. Where a particular inadequacy is

not material, the registrant is notified by letter pointing out the defect

and suggesting the proper procedure to be followed in the preparation

and filing of future reports, without insistence upon the filing of an

amendment to the particular document in question.

Statistics of Securities Registered on Exchanges

At the close of the fiscal year, 2,215 issuers had 3,560 security issues

listed and registered on national securities exchanges. These securities consisted of 2,562 stock issues aggregating 2,655,064,350 shares,

and 998 bond issues aggregating $18,426,753,851principal amount.

During the past year 88 new issuers registered securities under the

act on national securities exchanges, while the registration of all

registered securities of 61 issuers was terminated. Thus there was a

net increase of 27 in the number of issuers having securities registered

under the act during the year.

The following applications and reports were filed in connection with

the listing and registration of securities on national securities exchanges during the past year:

Applications for registration of securities______________________________ 527

Applications for "when issued" trading________________________________ 73

Exemption statements for short-term warrants__________________________ 73 Annual reports 2,189

Current reports 9,134

~endInents to applications and reports 1,663

Appendix tables" through 18 contain a considerable amount of detailed statistics concerning securities registered on exchanges.

TEMPORARY EXEMPTION OF SUBSTITUTED OR ADDITIONAL

SECURITIES

Rule X.12A-5 provides a temporary exemption from the registration

requirements of section 12 (a) of the act to securities issued in substitution for, or in addition to, securities previously listed or admitted

to unlisted trading privileges on a national securities exchange. The

purpose of this exemption is to enable transactions to be lawfully

effected on an exchange in such substituted or additional securities

pending their registration or admission to unlisted trading privileges

on an exchange.

The exchanges filed notifications of the admission to trading under

this rule with respect to 151 issues during the year. The same issue
34 SECURITIES AND EXCHANGE COMMISSION

was admitted to trading on more than one exchange in some instances,

so that the total admissions to such trading, including duplications,

numbered 177.

Proceedings Under Section 19 (a) (2)

Section 19 (a) (2) of the Securities Exchange Act authorizes the

Commission to deny, suspend the effective date of, suspend for a

period not exceeding 12 months, or to withdraw the registration of

a security if the Commission finds, after appropriate notice and opportunity for hearing, that the issuer of such security has failed to comply

with any provision of the act or the rules and regulations thereunder.

Three proceedings were pending under this section at the beginning

of the year. During the year one additional proceeding was instituted.

The registration of the securities of one issuer was ordered suspended,

and the proceedings in three cases were dismissed during the year,

so that there were no proceedings pending at the close of the year.

UNLISTED TRADING PRIVILEGES ON EXCHANGES 2

The early stock exchanges permitted trading in whatever securities

were available. Any member could have any security added to those

traded on the exchange merely by requesting its inclusion among the

issues which in those days were called out one at a time for bids and

offers. With the development of the exchanges as important securities

markets, the rules for adding stocks and bonds to the list became more

stringent, reaching the point where formal listing agreements and

considerable financial information were required of the corporations

whose issues were being listed. The practice continued, however, of

permitting securities to be traded at the request of exchange members

without the desire or agreement of the issuers. Such trading became

known as "unlisted trading." None of it occurs on New York Stock

Exchange. Most of the unlisted trading in issues which are nowhere

listed occurs on New York Curb Exchange. Most of the regional

exchanges confine their unlisted trading to issues listed on other

exchanges plus a few of the leading unlisted New York Curb Exchange stocks. The Securities Exchange Act of 1934 prohibits the

admission of any additional securities to unlisted trading on a stock

exchange unless they are already listed on some registered exchange

or unless investors have, respecting such securities, protections equivalent for those provided for in the act regarding listed securities.

Unlisted Trading on Registered Exchanges

At the close of the fiscal year, 541 listed stock issues aggregating

1,431,484,853shares were admitted to unlisted trading on one or more

exchanges other than those on which they were listed and 366 stock

issues aggregating 362,908,213 shares, not listed on any registered

exchanges, were admitted to unlisted trading.

The number of listed stock issues traded unlisted on other exchanges

is about the same as it was 10 years ago, when it stood at 554, but the

dispersion among exchanges is considerably greater. For example,

one stock listed on 2 exchanges has been admitted to unlisted tradmg

on 10 other exchanges, 5 of them since 1937.

For comprehensIve data with respect to the status of Issues on exchanges, see appendIx tables 12 through 19. •
THIRTEENTH AN NUAL REPORT 35

The number of stock issues not listed on any exchange which were

nevertheless admitted to unlisted trading has decreased over 50 percent during the decade, from the 737 shown on p. 25 of our Third

Annual Report to the current 366. The principal causes of this decrease were the listing of previously unlisted issues, retirement of

New York Real Estate Exchange and Chicago Curb Exchange, retirement of preferred stocks, expiration of warrants, and sundry liquidations of companies.

Of the 366 stock issues (including 4 warrant issues) admitted only

to unlisted trading, 291 were on New York Curb Exchange only, 13

were on that exchange and one or more exchanges outside New York,

and 62 were on the latter (or "regional") exchanges only. Domestic

corporations accounted for 271 of the issues, Canadian corporations

for 65, and 30 were American depositary receipts for shares of foreign

issues. Reported trading volume in the 366 issues for the 1946calendar

year was 53,481,177 shares, warrants, and depositary receipts. This

consisted of 29,658,957shares and 12,921,580warrants in domestic issues; 7,961,740shares in Canadian issues; and 2,938,900American depositary receipts. The 4 warrant issues and 30 American depositary

receipts were exclusively on New York Curb Exchange. Of the

2,938,900 reported trading volume in American depositary receipts,

2,360,100, or 80 percent, were of 1 issue, Burma Corp., Ltd. The

362,908,213shares comprising the 366 issues were about 12 percent of

the entire 3,031,265,525shares admitted to trading on the registered

exchanges.

The decrease in bonds admitted to unlisted trading on the exchanges

over the last decade has been from 42 to 14 issues in the "also listed"

category and from 550 to 97 issues in the "unlisted only" group. The

total of 111 current issues aggregate somewhat less than $1,500,000,000

face value, and 102 of these issues are on New York Curb Exchange.

Applications for Unlisted Trading Privileges

Section 12 (f) (2) of the act provides that, upon application to and

approval by the Commission, a national securities exchange may extend unlisted trading privileges to a security which is listed and

registered on another national securities exchange. Pursuant to this

section, and in accordance with the procedure prescribed by rule

X-12F-l, applications were granted extending unlisted trading

privileges to Boston Stock Exchange with respect to 9 stock issues;

Cincinnati Stock Exchange, 21 stock issues; Detroit Stock Exchange,

27 stock issues; Philadelphia Stock Exchange, 6 stock issues; and

San Francisco Stock Exchange, 8 stock issues and 1 bond issue. Three

of these exchanges were permitted to withdraw applications involving

five stock issues upon being advised that the applications did not meet.

the requirements prescribed by the rule. No applications were filed

durin~ the year under section 12 (f) (3).

Durmg the year the Commission put into effect a simplified procedure to eliminate hearings on applications for unlisted trading

privileges in cases where none of the interested parties or public investors desire a hearing. Upon the filing of an application the Commission now issues a notice which is served on the issuer and the exchanges concerned, published in the Federal Register, and released to

the press for the information of the public. The notice states that

767629-48--4
36 SECURITIES AND EXCHANGE COMMISSION

the Commission will hold a hearing on the matter only if requested by

any interested party. The notice further provides that, if no one

requests a hearing, the application will be determined by the Commission on the basis of the facts stated in the application and on other

information contained in the Commission's files.

Changes inSecurities Admitted to Unlisted Trading Privileges

During the year the exchanges filed numerous notifications pursuant

to rule X-12F-2 (a) of changes in the title, maturity, interest rate, par

value, dividend rate, or amount authorized or outstanding of securities admitted to unlisted trading privileges. Where changes of this

nature only are effected in an unlisted security, the altered security is

deemed to be the security previously admitted to unlisted trading

privileges and such privileges are automatically extended to the altered

security. However, when changes more comprehensive than these are

effected in an unlisted security, the exchange is required to file an application with the Commission, pursuant to rule X-12F-2 (b), seeking a determination that the altered security is substantially equivalent to the security previously admitted to unlisted trading privileges.

Applications filed pursuant to this rule were granted by the Commission with respect to one stock issue on Baltunore Stock Exchange,

three stock issues on Boston Stock Exchange, six stock issues on New

York Curb Exchange, and one stock issue on Philadelphia Stock Exchange. The Philadelphia Stock Exchange was permitted to withdraw an application involving one stock issue upon being advised by

the Commission that the application would be denied.

DEUSTING OF SECURITIES FROM EXCHANGES

Securities Delisted by Application

Section 12 (d) of the act provides that upon application by the issuer

or the exchange to the Commission, a security may be removed from

listing and registration on a national securities exchange in accordance with the rules of the exchange and subject to such terms as the

Commission deems necessary for the protection of investors. Inaccordance with the procedure prescribed by rule X-12D2-1 (b), 18

issues were removed from listing and registration on exchanges during

the year. Of these, 4 issues were removed upon application of their

issuers and the remaining 14 u'pon application of exchanges. In each

of these instances the application was granted without the imposition

of any terms by the Commission.

Of the four issues removed upon application of their issuers, one had

never been actively traded on the exchange involved and the holders

of substantially all of the outstanding shares had assented to the delisting; the issuer of one had been inactive since 1935, a large percentage of the outstanding shares was held by an officer of the company,

and no exchange transactions had occurred in the issue for over 4 years;

the remaining two issues had become verY closely J;1eldand the small

number of shares outstandmg ill public hands did not justify the

continuance of an exchange market.

The removal of the 14 issues u:{lon application of exchanges was

occasioned by various events which had the effect of practically

terminating public interest in the issues involved. These included

situations where the issuer was in the process of liquidation, where the

issue was greatly reduced in the amount outstanding, or where no
THffiTEENTH ANNUAL REPORT 37

provision had been made for the issue under a plan of reorganization.

Inone instance the issue had been approved for listing by the exchange

on the condition of submission of evidence of its satisfactory distribution. However, the distribution was not effected and the exchange

never admitted the issue to trading.

Another exchange application was that of the New York Curb

Exchange to strike from listing the $1 par value capital stock of

Standard Silver-Lead Mining Co. This security had been listed and

traded on the exchange since 1911. While small dividends had been

paid as recently as 1937, the company's principal mines had been

closed down and new ventures which it had undertaken had not been

successful, with the result that the corporation had operated at a loss

for the years 1938 to 1945, inclusive. Despite the absence of any

favorable prospects for future earnings or dividends and although

the stock had sold at prices below $1 a share during all the years from

1929to 1944, it became the subject of wide speculation in 1945 and

1946 and reached a price of $4.25 per share. Since the corporation

was practically dormant and had current liabilities greatly exceeding

its current assets, the exchange felt that it was not in the public interest

to continue the exchange market. The application to strike this

security from listing and registration was granted.

The simplified procedure on unlisted trading applications, described

in the preceding section, is being followed also in suitable delisting

cases.

Securities Delisted by Certification

Securities which have been paid at maturity, redeemed, or retired

in £Ull, or which have become exchangeable for other securities in

substitution therefor, may be removed from listing and registration

on a national securities exchange upon the exchange's filing with the

Commission a certification to the effect that such retirement has occurred. The removal of the security becomes effective automatically

after the interval of time prescribed by rule X-12D2-2 (a). The exchanges filed certifications under this rule effecting the removal of

313 separate issues. In some instances the same issue was removed

from more than one exchange, so that the total number of removals,

including duplications, was 343. Successor issues to those removed

became listed and registered on exchanges in many instances.

Inaccordance with the provisions of rule X -12D2-1 (d) , New York

Curb Exchange removed eight issues from listing and registration

when they became listed and registered on New York Stock Exchange.

This rule permits a national securities exchange to remove a security

from listing and registration in the event trading therein has been

terminated pursuant to a rule of the exchange which requires such

termination due to the security's becoming listed and registered and

admitted to trading on another exchange. Removal under this rule

is automatic, the exchange being required merely to notify the Commission of the removal.

Securities Removed From Listing on Exempted Exchanges

A securi~ may be removed from listing on an exempted exchange

upon the filing by such exchange of an appropriate amendment to its

exemption statement setting forth a brief statement of the reasons

for the removal.
38 SECURITIES AND EXCHANGE COMMISSION

During the year two exchanges removed five issues from listing

thereon. Three of these issues had been called for redemption and

two had become exchangeable for new securities under plans of recapitalization.

Exempted Securities Removed From Exchange Trading

During the year New York Stock Exchange removed from trading

two issues which had been temporarily exempted from the registration

requirements of section 12 (a) of the act pursuant to rule X-:f:2A-~.

One of these issues had become exchangeable for cash and other secunties under a plan of reorganization and the other issue had been paid

at maturity.

MANIPULATION AND STABILIZATION

Manipulation

In its administration of the provisions of the Securities Exchange

Act relating to the manipulation of securities markets, the Commission's policy is to attempt to detect manipulative practices at their inception, before the public has been harmed. At the same time, it

seeks to avoid interfering with the legitimate functioning of the securities markets. In brief, the Commission's investigations in this area

take two forms. The "flying quiz," or preliminary investigation, is

designed to detect and discourage incipient manipulation by a prompt

determination of the reason for unusual market behavior. If a legitimate reason for the activity is uncovered, the case is closed. If

more extended investigation seems required, a formal order is sought

of the Commission under which members of the staff are empowered

to subpena pertinent material and take testimony under oath. These

formal investigations often cover substantial periods of time, and

trading operations involving large quantities of shares are carefully

scrutinized.

The Commission keeps confidential the fact that any security is

under investigation so that the market in the security may not be unduly affected or reflections be unfairly cast upon individuals or firms

whose activities are being investigated. As a result, the Commission

occasionally receives criticism for failing to investigate situations

when, in fact, it is actually engaged in an intensive investigation of

those very matters.

A tabular summary with respect to the Commission's trading investigation follows:

Trading investigations

Flying

quizzes Pending June 30, 1946 -'___________________________ 245

Initiated July I, 1946 to June 30, 1947_________________ 66

Total to be accounted for_______________________ 311

Changed to formal investlgations_____________________ 4 Closed or completed 1 216

Total disposed of______________________________ 220

Formal

investiga- tions

31

5

36

2

2

Pending June 30, 1947_______________________________ 91 34

1Includes reference of cases to the Department ot Justice or to a national securities

exchange tor their action.
THffiTEENTH ANNUAL REPORT 39

Stabilization

During the 1947 fiscal year the Commission continued the administration of rules X-17A-2 and X-9A6-1. Rule X-17A-2 requires the

filing of detailed reports of all transactions incident to offerings in

respect of which a registration statement has been filed under the

Securities Act of 1933 where any stabilizing operation is undertaken

to facilitate the offering. Rule X-9A6-1 governs stabilizing transactions in securities registered on national securities exchanges, effected to facilitate offerings of securities so registered, in which the

offering prices are represented to be "at the market" or at prices related to market prices.

Of the 567 registration statements filed during the 1947 fiscal year,

317 contained a statement of intention to stabilize to facilitate the

offerings covered by such registration statements. Because a registration statement sometimes covers more than one class of security,

there were 362 offerings of securities in respect of which a statement

was made as required by rule 827 under the Securities Act to the effect

that a stabilizing operation was contemplated. Stabilizing operations

were actually conducted to facilitate 83 of these offerings. In the case

of bonds, public offerings of $160,942,300 principal amount were stabilized. Offerings of stock issues aggregating 11,870,892 shares and

having an estimated aggregate public offering price of $418,243,102

were also stabilized. In connection with these stabilizing operations

12,103 stabilizing reports were filed with the Commission during the

fiscal year. Each of these reports has been analyzed to determine

whether the stabilizing activities were lawful.

To facilitate compliance with the Commission's rules on stabilizing

and to assist issuers and underwriters to avoid violation of the statutory provisions dealing with manipulation and fraud, many conferences were held with representatives of such issuers and underwriters,

and many written and telephone requests were answered. A total

of 1,531 letters and memoranda of such conference and telephone requests and memoranda to the regional offices of the Commission were

written in connection with the administration and enforcement of the

stabilization and manipulation statutory provisions and regulations.

SECURITY TRANSACTIONS OF CORPORATION INSIDERS

. Sections 16 (a) of the Securities Exchange Act of 1934, 17 (a) of

the Public Utility Holding Company Act of 1935, and 30 (f) of the

Investment Company Act of 1940 require that corporation "insiders"

file reports of certain transactions in the securities of their companies.

These reports are required to be filed by every beneficial owner of more

than 10 percent of any equity security listed on a national securities exchange and by every officer and director of the issuer of any equity

security so listed; every officer or director of a registered public utility

holding company; and every officer, director, beneficial owner of more

than 10 percent of any class of security (other than short-term paper),

member of an advisory board, investment adviser or affiliated person

of an investment adviser of a re~stered closed-end investment company. There must be filed an initial report showing beneficial ownership, both direct and indirect, of the company's securities when one
40 SECURITIES AND EXCHANGE COMMISSION

of these relationships is assumed and a report must be filed for eaeh

month thereafter in which any purchase or sale, or other change ill

such ownership occurs, setting forth in detail each such change, on or

before the tenth day following the month in which it occurs.

The staff examines all reports filed to determine whether t~ey' comply

with applicable requirements. Where maccuracies or oIUlSSIOnsappear amended reports are requested. The reports are available f~r

public inspection from the time they are filed. However, It IS mamfestly not possible for many interested persons to inspect these re:ports

at the Commission's central office,or at the exchanges where additional

copies of section 16 (a) reports are also filed. The Commission therefor publishes. a m~mth~y officil~1sl;lmmary of security transactions and

holdings WhICh IS WIdely distributed among individual investors,

brokers and dealers, newspaper correspondents, press services and

oth-er interested persons. Files of this summary are maintained at

each of the Commission's regional offices and at the offices of the

various exchanges. The nature and value of these summaries is indicated by the fact that during the past 13 years 41,327 persons have

filed 272,450 reports with the Commission.

Preventing Unfair Use of Inside Information

For the further purpose of preventing the unfair use of information

which may have been obtained by the corporation insider by reason

of his confidential relationship to his company, section 16 (b) of the

Securities Exchange Act provides that any profit he realizes from

any purchase and sale, or any sale and purchase, of any equity security

of the company within any period of less than 6 months shall be recoverable by the issuer, or by any security holder acting in its behalf

if the issuer fails or refuses to bring suit for recovery within 60 days

after request or fails diligently to prosecute the suit after it is instituted. Corresponding provisions are contained in section 17 (b)

of the Public Utility Holding Company Act of 1935 and section 30 (f)

of the Investment Company Act of 1940. The Commission is not

charged with the enforcement of the civil remedies created by these

various provisions, but has filed briefs as amicus curiae in several

suits brought by private persons.

Ownership reporting provisions of these acts have enabled issuers

and public stockholders in some instances to recover substantial profits

which had been realized by insiders in short-term trading. In a number of other cases, the Commisison has been informed of the voluntary

payment to the companies of short-term profits realized by insiders.

Such repayments were often brought about by the necessity to report

short-term transactions.

Statistics of Ownership Reports

The number of ownership reports filed with and examined by the

Commission durrng the past fiscal year is set forth below.

Of the total number of reports filed during the year approximately

1~,500 reports 'Yere filed under th.e Securities Exchange Act, 1,000

WIth respect to rnvestment comparues, and 500 identified with utility

companies-c-or in the proportions of about 92 5 and 3 percent respectively, '
THmTEENTH ANNUAL REPORT 41

Number of ownership reports ot otff,cers,directors, principal security holders, and

certain other aDUiated persons filed and ea:aminedduring the fiscaZyear ended

June 30, 1947

Description of report 1 Original Amended Total reports reports

securities Form 4Exchange _________________________________________________________ Act of 1934:

Form 5_________________________________________________________ 14,842 725 15,567

Form 787 18 805 6_________________________________________________________ 2,197 51 2,248

PublicFormUtility U Holding Company Act of 1935: -17-L ___________________________________________________ 75 1 76 Form U-17-2____________________________________________________456 21 477

Investment Form N Comapny Act of 1940: -30F-L _________________________________________________109 ---------46- 109 Form N -30F-2__________________________________________________761 807

Total ______________________ 19,227 862 20,089

1 Form 41s used to report changes In ownership; form 5, to report ownership at the time any equity seeurt- ties of an Issuer are first listed and registered on a national securities exchange; and Form 6, to report owner. ship of persons who subsequently become officers, directors, or prtnelpal stockholders of such an Issuer.

under section 16 (a) of the Secunties Exchange Act of 1934;form U-17-11Sused for mltial reports and form

U-17-2 for reports of changes In ownership of securities, under section 17 (a) of the Public Utlbty Holding Company Act of 1935;and form N-30F-11s used for initial reports and form N-:JOF-2for reports of changes In ownership of securities under section 30 (f) of the Investment Company Act of 1940.

SOLICITATION OF PROXIES, CONSENTS, AND AUTHORIZATIONS

Under three of the acts it administers-sections 14 (a) of the Securities Exchange Act of 1934, 12 (a) of the Public Utility Holding

Company Act of 1935 and 20 (a) of the Investment Company Act

of 19~the Commission is authorized to prescribe rules and regulations concerning the solicitation of proxies, consents, and authorizations in connection with securities of the companies subject to those

acts. Pursuant to this authority, the Commission has adopted regulation X-14, which is designed to protect investors by requiring the

disclosure of certain information to them and by affording them

an opportunity for active participation in the affairs of their comfany. Essentially, this regulation makes unlawful any solicitation 0 any

proxy, consent or authorization which is false or misleading as to

any material fact or which omits to state any material fact necessary

to make the statements already made not false or misleading. Under

the regulation it is necessary, in general, that each person solicited

be furnished such information as will enable him to act intelligently

upon each separate matter in respect of which his vote or consent is

sought. The proxy rules set forth in this regulation also contain

provisions which enable security holders who are not allied with the

management to communicate with other security holders when the

management is soliciting proxies.

During the Jlast fiscal year the Commission received and examined

under regulation X-14 both the preliminary and definitive material

required with respect to 1,677such solicitations as well as "follow up"

material employed in 303 instances.

This proxy examination work is seasonal. Approximately 12 percent of all proxy statements filed during any year are for stockholder

meetings held in the 3-month period from March to May; about 10

percent are for meetings in the fourth week of April; and about 5

percent, or one in every 20, are for meetings held on one particular

day, the fourth Tuesday in March.

•__________________________________
42 SECURITIES AND EXCHANGE COMMISSION

According to a study recently made by the staff of the proxy statements filed under regulation X-14 during the calendar years 1943,

1944, 1945] and 1946, the prinicpal items of business for which stockholder action was sought were as follows:

Year ended December 31-

1943 1944 1945 1946

--- --- --- Proxy statements filed by management, _______________________ 1,467 1,523 1,570 1,664

Proxy statements filed by others than management; ___________ 31 27 24 21

--- --- --- --- Total proxy statements filed _____________________________ 1,498 1,550 1,594 1,685

--- --- --- --- For meetings at whIch the election of directors was one of the

1,368 1,350 1,350 1,407 items of business _____________________________________________

For meetings not involving the election of directors ____________ 109 172 213 244 For assents and authorizations not involving a meeting or the

34 election of directors __________________________________________ 21 28 31

Total proxy statements filed _____________________________ --- --- --- --- 1,498 1,550 1,594 1,685

The items of business other than that of election of directors were

distributed among specific proposals of action as follows:

Year ended December 31-

1943 1944 1945 1946

-- -- --- Mergers, oonsolldattons, acqulsition of businesses, and purchase and sale

47 59 40 65 of property ___________________________________________________________

Issuance of new seeuntles, modification of existmg securities, reeapitali- zation plans other than merger or consohdation _______________________ 95 144 227 249 Employces pension plans _______________________________________________ 46 105 94 75 Bonus and profit-sharing plans, including stock options ________________ 51 58 51 52 Indemrufication of officers and directors ________________________________ 137 31 25 36 Change m date of annual meetmg ______________________________________ 54 33 33 28 Other miscellaneous amendments to bylaws, and miseellaneous other matters (renegotration, investment pohey, V and V-T loans) ________ 131 141 217 309 Stockholder approval of mdependent auditors __________________________ 307 310 296 304

Number of management's proxy statements containmg stockholder pro~osals under rule X-I4A-7 ________________________________________ 27 20 14 19 Num er of such stockholder proposals __________________________________ 66 38 34 34 Net number of stockholders whose proposals were mcluded In management's proxy ,statements under rule X-I4A-7 (each stockholder Is

counted only once in each year regardless of the number of his pro- posals or tbe number of companies that Included his proposals in proxy statements) ____________________________________________________ 19 17 17 9

Itmight be helpful to describe by way of illustration the disclosure

resulting from examination of the proxy solicitation material intended

to be used in a particular case. In connection with the solicitation of

proxies by a cement producing company, the change in the position

of preferred stockholders which would result from a proposed recapitalization was not clearly set forth in the first instance. As originally drafted the proposed plan, which would have forced preferred

stockholders to give up substantial rights to the benefit of common

stockholders, including members of the management group, was not

clearly or adequately described.

Following the Commission's insistence that complete disclosure

be made in the proxy soliciting material of the effect of the planparticularly with respect to the prior position of the preferred as to

assets and earnings and as to the earnings record of the company

which would show that dividends on the preferred stock had been

earned in many years bu~ not paid, while substantial sums were being
THIRTEENTH ANNUAL REPORT 43

used to purchase the preferred at depressed prices-the company

elected to modify the plan so as to offer more favorable terms to the

preferred stockholders. Hence as a result of the disclosure demanded, the preferred stockholder received a plan much more equitable to his interest.

REGULATION OF BROKERS AND DEALERS IN

OVER-mE-COUNTER MARKETS

Registration

Brokers and dealers using the mails or other instrumentalities of

interstate commerce to effect transactions in securities on over-thecounter markets are required to be registered with the Commission

pursuant to section 15 (a) of the Securities Exchange Act, except for

those brokers and dealers whose business is exclusively intrastate or

exclusively in exempt securities. The following table contains pertinent data with respect to the registration of brokers and dealers

during the 1947fiscal year:

Registration of brokers and dealers under section 15 (b) ot the Securities

E(Dchange Act tor the 1947 'fiscal year

Effective registrations at close of preceding fiscal year__________________ 4132

Effective registrations carried as inactive______________________________ 180

Registrations placed under suspension during preceding fiscal year______ 0

Applications pending at close of preceding fiscal year 43

Applications filed during fiscal year 482

Total 4737

Applications withdrawn during year__________________________________ 10

Registrations withdrawn during year__________________________________ 537

Registrations canceled during year____________________________________ 53

Registrations denied during year_____________________________________ 1

Registrations suspended during year 0

Itegistrations revoked during year_____________________________________ 11

Registrations effective at end of year 4011

Registrations effective at end of year carried as inactive________________ 174

Applications pending at end of year___________________________________ 40

Total 4737

-- I These are carried as inactive because of the inability to locate the registrants despite careful inquiry. Six such registrations were canceled, withdrawn, or restored to active status during the year.

Broker-Dealer Inspections

During the 1947 fiscal year a total of 587 broker-dealer inspection

reports were received from the Commission's regional offices. These

inspections are undertaken pursuant to section 17 of the Securities

Exchange Act for the purpose of determining whether registrants

are in compliance with the requirements of law.

Ninty-four inspections reflected unsatisfactory financial conditions

requiring immediate corrective action or continued surveillance. The

high ratio of inspections in which unsatisfactory financial conditions

were revealed is due largely to the fact that a substantial number of

special inspections were undertaken to test financial condition following the September 1946 break in the market. In 131 inspections

the reports disclosed transactions at prices so different from prevailing market prices as to raise some question as to the fair treatment of
44 SECURITIES AND EXCHANGE COMMISSION

customers. In 133 inspections the reports contained information indicating noncompliance with provisions of regulation T relating to

the extension of credit. In 13 inspections questions were raised concerning improper hypothecation and commingling of customers' securities. Innine inspections it was discovered that firms took secret

profits in agency transaction by misrepresenting prices at which customers' orders had been executed.

As has been explained in previous annual reports, efforts are made

to determine whether infractions are the result of carelessness or represent a policy of indifference or willfulness on the part of responsible management. It is the Commission's established policy to

call minor infractions to the attention of the firm at the time of the

inspection so that corrective measures may be taken immediately.

This of course necessitates a subsequent check-up in order to determine whether the promised corrections have been effected. However,

when acts and practices are discovered which represent such substantial harm to customers that action by the Commission may be appropriate, inquiry or investigation beyond the scope of the inspection is

undertaken. During the 1947 fiscal year, 43 inspections resulted in

such inquiry or investigation.

Administrative Proceedings

A summary of the administrative proceedings instituted by the

Commission during the 1947 fiscal year with respect to brokers and

dealers is given below.

Record of broker-dealer proceedings and proceedings to suspena or etepel from

membership in a nati~nal securities association instituted pursuant to sec. 15

Of the Securities Ea:change Act of 1984

Proceedings year_________________________________________________________________ on revocation of registration pending at beginning of fiscal 2

Proceedings on revocation of registration and suspension or expulsion from

~ASI> pending at beginning of fiscal year____________________________ 4

Proceedings on denial of registration pending at beginning of fiscal year__ 2

Proceedings on question of terms and conditions on withdrawal of registra- tion pending at beginning of fiscal year 1

Proceedings ordered during year on revocation of registration____________ 15

Proceedings ordered during year on revocation of registration and suspen- sion or expulsion from ~ASI>_________________________________________ 3

Proceedings ordered during year on denial of registration_________________ 2

Total____________________________________________________________ 29

Revocation proceedings dismissed, withdrawal of registration being permitted or registration canceled________________________________________ 5

Revocation proceedings dismissed, registration continued in e1fecL________ 1

Denial proceedings dismissed, withdrawal of application being permlttedz., 1

Denial proceedings resulting in registration under terms and eonditlons.L; 1

Proceedings discontinued on question of imposing terms and conditions on withdrawal, withdrawal being permitted______________________________ 1

~~~:::~: Registration revoked ~~~~~=================================================== and firm expelled from ~ASI>_______________________ 1~1

Firms suspended from membership in ~ASI>_____________________________ 1

Revocation proceedings pending at end of fiscal year______________________ 4

Revocation proceedings and proceedings to expel or suspend from ~ASI>

pending at end of fiscal year -------___________________________________ 2

I>enlal proceedings pending at end of fiscal year_________________________ 1

Total____________________________________________________________ 29

'
THffiTEENTH ANNUAL REPORT 45

In proceedings against Ira Haupt & Co., the Commission held that

the brokerage exemption provided by section 4 (2) of the Securities

Act of 1933 was inapplicable to a distribution on an exchange by an

underwriter acting for a controlling person," The proceeding was

instituted to determine whether the firm had willfully violated section

5 (a) of the Securities Act. The violation arose out of the firm's sale

for the account of the "Schulte interests" (consisting of David A.

Schulte, a corporation controlled by Schulte~ and the David A. Schulte

Trust) of approximately 93,000 shares of the common stock of Park

& Tilford, Inc., from November 1, 1942, to June 1, 1944. The securities

so offered were not registered under the Securities Act.

The firm contended that its transactions in the Park & Tilford

stock for the account of the Schulte interests did not constitute a

violation of section 5 (a) because of the applicability to such transactions of certain exemptions provided by sections 3 (a) (1),4 (1)

and 4 (2) of the Securities Act. In its opinion, the Commission

rejected these claims to exemption and found that the firm was an

underwriter within the meaning of section 2 (11) of the Securities

Act since, upon the stipulated facts, the firm had effected a public distribution of the common stock of Park & Tilford for the Schulte interests, which concededly controlled 90 percent of the Park & Tilford

outstanding common stock. The Commission cited the legislative

history of the act to show that it was the intention of Congress to

require registration in connection with secondary distributions

through underwriters by controlling. stockholders. It poirited out

that while "distribution" is not defined in the act, it has been held to

comprise "the entire process by which in the course of a public offering

a block of securities is dispersed and ultimately comes to rest in the

hands of the investing public." Having found that the firm acted

as an underwriter in connection with the distribution of the Park &

Tilford stock to the public, the Commission concluded that the distribution of a controlling block of stock is a new offering and that

the exemptions of section 3 (a) (1) and the third clause of section

4 (1) were not applicable to such transactions.

The Commission further found that the brokerage exemption provided by section 4 (2) is not available to an underwriter who effects

a distribution of an issue for the account of a controlling stockholder

through the mechanism of a stock exchange. It pointed out the distinction between "trading" and "distribution." The opinion holds

that section 4 (2) permits individuals to sell their securities through

a broker in an ordinary brokerage transaction but that the process of

distribution itself, however carried out, is subject to section 5.

While concluding that the firm's violations were willful, the Commission did not find that revocation of registration or expulsion from

the exchange was necessary in the public interest, but held that it was

appropriate in the public interest to suspend the firm from membershiJ? in the National Association of Securities Dealers, Inc., for a

period of 20 days.

The revocation proceedings against Behel, Johnsen & Company,

Inc., Chicago, m., involved a pattern of trading which the Commission, in its opinion ana findings, described as "churning.". Three

I Securities Exchange Act Release No. 38411 (1946). • Securities Exchange Act Release No. 3967 (1947).
46 SECURITIES AND EXCHANGE COMMISSION

women customers, who opened their accounts with registrant in May

and June 1942 owned securities with an aggregate market value of

$541008. Thes~ securities and subsequent cash contributi0I?-s made

their total net investment $61,731. The pattern followed II?-.these

accounts was one of simultaneous sale and purchase of securities at

short intervals. Registrant used the proceeds fro~ the sale of the

customers' securities to purchase, purportably for Its own account,

securities which it had recommended to the customers, and then sold

such securities to the customers at a profit, confirming as a "principal"

in the transaction.

As a result of this course of dealing, from May 18, 1942, to May 7,

1945, the three women were induced to sell, in a series of 130 transactions, securities with a market value of $266,727 and to "purchase

from" the registrant, in a series of 143 transactions, securities that had

cost the firm $274,451. Approximately 61 percent of the securities

sold by the registrant to these customers were held by them for less

than 6 months and 86 percent were held for lessthan 1 year. Over the

course of the 3-year period, the capital in these three accounts, as

measured by the average of the market value of the opening and

closing of the portfolio plus the additional cash invested, was turned

over approximately four and one-half times. From the trading activity deliberately created in these three accounts, registrant realized

gross profits of $18,879, representing more than one-third of its total

gross profit during the period under consideration, while on the other

hand the customers benefited only to the extent of an increase of $2,400

in the aggregate market value of their security holdings at the end

of the period over the value of those held at the beginning of the

period.

Noting that the three women customers were all uninformed as to

securities, relying completely on registrant's advice in determining

the course of their transactions, and that the registrant's position was

one of trust, its undertaking and obligation being to treat these accounts as investment accounts, the Commission reprehended as a vicious

and fraudulent course of conduct registrant's practice of "Churning"

the accounts by inducing a great number of transactions and successive turn-overs of the portfolio solely for the purpose of its own gain

and to the substantial detriment of the customers. The Commission

pointed out that the registrant's practice of confirming "as principal"

where orders given by customers were filled by means of purchases

purportably made for the firm's own account facilitated perpetration

of the tyPe of fraud represented in this proceeding. By confirming

"as principal," the firm made no disclosure of either the commission or

profit derived from the operations effected in the customer's account.

The Commission found on the foregoing admitted facts that registrant

had willfully violated section 17 (a) of the Securities Act of 1933 and

sections 10 (b) and 15 (c) (1) of the Securities Exchange Act and

rules X-10B-5 and X-15Cl-2 (a) and (b) adopted thereunder. The

Commission concluded that it was in the public interest to revoke the

registration of registrant and to expel it from membership in the

NASD.

During the curr~nt yea!, the Commission instituted revocation proceedmgs agamst rune registered broker-dealers who had failed to submit yearly reports of their financial condition to the Commission as
THIRTEENTH ANNUAL REPORT 47

required by ru1e X-17A-5 promulgated under section 17 (a) of the

Securities Exchange Act," These cases are of interest because they

were the first in which the Commission has sought to revoke registration solely for the violation of this rule. The Commission noted in

its opinions in these proceedings that the promulgation of rule

X-17A-5 was announced by publication in the Federal Register, by

releases to the public press, and by distribution to the persons on its

mailing list, which included these nine registrants. In addition,

letters were sent to these registrants reminding them of the necessity

for filing reports of financial condition as required by the rule.

As to whether the violation commonly involved in these proceedings

was willful, the Commission observed that had these registrants acquired knowledge of the requirement, their failure to comply with it

could hardly be otherwise than willful; that under the circumstances,

ignorance of the requirements of the rule would appear to have been

the result of deliberate indifference to obligations imposed upon them

by their status as registered broker-dealers; and that their conduct

in placing themselves out of reach of communication from the Commission amounted to such a disregard of the duty inherent in their

licensed status to keep informed of the legal requirements attached

to that status as to make their violation of rule X-17A-5 "willful"

within the meaning of that term as used in section 15 (b) of the

Securities Exchange Act.

In four of these cases, namely, Wayne Lloyd Morgan, Julius Guttag, Henry Leach, and Sylvan Perry Spies, the Commission, finding

that the public interest and the protection of investors would be adequately served by withdrawal rather than revocation, permitted such

registrants to WIthdraw their registrations. The Commission, however, found that it was necessary in the public interest to revoke the

registrations of Ray Murphy, David Heffler, Robert Charles Johnson,

Earl P. Corley, and Charles Fletcher Baxter.

The proceedings which the Commission instituted against M. S.

Wien & Co. were based upon charges of manipulation of the market,

fraudulent misrepresentations, and nondisclosure of material facts in

connection with certain purchases and sales in the over-the-counter

market of the 5 percent income debentures of 1968 of the Phoenix Silk

Corporation,"

Under consideration of an extensive record the Commission concluded that the firm had made misrepresentations and material omissions in connection with these transactions, thereby willfully violating

sections 10 (b) and 15 (c) (1) of the Securities Exchange Act and

rules X-10B-5 and X-1501-2 thereunder. Holding that the firm must

be held responsible for the violations, the Commission found that it

was in the public interest that its broker-dealer registration be revoked and that it be expelled from membership in the NASD. The

Wayne Lloyd Morgan, d/b/a W. L. Morgan. Proceedings to revoke registration instituted July 10, 1946. Order dismissing proceedings and permitting withdrawal, July 23,

1946.

See the following Securities Exchange Act Releases:

Ray Murphy, No. 3857 (1946) ; Julius Guttag, d/b/a Guttaq Bros., No. 3893 (1946) ; David Heffler, d/b/a D. Heffler Oompan1/, No. 3879 (1946) ; Robert Oharles Johnson, d/b/a H. O. Johnson Oompany, No. 3878 (1946) ; Henry Leach, No. 3877 (1946) ; Sylvan Perry Spies, d/b/a Sylvan Perry 00., No. 3900 (1~47) ; Earl P. Oorlflll, No. 3880 (1946) : Oharles Fletcher Baeter, d/b/a Oharles F. Baeter and Assoclates, No. 3901 (1947). e Securities Exchange Act Release No. 3855 (1946).

•

-
48 SECURITIES AND EXCHANGE COMMISSION

opinion, however, noted that the culpability rested chiefly on Lann,

one of the partners who was personally in charge of the trading and

made all the representations respecting the debentures. Finding fur.

ther that there was nothing in the record to show that the other part.

ners knew of or acquiesced in any of the misrepresentations or omissions made by Lann in connection with the activities in the debentures,

the Commission provided in its order that the revocation of the firm's

registration should be without prejudice to the right to reapply for

registration after 30 days from the effective date of the order if by

that time Lann should have withdrawn from the firm and become disassociated from its business. Lann, as an aggrieved person, filed a

petition on December 30,1946, with the Circuit Court of A.ppeals for

the District of Columbia Circuit, for review of the Commission's order,

and the review was still pending at the close of the fiscal year.

When Lawrence R. Leeby, who proposed to do business as a sole

proprietor under the name of Lawrence R. Leeby & Co., applied for

registration as an over-the-counter broker, proceedings were instituted

to determine whether it was in the public interest to deny such registration," Leeby's registration as a broker and dealer had been revoked by the Commission in 1943 for violation of section 1'7 (a) of the

Securities A.ct of 1933 upon a finding by the Commission that he had

sold numerous oil royalties to two customers at exceedingly high markups over contemporaneous wholesale costs, the sales being confirmed

to the customers as principal transactions although the evidence

showed that Looby was charged with the high fiduciary duties of an

agent. The Commission found that in these circumstances he violated

hIS fiduciary duties in taking secret profits. Moreover, viewed even as

principal transactions, the Commission found the mark-ups taken in

such transactions were excessive and fraudulent.

Leeby's application for registration stated that he intended to engage in business only as a broker and at the hearing in the denial proceedings he testified that he proposed to charge commissions previously agreed upon with his customers and comparable to those charged

in similar transactions by members of exchanges. It was the opinion

of the Commission that such proposed plan of operation afforded a

promise that there would be no repetition of the taking of excessive

profits and the failure to reveal such profits which resulted in the

earlier revocation of Leeby's registration. Leeby further testified that

he proposed to amend his application to indicate that he would engage in transactions as a dealer in investment trust shares, which

transactions would be limited to securities registered with the Commission which he would purchase from the underwriters and sell

through the use of the prospectus filed with the Commission. In considering this amendment to his application, the Commission noted that

in such transactions Looby would be limited to the dealer discount

set forth in the prospectus and that the disclosure of such discount

would tend to prevent recurrence of the improper practices engaged

in by Leeby in the sale of oil royalties.

Upon further findings that Leeby had been employed as It salesman

by several firms since his revocation as a registered broker and dealer,

that the schedule of his transactions as a salesman for one firm by

Y Securities Exchange Act Release No. 8863 (1946). The proceedings b7 Leeb7 tor admiss10ll .to membersbip in the NASD are discussed at p. 54.
THIRTEENTH ANNUAL REPORT 49

which he had been employed for a considerable period disclosed that

the dealer transactions in over-the-counter securities had been effected

by him for the firm at prices not unreasonably related to the current

market quotations, and that letters had been supplied by brokerage

firms and individuals testifying to his good reputation and standing,

the Commission concluded that it was not necessary in the public

interest to deny Leeby's application for registration as a broker and,

after appropriate amendment of his application, as a dealer ininvestment company shares. The Commission made it clear, however, that

it was permitting his registration to become effective subject to the

condition that his activities were limited to those in which he represented he would engage and that a finding that he had departed from

such limitations would subject his registration to revocation.

Special Financial Reports or Broken and Dealen

On September 30, 1946, the Commission issued a call upon registered

brokers and dealers and members of national securities exchanges to

file an abbreviated financial report as of September 30.S A total of

3,595 notices were sent out and 2,930 reports were received. An analysis of the reports disclosed that in the main the net capital of brokerage

firms appeared to be adequate and in compliance WIth rule X-15C3-1

as of September 30. Less than 3 percent disclosed financial conditions requiring prompt correction. A number of the firms whose

financial condition was unsatisfactory reduced their inventories, reduced their indebtedness, or introduced new capital to meet the requirements of the rule. There were other circumstances in which firms

divested themselves of customers' cash lmd securities and transferred

them to other accounts in which credit was extended, thereby becoming exempt from the rule. While the staff of the Commission indicated

that the industry withstood the September market break remarkably

well, its analysis of the September 30 financial reports has raised some

question as to the adequacy of the protection which the rule in its

present form provides.

SUPERVISION OF NASD ACTIVITY

Membership

Membership in the National Association of Securities Dealers, Inc.

(NASD), the only national securities dealers association registered

with the Commission, increased during the year by 100 to stand at

2,614 on June 30, 1947. On that date, 25,573 individuals connected

with member firms in capacities which involved doing business directly

with the public were registered with the association as registered

representatives. These include partners, officers, traders and

salesmen.

Disciplinary Actions

The NASD reported to the Commission in the 1947 fiscal year final

action on eight disciplinary cases in which formal complaints had

been filed against members. In five of these cases the appropriate district business conduct committee found the firms in violation of the

N.ASD rules of fair practice and imposed fines, in amounts ranging

The New York Stock Exchange had alreadY issued a call upon Its members to IDe Sep- tember 30 reports with the Exchange and had a~d to make these reports available to the Commission. Consequently New York Stock Exchange ftrms were exempted from the

Commlssfon's call.

•
50 SECURITIES AND EXCHANGE COMMISSION

from $200 to $1,100, aggregating $2,135. .In another. case, a firm

ployee, who had been cited as a respondent in a complaint together w~th

his employing firm, had his registration as a registered representative

revoked on a finding that he had misappropriated customers' funds

and securities," Restitution in full was effected. The complaint was

dismissed as to the employing firm <:m.3;finding that it had l;l0. knowledge of the employee's improper actIvItI~S. In the two re~amlllg formal complaints the board of governors, 111 a review capacity, reversed

findings of violations by the district business conduct committee of

original jurisdiction and dismissed the complaints against the firms

involved.

The Commission continued its practice of referring to the NASD,

for appropriate action by the NASD, facts concerning the business

practices of members where there was some indication of a possible

violation of the NASD rules of fair practice. Seven such references

were made during the 1947 fiscal year and seven other cases were pending at the start of the year. By June 30, 1947, the NASD reported

the disposition of 13 of these 14 cases. Three resulted in formal complaint procedures, as reported above, in which violations were found

and fines imposed on the members concerned. In 9 other instances, the

district business conduct committees held informal discussions with the

members involved, but took no formal action. In the remaining case,

the firm cited retired from business at about the time the reference was

made and the NASD permitted the resignation to become effective.

Commission Review of Disciplinary Acrlon and of Denial of Membership

By the provisions of section 15 A (g) of the Securities Exchange

Act, any disciplinary action by the NASD against a member or denial

of membership to any applicant is subject to review by the Commission on application by an aggrieved party. Three such cases were

decided by the Commission during the year.

As indicated in the Twelfth Annual Report there was before the

Commission at the close of the 1946 fiscal year an appeal proceeding to

review disciplinary action by the NASD against the Washington,

D. C., office of Herrick, Waddell & Co., Inc. The NASD district business conduct committee, after the filing of a complaint and a hearing,

concluded that prices charged customers by the firm were not reasonably related to the market and that the firm's conduct in these transactions was in violation of the NASD rules of fair practice. As a

penalty, the firm was censured and directed to pay costs in the amount

of $250. This decision was appealed by the firm to the board of

governors where, by a tie vote, it was affirmed.

The issue before the Commission was whether there had been a

violation of the NASD's interpretations governing the amount of

mark-up over market which a member firm may charge in the sale

of a security to a customer. The basic facts were not in dispute and

no claim was made that, if a violation had occurred, the penalty was

excessive. There was no charge of fraud involved in the case. The

NASD findings were based in, part on an exhibit showing that the

gross profit received by Herrick, Waddell & Co., Inc., in39 transactions

ranged from 4.2 percent to 11.4 percent over cost price. Inmost purThis is the first disciplinary case in which a complaint was directed against a regis- tered representative under the procedure adopted e1fectlve January 15. 1946.

~-

•
THIRTEENTH ANNUAL REPORT 51

chases by customers, the firm purported to act as principal, executing

customers' purchase orders in so-called riskless transactions, in which

the firm purchased the security only after it had received the order from

the customer and then billed the security to the customer at a stated

mark-up over cost.

Evidence was introduced that it was general practice for the firm's

salesman to inform the customer at the time the customer's order was

accepted that the firm would act as principal and that the cost to the

customer would include a mark-up over cost to the firm stated in

points to the nearest one-eighth of a point. These disclosures, according to the evidence, were also made in writing by means of a confirmation sent to customers immediately after the firm's purchase for its

own account and its concurrent sale to the customer. The firm contended that the relevant NASD rule was no broader than a prohibition against fraud which, it claimed, was obviated by the oral and

written disclosures made to the customer.

The NASD argued and the Commission found that the NASD rules

<FO beyond fraud, but the Commission concluded that the NASD

findings were not supported by the evidence, and that the NASD had

not properly applied its interpretations governing mark-ups.> The

NASD had relied heavily upon evidence comparing the firm's mark-up

policy with the practices of other firms in the District of Columbia.

The Commission, however, held that this evidence did not provide a

standard sufficiently clear to constitute a proper basis for a finding

that the firm's mark-ups were unreasonable in their relationship to

the market. The Commission also held that the NASD had not given

proper weight to various other circumstances, including particularly

the oral and written disclosures of the firm as to its capacity and

amount of mark-up. The Commission disagreed with the NASD view

that these disclosures were immaterial and emphasized that they are

pertinent to the question of ethical conduct. The Commission remanded the record to the NASD :for reconsideration consistent with

the Commission's opinion. Subsequently the matter was reconsidered

by the board of governors, which dismissed the complaint.

A case involving the "denial of membership" was decided on the issue

whether Foelber-Patterson, Inc. was disqualified :from membership

in the NASD as a result of a Commission order issued in 194211 revoking the registration o:fa broker-dealer firm in which Foelber and Patterson were officers,directors and shareholders. The Commission had

granted Foelber-Patterson, Inc., registration as a broker-dealer in

1945,but subsequently, on application to the NASD for membership,

the NASD denied admission on the grounds that Foelber and Patterson had been causes o:fthe Commisison's order revoking the registration of Central Securities Corp., and that, notwithstanding the subsequent registration of Foelber-Patterson, Inc., the applicant was disqualified from membership and could be admitted only with the approval or at the direction of the Commission. The firm then filed

with the Commission a petition for review of that action. The Commission held that when a broker-dealer whose registration has been

revoked is subsequently permitted by the Commission to become registered, the disqualification is removed in that he is no longer subject

10 Securities Exchange Act Release No. 3985 (1947). 11Oentral Securities OorpiwatWn, 11 S. E. C••98.

767629-48--5
52 SECURITIES AND EXCHANGE COMMISSION

to an order of revocation and, looking behind the corporate veil, held

that the firm was not disqualified." The Commission ~ccord~n~lyset

aside the action of the NASD and required applicant s admission to

membership. . .. Another "denial of membership" case arose on a petition filed by

Republic Investment Co. requesting the Commission to review an

NASD order denying applicant's admission to membership, The

NASD had concluded that Republic Investment Co. was disqualified

from membership because its president, A. Morris Krensky, had been

a cause of the expulsion of Lowell Niebuhr & Co., Inc., by and from

the NASD for violations of its rules of fair practice. Accordingly,

Republic Investment Co. could be admitted only with the approval or

at the direction of the Commission. The Commission, in its opinion,

declared that it was unable to find any evidence in the record to support the conclusion that Krensky had knowledge of, or in any way

participated in, the acts which led to the expulsion of Lowell NIebuhr

& Co.,Inc., or that he was a cause thereof within the meaning of section

15A (b) (4) of the Securities Exchange Act and the identical section

2 of article I of the NASD bylaws. The Commission :further stated

that "at the time those acts occurred, the record indicates that he

(Krensky) actually had withdrawn from the firm." The Commission

concluded that the applicant was not disqualified from membership

and, by order, set aside the action of the NASD and required applicant's admission to membership."

Commission Action on Petitions for Approval of or Continuation in Membership

In addition to the review of cases such as those cited above, a petition can be brought before the Commission under the provisions of

section 15A (b) (4) of the Securities Exchange Act by or on behalf

of a member of the KASD for the continuance of its membership

when it proposes to take in a partner, officer,director or an employee

who is himself disqualified from membership. In this type of action,

the question before the Commission is whether it is in the public interest, in spite of the existence of valid disqualification, to approve the

continuance of membership. Applications are directed in the first

instance to the NASD. Ifthe NASD acts favorably to the applicant,

it so advises the Commission and becomesthe petitioner. Under this

circumstance, the Commission considers "approval" of the petition

for admission to or continuance in membership. If the NASD rejects

the application, the applicant may petition the Commission for an

order "directing" the NASD to continue the petitioner in membership.

In the last year, three "approval" petitions were filed by the NASD

on behalf of members. Action was taken by the Commission as to

two of these petitions and the third, which was pending at June 30,

1947,was subsequently withdrawn.

At .tJ;teclose of the 1946fiscal year there was before the Commission

a petIt~o~filed by the NASD on behalf of Greene & Co. applying for

Commission approval of the continuance of Greene & Co. in membership with 1V. F. Thompson acting as a partner or as an employee

of the firm. Thompson had been one of two partners of W. F.

Thompson & Co., which, in 1942, had been found by the NASD to

U Securities Exchange Act Release No. 3847 (1946). 13 Securities Exchange Act Release No. 3866 (1946).
THIRTEENTH ANNUAL REPORT 53

have violated certain of its rules and to have been guilty of conduct

inconsistent with just and equitable principles of trade. The firm was

expelled from the NASD and fined $1,200. Subsequently, Thompson

was employed by Greene & Co. The NASD acted favorably on the

firm's application for continuance of membership and the petition before the Commission was filed by the NASD on behalf of the firm.

After hearings were held the Commission approved the petition." A

significant fact developed at the hearings was that, apart from the

above-mentioned NASD proceedings, Thompson had never been subject to any disciplinary action, law suit or complaint growing out of

his securities business.

As-mentioned earlier, Lowell Niebuhr & Co., Inc. had been expelled

by and from the NASD in 1942 for violation of the NASD rules in

two respects-conducting a securities business while its liquid assets

were considerably less than its obligations and filing balance sheets

with the NASD in which its financial condition was misrepresented.

Subsequently, the Commission found willful violations of its statutes

on somewhat the same facts," but on a showing that, among other

things, the firm had met its obligations in full, the Commission permitted withdrawal of registration and dismissed the revocation

proceedings. The NASD was favorably inclined to Niebuhr's reemployment by Leason & Co., Inc., a member firm, and recommended

that the Commission approve the firm's continuation in membership.

On an independent review of the record before the NASD, the Commission concluded that it was appropriate in the public interest to

approve the application."

Edward E. Trost was under a disqualification from membership as

a result of a Commission order revoking the broker-dealer registration

of Trost & Co., Inc. and expelling the firm from membership in the

NASD.n Trost was subsequently employed by a member firm of the

NASD, which made application for continuance of membership. For

the first time, the unique procedure was employed in which the firm

making application was permitted to do so without publicly disclosing its identity. This procedure was permitted, and will be permitted

where feasible in future cases, on advice that the publicity attendant

upon a Commission proceeding had discouraged some members from

taking the necessary legal steps to obtain approval of the employment

of persons under some disqualification but who, with due regard to

the public interest, may be employed under appropriate supervision

by an NASD member.

The board of governors of the NASD found, after a review of the

Commission's opmion which gave rise to the disqualification and of

Trost's subsequent activity and general reputation, that he should

be permitted to engage in the securities business as an employee and

registered representative. Its findings included the facts that he

was subject to supervision by responsible partners of the firm emJ?loying him and that, while so employed, there was no record of exorbitant

profits such as had formed the basis for the Commissions'.J?rior disciplinary action. Upon a review of the record the Commission con-

.. Securities Exchange Act Release No. 3836 (1946). 111 Securities Exchange Act Releases Nos. 3668 (1945) and 3707 (1945) . .. Securities Exchanlte Act Release No. 3937 (1947). IT Troat c£ 00., Ino., 12 S. E. C. 531 (1942).
54 SECURITIES AND EXCHANGE COMMISSION

eluded that it was appropriate in the public interest to approve the

application."

The first case in which the Commission directed the NASD to admit an applicant to membership after the NASD had disapproved the

application arose on the petition of Lawrence R. Leeby to be admitted

to membership. Leeby was under a disqualification from membership as a result of his expulsion from and by the NASD in 1942and the

revocation of his broker-dealer registration by the Commission in

1943.19 The Commission, in 1946, granted Leeby registration as a

broker in over-the-counter securities and as a dealer in investment

trust shares." Leeby's application for membership was thereafter approved by the appropriate district business conduct committee of the

NASD but was disapproved by the board of governors, without explanation or findings, solely because of the disability arising out of

his previous expulsion.

The Commission had to consider whether it was appropriate in the

public interest to direct Leeby's admission to membership. In its

opinion, the Commission pointed out that the limited registration as a

broker-dealer already granted to Leeby should tend to prevent a recurrence of the practices which had led to his expulsion and to the revocation of his registration as a broker-dealer. The Commission emphasized that it was incumbent upon the NASD, under the circumstances, if its action of disapproval were to be sustained, to present

adequate reasons for barring Leeby from membership and that none

had been advanced. In the absence of such findings, the Commission

was forced to make its decision without the benefit which would, and

should, be derived from a statement of the NASD views. The Commission, by order, directed the NASD to admit Leeby to membership."

CHANGES IN RULES AND FORMS

Rule X.llDI-I-Extensions of Credit by Broker-Dealers

In general, section 11 (d) (1) of the act makes it unlawful for a

broker-dealer to extend or maintain credit on any security which was

part of a new issue in whose distribution he participated during the

preceding 6 months. By an amendment to rule X-11D1-1 adopted

during the year an exemption is afforded which permits broker-dealers

who would otherwise be subject to section 11 (d) (1) to extend credit

to their customers upon securities received on the exercise of certain

short-term rights or warrants." The exemption is available only where

the right has been issued to the customer as a stockholder of the corporation issuing the security upon which credit is to be extended, or

as a stockholder of a company distributing such security pursuant

to section 11 of the Public Utility Holding Company Act of 1935.

This amendment removes the absolute prohibition of section 11 (d)

(1) but does not, of course, remove the exempted transactions from the

scopeof regulation T or any applicable stock exchange rules on margin.

Regulation T, the margin regulation promulgated by the board of

governors of the Federal Reserve System under section 'I of the act,

18 Securities Exchange Act Release No. 3955 (11l47). D 18 S. E. C. 499.

"See p. 48. .. Securities Exchange Act Release No. 3898 (1947). :II Securit1Q8 Exchange Act Release No. 3899 (1946).
TRIRTEENTH ANNUAL REPORT 55

had been amended to permit extensions of credit in these cases on

specified conditions.

Rule X-12D2-I-Reports by Exchanges

By an amendment to this rule the Commission eliminated the

requirement that an exchange which had suspended a security

trom trading file a statement every 2 months setting forth the reasons

for the continuance of the suspension." The amended provision

requires an exchange merely to notify the Commission of any change

in the reasons for the suspension and of the effective date on which

the suspended security is restored to trading.

Rule X-12D2-2-Delisting of Retired Securities

Paragraph (a) of rule X-12D2-2 permits an exchange, upon certification of certain facts to the Commission, to remove from listing and

registration securities which have been "retired." Paragraph (a) was

amended to make it clear that securities shall be deemed to be retired

within the meaning of the rule where all rights pertaining to such

securities have been extinguished."

Rule X.13A-6B-Quarterly Reports

On July 12, 1946, the Commission announced an amendment to

rule X-13A-6B, which requires quarterly reports of sales volume from

most issuers having securities registered on a national securities exchange. The amendment exempts from the rule companies primarily

engaged in the production of raw cane sugar or other seasonal, single

crop agricultural commodities, since such producers will ordinarily

have no sales in two or more of their fiscal quarters.

Rule X-15A-2-Shares in Cooperative Dwellings.

This new rule exempts shares of cooperative corporations, representing ownership or a right to possession and occupancy of specific

apartment units in property owned by such corporations, from the

operation of section 15 (a).25 Section 15 (a), in substance, requires

the registration of brokers or dealers who effect transactions in securities over the counter. Shares of the type covered by the rule are invariably distributed through the usual real estate channels and not

through securities brokers.

The Commission determined that the public interest did not require

that real estate brokers who are duly licensed by the appropriate

State or local authorities and subject to their supervision be subjected to the additional registration requirements of section 15, solely

by reason of their participation in the sale of such securities. The

rule is applicable, however, only if the securities are sold by or through

such duly licensed real estate brokers. The registration requirements

of the Securities Act of 1933 and the antifraud provisions of both

the Securities Act and the Securities Exchange Act remain applicable,

of course, to such securities.

Rules X.16B-2 and X.16C-2-Exemption from Sections 16 (b) and 16 (c)

These rules conditionally exempt underwriting transactions from

secti?ns 16 (b) and 16 (c) of the act.26 Section 16 (b) provides

.. Securities Exchange Act Release No. 3921 (1947) . .. Securities Exchange Act Release No. 3861 (1946) •• Securities Exchange Act Release No. 3963 (1947) • .. Securities Exchange Act Release No. 3907 (1947).

•
56 SECURITIES AND EXCHANGE COMMISSION

that "short-swing" profits by certain corporate insiders shall inure

to their corporation. Section 16 (c) prohibits short sales of such

equity securities by such persons. The two rules exempt bona fide

underwriting transactions by dealers who fall within one of the three

classes of insiders specified in section 16, or by dealer firms with which

such persons are connected. However, in order to prevent such insiders or insider firms from acquiring a preferential position when

they participate in a distribution, the exemptions afforded by the two

rules are subject to the condition that noninsiders or noninsider firms

shall have participated in the distribution "on terms at least as favorable" as those on which the insiders have participated and "to an

extent at least equal to the aggregate participation" of all insiders.

The purpose of the amendments was to make it clear that the mere

receipt of a fee by an insider as manager of an underwriting syndicate

should not in itself be deemed to place the insider in a preferential

position within the meaning of the rule and thereby make the exemption unavailable.

Rule X-16B-4-Exemption of Registered Holding Companies

This rule provides that any transactions by a holding company

registered under the Public Utility Holding Company Act of 1935

or by a subsidiary of such a company, where both the purchase and

the sale have been approved or permitted by the Commission under

that act, shall be exempt from the civil liability provisions of section

16 (b) or the Securities Exchange Act.21 (These liabilities are described in the preceding subsection.)

Form 10 for Corporations

On June 19, 1947,the Commission announced an amendment to the

Instruction Book for Form 10 for Corporations. Form 10is the basic

general form prescribed for use by corporations in filing applications

for registration of securities on a national securities exchange. The

amendment deleted from the instruction book certain temporary instructions, which had become obsolete, as to the financial statements to

be filed with an application. The amendment also deleted the instruction as to the form and content of financial statements and schedules, inasmuch as the form and content of financial statements and

schedules required to be filed with an application on Form 10 are

now governed by the provisions contained in regulation S-X, the

Commission's general accounting regulation.

Forms 10-K and I-MD-Annual Report Forms

On January 2D, 1947,the Commission announced amendments to the

instructions for Form 10-K, the basic annual report form for most

issuers having securities listed and registered on a national securities

exchange. The amendments operate to simplify the requirements for

financial statements by permitting a registrant to file either consolidated or individual statements where registrants own assets and

re,:enues comprising more than 85 percent of those shown in the consolidated statement. Heretofore both individual and consolidated

statements were required. The amendments bring to this form certain

.. Securities Exchange Act Release No. 3848 (1946).
THIRTEENTH ANNUAL REPORT 57

of the changes adopted, as discussed elsewhere in this report, in the

recently revised Form 8-1 under the Securities Act of 1933.

The amendments to the Instructions to Form 10-K operate to effect

a corresponding simplification in the requirements of Form 1-MD,

since that form requires registrants to file the same statements as those

required of registrants on Form 1Q-K. Form 1-MD is the basic annual report form for issuers which have registered securities under

the Securities Act of 1933 and are required to file annual reports by

section 15 (d) of the Securities Exchange Act.

Forms 12-K and 12-AK-Annual Report Forms

On AprilS, 1947,the Commission adopted minor amendments to its

annual report Forms 12-K and i2-AK. Companies which report to

the Interstate Commerce Commission on its Form A are permitted,

in connection with reports to the Securities and Exchange Commission,

to file certain selected schedules from Form A in lieu of the complete

Form A report. The purpose of the amendments is to revise the

list of selected schedules to conform to certain changes made in Form

A by the Interstate Commerce Commission for the year ended December 31, 1946.

UTIGATION UNDER THE SECURITmS EXCHANGE ACT

The Commission's litigation activities under the act during the 1947

fiscal year included: (1) Injunction actions in the district courts to

restrain broker-dealers and others from violating those provisions of

the act and the Commission's rules designed to protect security holders

and the customers of broker-dealers; (2) appellate court actions on

petitions to review orders of the Commission; and (3) actions between

private parties in which the Commission participated as amicus curiae.

Injunction and Appellate Proceedings Involving Broker-Dealers

The large majority of injunction actions was against brokerdealers. In8. E. O. v. Patrick A. Trapp a permanent injunction was

entered which, for the first time inany contested civil action, judicially

established two theories of fraud advanced by the Commission in

connection with sales of oil royalties." The first is that it is fraudulent for a dealer to sell oil royalties at prices in excess of the probable

returns to purchasers, as computed on the basis of reasonable estimates

of the recoverable oil underlying the tracts covered by the royalties."

The court's holding to this effect was based on expert evidence that,

as of the purchase dates, the probable returns based on such estimates

ranged from only 65 to SOpercent of the cost of the royalties to the

buyers. The second new judicial principle, which the Commission had

followed in an earlier administrative proceeding, isthat it is fraudulent

for a dealer to sell oil royalties at prices bearing no reasonable relationship to his contemporaneous cost. These fraudulent practices were

held to have violated section 15 (c) (1) of the Securities Exchange

Act, as well as section 17 (a) (2) and (3) of the Securities Act of 1933.

.. Civil No. 1288, N. Dak , June 4, 1947. .. This theory was also the basis of the complaint In 8. E. O. v. Joseph. J. LeDone, Civil

No. 40-347, S. D. N. Y., Mar. 26, 1947, in which a permanent Injunction by consent was entered. In this case Investors had been charged $416,078 for 011 royalties worth at the

time of the sales (on the basis of the then current value of the recoverable 011) not more than $272,890, or approximately $143,188 less than the total paid by the investors.
58 SECURITIES AND EXCHANGE COMMISSION

Trapp's registration as a dealer had been revoked by the Commission several years before and he was therefore engaged in business

as a dealer without being registered as required by section 15 (a) of

the act. The court found also that he had made false representations to purchasers about his ownership of the oil royalties being sold

to them. The defendant joined a lodge and then represented to a number of his brother members that he was liquidatmg his oil royalty

holdings in order to raise funds for a mining venture. Jn fact, his

practice was first to make sales of oil royalties which he did not own

and then to use the customers' money to acquire the royalties from

another dealer.

In S. E. O. v. Fiscal Service Oorp. and Otto F. Herald the defendants consented to the entry of a judgment permanently enjoining

them on all counts of the Commission's complaint;" The Commission had alleged that, while unlawfully engaged in business as a broker

and dealer in securities without being registered under section 15 (a)

of the act, the defendant firm had violated the antifraud and confirmation rules of the Commission in reporting to its customers that it

was acting as agent, when in fact it was buying and selling for its

own account, and in taking secret profits in those transactions. In addition the complaint had alleged violations of the credit provisions of

regulation T (the margin rules) and of the Commission's hypothecation and bookkeeping rules. In all, the complaint alleged violations

of sections 7 (c),8 (c), 10 (b), 15 (a), 15 (c) (1),15 (c) (2),17 (a),

and 20 (b) ofthe act.

During the fiscal year the Commission was engaged in two court

actions involving broker-dealers who were charged with violating the

fraud provisions of the act by doing business while insolvent. In both

S. E. O. v. Raymond, Bliss, Inc. and S. E. O. v. York the Commission filed complaints charging that the defendants had accepted money

and securities from customers without advising them of the defendants' insolvent condition, and had hypothecated customers' securities

without their knowledge or consent. In the Raymond, Bliss case a

preliminary injunction was granted notwithstanding the facts that

the firm had ceased doing business and that Bliss' family had made an

assignment for the benefit of creditors. So long as the firm continued

to be registered, the court stated, it could not be said that there was

no risk of further violations. Because of the assignment, which was

made after the filing of the Commission's complaint, the request for the

appointment of a receiver was for the time being denied." The request for a final injunction was still pending at the close of the fiscal

year.

In the York case a temporary restraining order was entered. The

defendant then filed a voluntary petition in bankruptcy and a receiver

was appointed. The defendant agreed not to engage in the securities

business pending final determination of the bankruptcy proceedings

and the Commission then stipulated to the disrnissal of its application for a preliminary injunction and the appointment of a receiver.

H<?w~ver,the d.efendant shortly thereafter was shot and killed by his

principal creditor and the court action was discontinued." An

administrative proceeding for revocation of York's registration as a

"'Civll No. 47C408. N. D. m., Mar. 5, 1947. 11 Civil No. 5999. Mass., Sept. 25, 1946 .. Civil No. 894, W. D. Texas, July 31, 1947.

•
THIRTEENTH ANNUAL REPORT 59

broker-dealer, which had been instituted by the Commission, was also

discontinued. sa

Three companion cases based on regulation T, the first of their kind,

were pending at the beginning of the fiscal year in the United States

District Court at Cleveland." That regulation, adopted by the board

of governors of the Federal Reserve System under section 7 (c) of

the Securities Exchange Act and enforced by the Commission, governs

the extension of credit by members of national securities exchanges

and brokers or dealers transacting a business through the medium of

such members. In these three cases the Commission charged that

Butler, Wick & Co., of Youngstown, Ohio, Hirsch & Co., of New York

and Cleveland (both members of the New York Stock Exchange),

and The S. T. Jackson & Co., Inc., an over-the-counter firm of Youngstown, had repeatedly violated regulation T by overextensions of credit

to Richard C. Brown, of Youngstown, and First Mahoning Co., an

investment company controlled by him; that A. E. Masten & Co., a

member house in PIttsburgh, had overextended credit directly to the

Jackson firm, its over-the-counter correspondent, and indirectly

through the Jackson firm to Brown and his investment company, customers of the Jackson finn; and that Brown and his investment company had aided and abetted all of these violations. For the most part,

these violations involved the "special cash account" provisions of

regulation T. During the 1945fiscal year the court had entered a final

injunction by default against the Jackson firm. During the current

year final injunctions were entered by default against Brown and

First Mahoning Co., who had been named as defendants in all three

cases.a5

The three cases were disposed of after the close of the year by the

entry of consent judgments against the remaining defendants, Hirsch

& Co., Butler, Wick & Co., and A. E. Masten & Co. Each contained

a finding that the defendant firm had violated section 7 (c) (1) of

the Securities Exchange Act and regulation T, but that the violations

had not been committed intentionally. The Commission agreed that

this was the fact as to these defendant firms. The Commission, however, had not charged these firms with violating regulation T intentionally. It had taken the position that the presence or absence of

actual intent to violate the regulation was irrelevant in an action to

enjoin further violations, and each of the judgments specified that

the finding of lack of intent to violate was made without determining the legal question whether intent was an element of the offense

under section 7 (c) (1) of the act or regulation T. In view of the

defendants' admission and the court's adjudication that all three

firms had violated regulation T, and under all the facts and circumstances surrounding the actions (among which was the fact that these

cases were the first of their kind), the Commission agreed to their

disposition without the formal entry of injunctions.

InS. E. O. v, Schultz, another regulation T case instituted in the

same court, the Commission obtained final judgments against the

partners of L. J. Schultz & Co. (by consent) and against Josiah

Kirby (by default}." The Commission's complaint alleged viola-

.. SecuritIes Exchange Act Release No. 8965 (1947). If 8. E. a. v. Hirsch, Civil No. 28474; 8. E. a. v. Butler, Civil No. 28475; 8. E. a. v. Young, CIvil No. 28476 . .. Civil No. 28476, N. D. Ohio. Oct. 21, 1946 .. CIvil No. 24198, N. D. Ohio, Sept. 4,1946. •
60 SECURITIES AND EXCHANGE COMMISSION

tions of the "special cash account" provision of regulation T similar

to those in the three preceding cases. The Commission's affidavit

alleged that in a 20-month period the Schultz firm had executed 350

transactions for Kirby, 160 of which had been in violation of regulation T.

8. E. O. ~. Nevada Oil 00., pending from the preceding year, was

an action for a mandatory injunction to require the defendant, a registered dealer, to permit an examination of its books and records required under section 17 (a) and the Commission's bookkeeping rules.

The court granted a motion by the Commission for summary judgment, ordering the defendant to permit the examination. The summary judgment, however, was subject to a condition which the Commission sought to remove by a motion to amend, and at the same

time the corporation filed a motion for a rehearing. Pending action

on these motions, the corporation permitted the Commission to make

the examination, which demonstrated that it was not doing business

as a broker or dealer. The Commission therefore stipulated with the

defendant to the vacation of the summary judgment and the dismissal

of the action, and permitted the company to withdraw its registration with the Commission."

During the fiscal year the Commission was in court on two manipulation cases, both involving broker-dealers. In the first, 8. E. O. v. Bennett and the Federal Oorp., the Commission alleged the violation of

section 9 (a) (2) of the Act by the manipulation of a stock listed on

the New York Curb Exchange. The complaint alleged that Federal,

controlled by Bennett, had manipulated the market for the common

stock of Red Bank Oil Co., also controlled by Bennett, in order to

facilitate a pending offer of a substantial block of that stock which was

then in process of registration under the Securities Act of 1933. After

a preliminary injunction had been denied during the preceding fiscal

year on the ground that there was insufficient proof of a manipulation," Federal consented to the entry of a permanent injunction.

However, the complaint was dismissed with the Commission's concurrence insofar as it related to Bennett individually." Thereafter

Federal's registration as a broker-dealer was revoked by the Commission pursuant to section 15 (b) of the Act on the basis of the court's

injunction."

The second manipulation case, Lamm.v, 8. E. 0., is a petition to

review the order of the Commission in M. S. Wien and Co., discussed

above at p. 47. This case, one of two circuit court appeals under the

act during the 1947 fiscal year, represents the first court review of a

Commission finding of manipulation in the over-the-counter market in

violation of section 10 (b) and 15 (c) (1) of the act and rules

X-10B-5 and X-15Cl-2 thereunder. Lann, a partner of Wien & Co.,

was found by the Commission to have been primarily responsible for

the manipulation and fraud upon which the order revoking the Wien

firm's registration as a broker-dealer was based. The basis of the

appeal was that the Commission, in finding that the petitioner had

violated the antifraud prOVISIOnsof the Federal securities laws, had

IT Civil No. 1142. N. D. Te~, Feb. 25, 1947 .. 62 F. SuPP. 609 (S. D. .N. Y. 1945) .. Civil No. 32-104, S. D. N. Y., Dec. 30, 1946 .. Securities Exchange Act Release No. 390~ (1~47) .. Civil No. 9640, App. D. C.

~

• • • •
THmTEENTH ANNUAL REPORT 61

gone beyond ordinary standards of fraud and improperly applied to

his over-the-counter activity. specific statutory provisions applicable

solely to exchange markets. The appeal was pending at the close of

the fiscal year.

The final court action involving a broker-dealer is Norris & Hirsckberg, Inc. v. S. E. O. (previously discussed at pages 35-36 and 41 of the

Twelfth Annual Report) . On January 22, 1946, after prolonged proceedings, the Commission had issued Its findings and opinion in this

matter and ordered the revocation of the registration of Norris &

Hirschberg, Inc., as a broker-dealer. The Commission had found

that in fixing prices which were unaffected by the operation of a free,

open, and competitive market without disclosing the nature of its

market, in dealing- as a principal with uninformed customers and customers who had gIven it powers of attorney, and in trading excessively

for accounts as to which it had discretionary powers, this firm had

engaged in activities which were fraudulent and illegal under section

17 (a) of the Securities Act of 1933 and sections 10 (b) and 15 (c) (1)

of the Securities Exchange Act of 1934. A petition for review of the

Commission's order was filed on April 29, 1946, in the Court of Appeals

for the District of Columbia. This appeal has not yet been argued on

its merits.

After the filing of the petition for review the court entered an

order on stipulation staying the Commission's order of revocation

pending further action by the court. The court conditioned this stay

upon conformance by the firm with its stipulation and agreement with

the Commission not to engage during the pendency of the review in

acts or practices violating the above-mentioned provisions of the

statutes. On June 8, 1946, the Commission filed a transcript of the

record in the court of appeals. This transcript was attacked by

Norris & Hirshberg, Inc. on several grounds. The court has upheld

these objections in part, remanding the case to the Commission and

physically returning the certified transcript and additional material

tendered.

Injunction Actions Against Persons Other Than Broker-Dealers

The second category of injunction cases consists of actions against

persons other than broker-dealers for violations of those sections of

the act and the Commission's rules designed to protect security holders

in general. One of these is rule X-10B-5, which contains a general

prohibition against fraud in the purchase or sale of securities in interstate channels. An action based both on this rule and on section 17

of the Securities Act of 1933, which prohibits fraud only in the sale

of securities, was S. E. O. v, Standard Oil OompanY of Kamas.42

The Commission's complaint charged that the corporation and its

president, Charles B. Wrightsman, by whom the corporation was

controlled, had defrauded the corporation's minority stockholders

in connection with a scheme to acquire the common stock of the corporation from them. The complaint alleged further that Wrightsman,

in connection with the purchases from minority stockholders, had

circulated to them balance sheets representing Standard's properties

to be worth less than $4,000,000 when qualified engineers had appraised

G Civil No. 2552, S. D. Texas, Feb. 26, 1947.
62 SECURITIES AND EXCHANGE COMMISSION

its oil reserves alone to be worth $16,000,000 to $20,000,000. These

appraisals had been relied upon by banks in making loans to the

company, which for the most part were used in the purchases of stock

from the minority holders.

The Commission charged also that Standard and Wrightsman, as

a result of their program of purchasing and retiring the common

stock, had controlled the market on the New York Stock Exchange and

over-the-counter with the result that stockholders wishing to sell had

no practical choice except to sell to the defendants at their price. The

complaint alleged in addition that the defendants had devised a

merger scheme for the company in a further attempt to acquire stock

at depressed prices and to eliminate the minority stock ownership.

The defendants filed an answer denying the allegations of the complaint but thereafter consented to the entry of a final judgment.

Two actions during the year were based on regulation X-14, which

comprises the Commission's proxy rules. The first is S. E. O. v. McQuistion. The Commission's complaint charged that the defendant

had solicited proxies of the voting security holders of Third Avenue

Transit Corp. for its annual meetmg without furnishing them with a

proxy statement containing the information specified in the proxy

rules, and had mailed proxy soliciting material prior to the expiration

of 10 days following the filing of preliminary copies of the proxy

statement and form of proxy. A preliminary injunction was entered

before the close of the fiscal year.43 The second is S. E. O. v, Transamerica Oorp., pending from, the preceding year. In that action

the Commission sought to restrain the defendants from using proxy

material obtained as a r~esult of solicitations which did not include

proposals which a minority stockholder, pursuant to rule X-14A-7,

desired to bring before the annual meeting. The district court sustained the right of the minority stockholder with respect to one of four

proposals in question, denied a defense motion to dismiss, and enjoined the defendants from violating section 14 (a) of the act and

rules X-14A-2 and X-14A-7 thereunder." Cross appeals from this

judgment to the Circuit Court of Appeals for the Third Circuit were

pending at the end of the fiscal year.

S. E. O. v. Metropolitan Mines Oorp., Ltd., was instituted just before

the close of the fiscal year. The Commission charged the defendants

with violating sections 13 (a), 14 (a), 16 (a) and 20 (c) of the Securities Exchange Act and section 5 (a) of the Securities Act of 1933. The

complamt alleged: (1) That the defendant corporation from 1943 to

1946 had failed to file annual reports with the Spokane Stock Exchange and with the Commission as required by section 13 (a) of the

Securities Exchange Act; (2) that Roy H. Kii1gsbury, the secretarytreasurer and managing director of the corporation, had made purchases and sales of its equity securities without reporting his changes

of ~wnershIp WIth the exchange and the Commission as required by

section 16 (a) of the act; (3) that the defendants had violated section

5. (3;) of the Securities. Act in selling 1~,000 shares of the corporatI?n s common stock WIthout a registration statement being in effect

WIth the Commission ; and (4) that the defendants had solicited prox-

.. Civll No. 41-47, S. D. N. Y., May 16, 1947 .. 67 F. 8upp. 326 (Del. 1946). •
THffiTEENTH ANNUAL REPORT 63

ies from stockholders without filing proxy statements as required by

section 14 (a) of the Securities Exchange Act.4s

Participation by the Commission in Private Actions

The private actions in which the Commission participated as amicus

curiae during the fiscal year for the purpose of assisting the courts in

construing the act and the Commission's rules fall into three categories: (1) A number involving sections 9 and 10 (b), two of the antifraud sections of the act; (2) two based on regulation X-14, which

contains the Commission's proxy rules; and (3) several based on section 16 (b), which provides for private actions to recover "shortswing" profits by corporate insiders.

The first of the fraud cases is Kardos» v, National Gypsum 00., a

private action for damages based on section 10 (b) of the act and rule

X-10B-5 thereunder . All the stock of Western Board & Paper Co. had

been owned in equal amounts by two individuals named Kardon and

two named Slavin. While all four were officers and directors of the

company, its affairs were managed by the Slavins. The Kardons

claimed that they were defrauded because the Slavins induced them

to sell their stock to the Slavins without the latter disclosing their negotiations (1) for the sale of certain assets of Western to the defendant National Gypsum Co. and (2) for the execution of certain contracts between the Slavins and National Gypsum Co. The defendants filed a motion to dismiss which, among other things, raised the

following two questions: (1) Whether an individual right of action

exists for damages resulting from a violation of section 10 (b) and

rule X-10B-5; (2) whether section 10 (b) of the act was intended to

apply to the securities of a closely held corporation.

The Commission filed a brief as amicus curiae on these two points.

On the first it argued that an individual may maintain such an action

either (a) by application of the general common law rule that members

of a class for whose protection a statutory duty is created may sue for

injuries resulting from its breach and that the common law will supply

a remedy if the statute gives none, or (b) under section 29 (b) of the

act, which provides that contracts in violation of any provision of the

act shall be void. On the second point, the Commission argued that,

while the primary concern of Congress was undoubtedly with corporations having widely distributed securities, the statute was intended

to apply also to the securities of closely held corporations. The court

denied the defense motion to dismiss, relying on the position takeu by

the Commission on both points."

The Kardon. decision was followed in Slavin Y. Germantouni Fire

Insuranoe 0.0.,41 in Fifty Third Union Trust 00. v, Block 48 and in

Fry v, Sohumaker." The Commission participated as amicus curiae

in all these cases.

Another fraud case is Speed v. Tramsamerioa Oorp., which was still

pending at the close of the year.50 There the Commission appeared

before the district court to urge that, when a corporate "insider" (in

•• SUbsequent to the close of the fiscal year a consent decree of mandatory injunction on nIl counts of the Commlsslon's complaint was entered. CiVIlNo. 664, E. D. Wash., July 18,

1947. .. 69 F. Supp. 512 (E. D. Pa. 1946) . •• Civil No. 6564, E. D. pa'l

Dec. 5, 1946. .. Civil No. 1507, S. D. Oh 0, Dec. 11, 1946 .. Civil No. 6418, E. D. Pa., Jan. 10, 1947. .. 71 F. Supp. 457 (D. Del. 1947).

•
64 SECURITIES AND EXCHANGE COMMISSION

this case the controlling stockholder) buys stoc~ from ~ority holders

without disclosing to them material facts comrng to hIS attention by

virtue of his position, there is a violation of section 10 (b) of the act

and rule X-10B-5. A second point in the Commission's brief in the

Speed case was based on the principle established a .few.months before

in the Kardon case-that a private person may maintain an action on

his own behalf for damages claimed to arise from a violation of

section 10 (b) and rule X-lOB-5. A defense motion for summary

judgment was sustained on one count, but was dismissed on the counts

as to which the Commission participated.

The final two fraud actions in which the Commission participated as

amicus curiae were Acker v. David A. Schulte and Sohmolka v, David

A. Schulte. These were separate actions by individual stockholders of

Park & Tilford, Inc. against the company, its former president, and

various other individuals for damages resulting from the alleged

manipulation of the stock of the company on the New York Stock

Exchange in violation of sections 9 and 10 (b) of the Securities Exchange Act of 1934. Section 9 (e), which creates a civil right of action

for persons who suffer damages as a result of a violation of the antimanipulation provisions of section 9, provides that the court, in its

discretion, may require an undertaking for the payment of costs from

either party. The defendants filed motions demanding security for

costs on the ground that the suits had not been brought in good faith.

The Commission filed a brief in opposition to these motions, arguing

that section 9 (e) was designed to afford public investors a more

effective remedy for recovering damages than existed at common law

and that, in order to preclude the statutory provision from operating

as a barrier to suits under section 9 (e), the party seeking security

for costs should be required to show by clear evidence that the suit had

been brought in bad faith. The court, following this theory, denied

the defense motions. In view of this ruling, the court found it unnecessary to consider whether security could be ordered under section

9 (e) where the action is brought also under section 10, which does not

contain a provision authorizing the requiring of security for costs,"

The first of the proxy cases in which the Commission intervened

as amicus curiae during the year was Doyle v. Milton. This was an

action by a stockholder of the Equity Corp., a registered investment

comPll:ny, designed primarily to restrain the use of proxy soliciting

material alleged to be false and misleading and therefore in violation

of rule X-14A-5. The question presented was whether a proxy statement is false or misleading if it fails to state all possible alternatives

to a course of action for which the management seeks approval. Upon

the request of the court the Commission filed a memorandum taking

a position in the negative. This position was sustained,"

The sec0Il:dpro~y case was Tate v. Sonotone, also based on allegedly

false and misleading proxy material, The Commission was requested

by the district c~mrt for advice on whether the court had jurisdiction

to entertarn a suit by a private party under section 14 (a), upon which

the proxy rules are based. A member of the Commission's staff appeared and orally advised the court in the affirmative The court so held.53

: 73 F F. Supp, (S, D. N. Y.. May 26.1947) . Supp, 281 (S. D. N. Y. 1947). 03 Civil No. 41-39. S. D. N. Y. April 15. 1946.

•

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THIRTEENTH ANNUAL REPORT 65

Under section 16 (b) of the act, if a corporation has an equity security registered on a national securities exchange, any profit realized by

its officers, directors or principal stockholders on purchases and sales of

any of the corporation's equity securities within any 6-month period

may be recovered by the corporation or by any security holder in its

behalf. Two of these private section 16 (b) actions in which the Commission participated as amicus curiae were Kogan v. DUI/)id A.

8chulte,54 and Park &1 Tilford, Inc. v, Arthur D. Schulte,55 both of

which arose from the same series of transactions as formed the basis

of Acker v, DUI/)idA. Schulte and Sohmolka v, David A. Sohulte, the

fraud actions discussed above. In the preceding fiscal year the district

court had held that the conversion of preferred stock into common by

a controlling stockholder within 6 months prior to a sale of common by

him was a purchase of the common within the meaning of section

16 (b).

This holding was affirmed by the Circuit Court of Appeals in the

Park &1 Tilford case during the current year.56 The circuit court's ruling also (1) reversed the district court holding denying Kogan, a

minority stockholder, the right to intervene in the Park &1 Tilford

case, and (2) increased the measure of recovery awarded by the district court. On the intervention question, the circuit court held that

the defendants and their father were so dominant in the affairs of the

plaintiff corporation that it was proper to permit Kogan's intervention in order to assure adequate representation of the interests of the

minority stockholders. On the question of damages, the amount recoverable by the corporation under the statute is the proceeds of the

sale of the stock minus the purchase price. The district court computed

this to be $302,145. This figure was arrived at by taking the market

value of the common into which the preferred had been converted

as the "purchase" price, and deducting that gross figure from the

proceeds of the sale. The circuit court recomputed the recoverable

profit to be $418,128 on the ground that the "purchase" price was not

the market value of the common acquired on conversion, but rather the

lower market value of the preferred on the conversion date. A petition for rehearing based solely on the increase in the amount of the

judgment was denied, one judge dissenting."

Another section 16 (b) action in which the Commission had filed

a brief as amicus curiae during the preceding fiscal year was Gratz

v, Olaughton, in which the defendant contested the venue of the action.

The Commission expressed the view that the statute should be construed to provide as many alternative choices of venue as could rea-

.sonably be implied from the language of the act in order to accomplish the legislative purpose. Otherwise, the Commission argued,

a stockholder might be faced with the burden of bringing his suit

in a court distant from the place where the significant acts occurred.

In line with this construction the Commission took the position that

it was proper to lay the venue in the place where the transactions

occurred. This position was sustained by the court,"

.. 61 F. SuPP. 604 (S. D. N. Y. 1945) .. 160 F. (2d) 989 (C.C. A. 2, 1947).

"160 F. (2d) 984 (c. C. A. 2, 1947). IT 160 F. (2d) 989 (C. C. A. 2, 1947). A petition for a writ of oertiorari was tiled

by the defendants after the close of the tlscal year. 18- F. Supp. (S. D. N. Y. Apr. 2, 1947).

•

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66 SECURITIES AND EXCHANGE COMMISSION

A similar ruling was made in G'rossman v. Yowng, in which the

Commission also participated." Two additional issues, however, were

involved in the Grossman case. The first related to the 2-year limitation on actions provided in section 16 (b). The defendant had been

delinquent in filing the reports of changes in ownership of stock required by section 16 (a), and the Commission took the position that

the time during which he had failed to make these disclosures required

by the statute should not be included in the 2-year period. The second point was the construction of the provision of section 16 (b)

which gives a security holder the right to bring a suit for the recovery

of "Short-swing" profits on behalf of his corporation only if the

corporation itself fails to bring the suit within 60 days after request.

The Commission argued that, where the right of action might be

jeopardized by waiting the full60-day period or where the corporation

has indicated that it does not intend to institute the action, there is

no need for an individual security holder to wait until the expiration

of the full 60-day period before instituting the action on behalf of

the corporation."

In Berkey &: Gay Furniture 00. v. Wigmore 61 the Commission participated as amicus curiae on the question of the right of an individual

stockholder to intervene in a section 16 (b) action where the corporation itself has already instituted suit. The case was still pending

at the end of the fiscal year.

There were in addition several section 16 (b) actions over which

the Commission maintained close observation during the course of

the year, as is its practice, but in which no active participation was

necessary since no question of statutory construction arose."

.. 70 F. SUPP.970 rs, D. N. Y. 1947). eoThe Commission's construction on both issues was follOwed by the court In an opinion shortiy after the close of the year which overruled a defense motion to dismiss. -- F.

BUJlP.-- (B. D. N. Y., July 3, 1947). Civil No. 40-147, B. D. N. Y. .. Dottenheim v, Emo/80n Electrio Manufacturing 00., -- F. Supp. - (E. D. N. Y.,

Jan. 29, 1947) ; Twent~eth qentu~Fore Film Oorp. v. Jenkins, -- F. SuPp. -- (S. D.

N. Y., Feb. 19, 1947) ; Pott~h v. Dlllak, et al., 71 F Bupp. 737 (S. D. N. Y. 1947).
PART m

ADMINISTRATION OF THE PUBLIC UTILITY

HOLDING COMPANY ACT OF 1935

The Public Utility Holding Company A.ct of 1935 was enacted for

the purpose of eliminating certain evils and abuses which the Congress

found to exist in connection with the activities of holding companies

having subsidiaries which are electric utility companies, or which are

engaged in the retail distribution of natural or manufactured gas. It

was particularly designed to eliminate holding companies serving no

useful purpose and thus to afford to the operating companies the ad.

vantages of localized management and to strengthen local regulation.

This objective finds its most direct expression in section 11 of the

act. Section 11 (b) (1) requires the operations of holding company

systems to be limited to one or more integrated systems and to such

additional businesses as are reasonably incidental or economically

necessary or appropriate to the operation of the integrated systems.

Section 11 (b) (2) requires elimination of undue complexities in

corporate structures of holding company systems and the redistribution of voting power among their security holders on a fair and equitable basis. The act provides also for the registration of holding

companies (sec. 5); regulation of security transactions of holding

companies and their subsidiaries (sees, 6 and 7) ; regulation of acquisitions of securities and utility assets by. holding companies and

their subsidiaries (sees. 9 and 10) t regulation of sales of public utility

securities or assets, payment of dividends, solicitation of proxies, intercompany loans and other intrasystem transactions (sec. 12) ; control

of services, sales, and construction contracts (sec. 13) ; and the control

of accounting practices (sec. 15).

Following the pattern of recent years, activity under the Holding

Company A.ct has centered largely around plans for integration and

reorganization filed under section 11 and the issuance of securities

under sections 6 and 7.

INTEGRATION AND CORPORATE SIMPLIFICATION UNDER SECTION 11

Litigation Arising Under the Act

InNovember 1946 the Supreme Court upheld the constitutionality

of section 11 (b) (2) in proceedings involving Commission orders requiring the dissolution of American Power & Light Co. and Electric

Power & Light Co.' This section requires registered holding companies and their subsidiaries to eliminate unnecessary corporate complexities and any unfair or inequitable distribution of voting power

.among their security holders. The court held that section 11 (b) (2)

was a reasonable exercise of congressional power under the commerce

clause of the Constitution; that it did not embody an unconstitutional

1329 U. S. 90.

161629--48-6 67
68 SECURITIES AND EXCHANGE COMMISSION

delegation of legislative authority; that the due process clause of the

fifth amendment was not violated; and that the Commission's findings

were amply supported by the record. In March 1946 the Supreme

Court had sustained the constitutionality of section 11 (b) (1) of

the act,"

A list of all instances in which the Commission appeared in the

Federal courts during the fiscal year in connection with proceedings

under the Holding Company Act, either as a party or as amicus curiae,

and the status of these cases at the end of the year is set forth in the

appendix.

In the following cases, decided by the courts during the fiscal year,

the courts discussed various aspects of the adminstration of the Holding Company Act.

American Power & Light Oompany v, S. E. O.s-American Power

& Light Co. petitioned for review of an order of the Commission requiring Florida Power & Light Co., a subsidiary of American, to

amortize certain items classified as plant acquisition adjustments (account 100.5) aggregating approximately $10,500,000, and to classify

as plant adjustments (account 107) and charge to earned surplus

approximately $1,800,000. A.smore fully set out in the section dealing

with regulation of utility accounts, the court upheld the power of

the Commission to regulate the accounting practices of an intrastate

public utility subsidiary of a registered holding company, and held

that the Commission's order was amply supported by Its findings and

by the facts in the record.

In re Blatchley, Blatchley v, S. E. 0., and Goldfine v. S. E. 0.4

The Commission approved a plan of New England Public Service Co.

under section 11 (e) of the act under which the company proposed to

sell certain nonutility assets, and filed an application for enforcement

in the District Court of the United States for the District of Maine.

In the district court proceedings all security holder representatives

urged approval of the plan. Enforcement was opposed by one Goldfine who desired to bid for the properties to be sold. The district court

entered an enforcement order and thereafter Goldfine and-one Blatchley, a preferred stockholder who had not appeared in the Commission

or district court proceedings, filed in the Circuit Court of Appeals for

the First Circuit petitions for review of the Commission's order under

section 24 (a) of the act, appealed from the district court enforcement

order, and filed certain other petitions and motions in the district court

and in the Circuit Court of Appeals. The Circuit Court of Appeals

dismissed the petitions to review the Commission's order for lack of

jurisdiction, in view of the enforcement proceedings in the district

court. The appeals from the district court enforcement order were

dismissed upon the ground that Goldfine, not a stockholder but a

prospective bidder, and Blatchley, a stockholder who did not appear

below, had no standing to appeal from such orders.

8. E. O. v, Ohenery Oorp01'ation.5-In connection with the reorganization of Federal Water & Gas Corp., the Commission had required

that Chenery Corp., and certain individual defendants, who had acquired securities of Federal during the reorganization proceedings,

North American Oompany v. 8. E. G., 327 U. S. 686.

8158 F. (2d) 771 (C. C. A. 1, Dec. 1946), certiorari denied 331 U. S. 827.

"157 F. (2d) 894,898,899.900,901 (C. C. A. 1, 1946), rehearing denied Dec. 18. 1946. I 67 S. Ct. 1575.

_

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THmTEENTH ANNUAL REPORT 69

Delimited, in substance, to the cost of such securities. InS. E. O. v.

Ohenery Corporation; 318 U. S. 80, the Supreme Court had held that

the Commission's order could not be sustained on the judicial grounds

stated in its findings and opinion, and had directed that the case be

remanded to the Commission for further proceedings. On remand,

the Commission reexamined the problem in the light of the Supreme

Court opinion and reached the same result. The Commission's decision was reversed by the United States Court of Appeals for the

District of Columbia. In June 1947 the Supreme Court reversed the

Court of Appeals and upheld the decision of the Commission. The

Supreme Court held that the Commission, which had not previously

been confronted with the problem of management trading during reorganization, had the power to deal with the problem on a case-to-case

basis. The court found that the Commission had made a thorough

examination of the problem, utilizing statutory standards and its own

accumulated experience with reorganization matters; that it had considered properly the subtle factors involved in the marketing of utility

company securities, and the dangers of abuse of corporate position, influence and access to information involved in the management purchases; and that the Commision's action had been based upon substantial evidence and was consistent with the authority granted by Congress. Mr. Justice Frankfurter and Mr. Justice Jackson dissented in

an opinion anounced in October 1947.

In re Oommwnity Gas and Power Oompany and American Gas and

Power Oompany.6-By orders issued in February 1946 and in January

1947, the Commission approved a plan which provided, among other

things, for the reorganization of American Gas & Power Co. and for the

allocation, to the holders of its secured debentures, common stock and

warrants to purchase common stock, of shares of a new common stock

to be issued under the plan. Certain representatives of debenture holders objected to court enforcement of the plan primarily upon the

ground that the Commission had no power to approve a plan for the

satisfaction of secured debentures in common stock. Following In re

Standard Gas and Electric OO'lTl/fJany,7the district court held that

a plan for distribution in kind to secured debenture holders may be

approved by the Commission, and that in the particular case it was an

appropriate and fair method for effecting compliance with the act.

Appeals from this decision were taken to the Circuit Court of Appeals

for the Third Circuit and are ]?ending there. Consummation of the

plan was stayed by the Circuit Court of Appeals pending determination of the appeals.

In 1'6 Electric Bond and Share Oompany.8-In September 1946 the

Commission issued an order under section 11 (e) of the act approving a

plan (plan II-A) for the retirement of the preferred stock of Electric Bond & Share Co., and an order under section 11 (b) (2) of the

act requiring Bond & Share to eliminate preferred stock from its capital structure. Enforcement proceedings in the United States District Court for the Southern District of New York, which had been

instituted in connection with a prior plan for partial payment of the

preferred stock, were reopened on the Commission's supplemental ap-

'71F.Supp.171 (Del. 1947). , 151 F. (2d) 326 (C. C. A. 3, 1945), certiorari denied 327 U. S. 796.

'Unreported (D. C. S. D. N. Y., Dec. 1946), affirmed Okin V. S. E. G., 161 F. (2d) 978

(C. C. A. 2, 1947).
70 Sl!:CUlUTIEs ANI> EXCHANGl!: COMMISSION

plication. Objections to enforcement of plan II-A by common and

preferred stockholders of Bond & Share were overruled by the district

court. The exclusion of a common stockholder from personal participation in the Commission hearing was held to be supported by the

record showing obstructive conduct; since he had the right to be represented by counsel, to submit his own views in writing and to attend

the proceedings as a spectator so long as he behaved himself, the court

held that he had been accorded his full constitutional and statutory

rights to a fair hearing. The court further held that in a section 11

(e) enforcement proceeding, the district court acts as a reviewing

authority and may not add to the record made before the Commission

on the question whether the plan is fair and equitable and appropriate.

Absent a specific offer of proof, together with a showing that the new

evidence proferred is material to the issue, that reasonable grounds

exist for failure to adduce it at the Commission hearing, and that its

consideration by the Commission would be advisable, there is no basis

for referring the matter to the Commission for further consideration.

The court after considering all objections held that the plan was fair

and equitable and appropriate to effectuate the provisions of section

11 in providing for the retirement of the preferred stock, with immediate payment to preferred stockholders of their liquidation preference and issuance to them of certificates evidencing a contingent right

to receive additional amounts, and for the sale by Bond & Share of

certain portfolio securities, with rights offerings to common stockholders, in order to raise cash required for such payments.

Appeals taken and petitions for review of the Commission orders

filed by the common stockholder were dismissed by the Circuit Court

of Appeals as being without merit.

In re Engineers Publio Service Oompany.9-The Commission had

approved a plan for the liquidation of Engineers Public Service Co.,

which provided among other things for payment in cash to preferred

stockholders of amounts equal to the call price of their shares. Certain

holders of common stock of Engineers opposed court enforcement of

this aspect of the plan. The district court held that the plan was

unfair in providing for payment to the preferred stockholders of

more than their involuntary liquidation preference. The district

court made its own independent examination of the preferred stock,

with particular emphasis on its issue price and market history. Accepting the Commission's conclusions that the present investment

value of the preferred stock was at least equal to the call price, the

court held that this was not a controlling factor, but that participation

should be accorded to the various security holders in accordance with

a standard of "colloquial equity."

Except in this respect the dissolution plan was approved, and pursuant to the court order Engineers has paid to its preferred stock-

• 71 F. Supp, 797 (Del. 1947).
THmTEENTH ANNUAL REPORT 71

holders amounts equal to the involuntary liquidation preference of

their shares and has set aside in escrow additional amounts to cover

the maximum payable in the event that the district court's decision is

reversed. Appeals were taken to the Circuit Court of Appeals for the

Third Circuit by the Commission and by certain preferred stockholders. and are now pending,

Laddv. Brickley.lo-In March 1946the Commission approved a plan

proposed by Brickley, trustee for International Hydroelectric System appointed pursuant to section 11 (d) of the Holding Company

Act, for the settlement of claims of International Hydro against International Paper Co. The settlement was approved in June 1946

by the United States District Court for the District of Massachusetts.

Certain junior security holders of International Hydro appealed on

the ground that the settlement was inadequate. The Circuit Court of

Appeals noted that the settlement had been approved by the Commission, by the district judge, and by the majority of those interested

in the company. The court's opinion reviewed the claims asserted

by International Hydro against International Paper, the defenses to

those claims, and the investigation of them by the Commission and the

trustee. The court held that the district judge was not required to

estimate separately the probable success of each claim and defense,

and that findings of ultimate fact that the compromise is for the best

interests of the estate, that the consideration payable thereunder was

fair, reasonable and adequate, and that adequate notice and opportunity to be heard had been given to all persons interested, were

adequate to support the district court's order.

Lahti v. New England Power A88ociation.Jl-Pursuant to section 11

(e) the Commission approved, and the United States District Court for

the District of Massachusetts approved and enforced, a plan for the

reorganization of New England Power Association and its five subholding companies. A number of security holders of the companies

affected challenged on appeal the fairness and equity of the allocations proposed in the plan. The Circuit Court of Appeals held that

the findings of fairness by the Commission and the district court could

not be upset by the Circuit Court of Appeals unless they were shown

to be without rational basis in fact or to be predicated on a clear-cut

error of law. In determining the equitable equivalent of the rights

surrendered, the court stated that consideration must be given to the

entire set of rights and limitations of the security to be surrendered

in the business context of the issuer, apart from the impact of section

11, and that a comparison of earnings prospects is the primary factor

to be considered in making the determination. The court reviewed

the comparisons made and law applied by the Commission, and accepted the judgment of the Commission and the district court that the

'.1;;8 F. (211)212 (C. C. A. 1, 1946) certiorari denied 330 U. s. 819. u 160 F. (2d) 845 (C. C. A. 1, 1947).
72 SECURITIES AND EXCHANGE COMMISSION

plan accorded fair and equitable treatment to holders of the securities represented by objectants.

In re United Gas Oorp01'ation.12-InNovember 1944 the United

States District Court for the District of Delaware had approved and

enforced a plan for the reorganization of United Gas Corp., a public

utility subsidiary of Electric Bond & Share Co. and Electric Power &

Light Corp.18 A minority common stockholder of Bond & Share

appealed from the injunctive provisions of the district court's enforcement order, enjoining any action interfering with the plan, including

the prosecution of proceedings in other tribunals. The Circuit Court

of Appeals held that the injunction met the requirements of the Holding Company Act and of the judicial code, and was appropriate to

avoid a multiplicity of law suits and to permit the prompt, unimpeded

execution of the plan of reorganization, objectives plainly within the

purview of the relevant statutes.

Divestments Under Section II

During the year holding companies divested themselves of 31 subsidiaries with assets of $1,978,000,000. This brings the total of such

divestments since December 1,1935, to $8,051,000,000. Of this amount,

$5,450,000,000is no longer subject to the act.

The tables below summarize divestments of electric, gas, and nonutility companies by registered public utility holding companies for

the 1947 fiscal year and for the period December 1, 1935, to June 30,

1947:

July 1, 1946, to June 80, 1947

Number of companies Assets of companies divested

($000,000omitted)

Elec- Gas Non- Total Elec- Gas Non- Total tne utility tric ntility

-- -- -- -- -- -- -- -- Divested by exchange or dJstributlon

ofsecurities to securitil: holders:

No longersubject to oldingCom- pany Act ______________________ 2 2 1 5 $172 $16 $27 $215 Still subject to Holding ComP311Y Act ,___________________________ 3 ----.--- ____w._. 3 354 -------- -------- 354

Divested by sale of property or seeu- ntles: , No longer subject to Holding Company Act .. '9 4 5 18 '620 15 20 655

Still subject to Holding Company Act 1.. .. 5 --.----- 5 754 -------- -------- 754

-- -- -- -- -- -- -- -- Total divested. .. ______________ 19 6 6 31 1,900 31 47 1,978

Number of companies making- Sale price ($000,000 omitted) such sales

Partial sales ofproperty not included

in above totals:

Assets sold no longer subject, to 3 3 4 10 $2 $1 $3 $6 the act. .. ___. _________________

Assets sold still subject to the act, Totals 3 3 4 10 2 1 3 6

See footnotes at end of table.

12 162 F. 2d 409 (C. C. A. 3, 1947).

58 F. Supp. 501.

' ______________

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'"
THIRTEENTH ANNUAL REPORT

December 1, 1995, to June 90, 1947

73

Number of companies Assets of companies divested

($000,000omitted)

- Elec. O"s Non- Tot,,1 Elec. Gas Non- Total trlc utility trio utility

--- --- -- -- -- ------ Divested by exchange or dlstrlbution of securities to security holders:

No longer subject to Holding Company Act••...•.•• •.••... 14 10 3 Zl $1,336 $434 $31 $1,801

Still subject to Holding ComDiveJe':fYb~ct sill;' of' j);operty" or' 11 .- 11 1,580 .- - 1,580

securities:

No longer subject to Holding Company Act •. _._........•.. 131 90 118 339 2,894 365 390 3,649

Still subject to Holding Com.

pany Actl ...•...••..••..•••.•. 37 13 3 53 976 25 20 1,021

------------------------ Total dlvested., ............... 193 113 124 430 6,786 824 441 8,051

Number of companies making Sale price ($OOO,OOOomltted) such sales

Partial sales of property not ineluded in above totals'

Assets sold no longer subject to the act ....... ___.............. 54 16 30 100 $80 $8 $30 $118

Assets sold still subject to the act ............................ 11 5 1 17 11 4 1 16

------------------------ Totals ......................... 65 21 31 117 91 12 31 134

I By reason of their relationship to other registered holding companies . Includes all cases where total divestment was effected by sales of entire property to one or more than one buyer . In the case ofsales to more than one buyer, the company was classified in accordance With the disposition of the majority of the assets sold. , Reflects divestment of Pennsylvania Power & Light Co. by Electric Bond & Share Co. The divestment

of Pennsylvania Power & Light Co. by National Power & Light Co.ls not included ill the above summary table tlgures

Northern Natural Gas Oo., which was a subsidiary in three different company systems and Itself a registered holding company having consolidated assets of $e3,178,222. was not included In the above sum- mary; Lone Star Gas Corp. dlstnbuted its common stock Investment therein to its own stockholders and

United Light & Power Co. sold its holdings for $10,533,612.

With less favorable market conditions prevailing during most of

the past year than in 1946,divestments were carried out less frequently

by sales in the open market and greater reliance was placed upon

distribution plans. Outright distributions or warrant offerings of

portfolio common stocks were made in the following instances:

A-outright distributions:

Allied Gas Co. by Great Lakes Utilities Co.

Birmingham Electric Co. by National Power & Light Co.

Carolina Power & Light Co. by National Power & Light Co.

central and South West Corp. by Middle West Corp.

Northern Indiana Public Service Co. by Midland Realization Co.

Pennsylvania Power & Light Co. by National Power & Light Co.

South Carolina Electric & Gas Co. by General Public Utilities Corp.

B-Purchase warrants issued to common stockholders of parent:

American Gas & Electric Co. by Electric Bond & Share Co.

Cincinnati Gas & Electric Co. by Columbia Gas & Electric Corp.

Cleveland Electric lliuminating Co. by The North American Co.

Gulf States Utilities Co. by Engineers Public Service Co.

Pennsylvania Power & Light Co. by Electric Bond & Share Co.

_

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74 SECURITIES AND EXCHANGE COMMISSION

The common stocks of five small utility subsidiaries were sold to

the public through underwriters. Two additional divestments were

brought about by reorganization which removed the subsidiary from

the control of the parent. The remaining divestments were carried out

by private sales to individuals, public bodies or other utility companies.

Noteworthy progress has also been witnessed in the simplification

of corporate structures and redistribution of voting power of holding

company systems under section 11 (b) (2). Because of the fact that

in many cases dissolution of unnecessary holding companies cannot

take place until a series of involved transactions has been consummated,

it is difficult to provide a precise statistical measure of the over-all

simplification which has been achieved. The following table, however,

covering the period from June 15, 1938,to June 30, 1946, indicates the

sharp reduction which has taken place in the total number of holding

companies, and utility and nonutility subsidiary companies subject to the Holding Company Act. This reflects the simplification

which has occurred as a result of compliance with both the geographic

integration requirements of section 11 (b) (1) and the corporate

simplification requirements of section 11 (b) (2).

Total Eliminations Com. com. panies panies Absorbed Sales,dis- Other subject subject .. by solutions Exemp- dis. Total to act to act merger or and other tion by posals i as of

during eonsol- divest. rule or June 30, period idation menta order 1947

--- -- Holding companies ..•..• _. ._ 207 23 56 30 9 118 89 ElectrIc and/or gas eompanies, .••••••• 903 126 335 59 47 567 336 Nonutilities plus utilities other than

electric and/or gas eompames 1,007 96 360 58 84 598 409 --- --- --- -- -- -- Total companies ......•..•••••••• 2,117 245 751 147 140 1,283 834

I Principally small or nonutility subsidiaries, with little or no public interest, disposed of by various means.

Notable progress in meeting the requirements of section 11 has been

made by holding company systems, both large and small, during the

past year. A brief summary of the year's activity under section

11with respect to a number of major holding-company systems follows.

Earlier developments in the section 11 proceedings concerning these

and other systems have been outlined in the Twelfth Annual Report

and in the reports for earlier years.

STATUS OF INTEGRATION PROGRAMS-MAJOR SYSTEMS

American Water Works & Electric Co., Inc.

Findings and opinions were issued by the-Commission on December

23,1946 and February 17, 1947 with respect to two plans filed under

section 11 (e) by American Water Works & Electric Co., Inc. (American) and certain of its subsidiaries." An order was issued on March

19, 1947 by the district court finding these plans fair and equitable

and appropriate to effectuate the provisions of section 11 (b) of

the act.

.. Holding Company Act releases Nos. 7091 and 7208.

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mmTEENTH ANNUAL REPORT 75

Plan I is concerned primarily with the creation of a new water

works holding company to be known as American Water Works Co.,

Inc. Two subholding companies, Community Water Service Co. and

Ohio Cities Water Corp., will be dissolved and the new holding company will then own directly or indirectly substantially all of the

water works properties in the American system. Ten-year serial debentures of the new company- in the amount of $15,000,000are to be

sold to John Hancock Mutual Life Insurance Co. and approximately

2,500, 000 shares of common stock are to be sold at competitive

bidding," ,

Plan II, which is to be undertaken after the consummation of plan

I, proposes the liquidation of American. Thus, after se~egation of

the water compames in a new system, the remaining subsidiaries will

be controlled by the West Penn Electric Co., now a subholding company in the American system. Under plan II American will payoff

in cash its bank loan notes and preferred stock and will distribute

its residual assets to its common stockholders. The question as to

whether the preferred stock shall be retired at its liquidation price of

$100 per share or at some gEeater amount has not been determined.

The plan provides that certificates of contingent interest in any such

additional payment shall be distributed to preferred stockholders if

final determination of this question has not been made at the time

plan II becomes effective.

Community and Ohio Cities have outstanding preferred stocks with

substantial dividend arrearages, and the Commission has determined

that the equitable equivalent of such shares is $180 per share and

$159per share respectively, plus, in each case, an allowance for accrued

dividends from October 31, 1945 to the effective date of the plan.

Holders of these preferred stocks are to be given the option of receiving the amounts due them in cash or in new common stock of

American Water Works Co., Inc., on the basis of the initial public

offering price.

Cities Service Co.

In November 1946 Cities Service Co. (Cities) filed a plan for the

simplification of its corporate structure pursuant to section 11 (e).

Extended hearings and conferences were held and during the course

of the proceeedirigs Cities amended its plan to meet objections and

proposals for modification. On April 24, 1947, the Commission approved the amended plan 16 and on May 27, 1947, the district court ISsued an order enforcing it. The amended plan has since been consummated.

Briefly, the plan provided for the issuance by Cities of new debentures to the holders of its outstanding preferred and preference stocks

in a principal amount equivalent to their respective redemption prices

and in discharge of all the rights and claims of such security holders,

including their claim for dividend arrears. The plan also provided

for the unmediate retirement of approximately 40 percent of outstanding long-term debt and contemplated the applications of anticipated proceeds from the sale of certain subsidiary utility companies

to the retirement of the remaining outstanding long-term debt and

to the reduction of the outstanding amount of new debentures.

to The sale of these shares was carried out after the close of the tlscal year. le Holding Company Act release No. 1368 (194.1).
76 SECURITIES AND EXCHANGE COMMISSION

Pursuant to section 11 (b) (1) orders of the Commission, Cities has

made further progress in the divestment of its direct and indirect

interest in nonretainable utility companies. On August 29, 1946, the

Commission approved the liquidation and dissolution of Cities Service

Power & Light Co., a holding company subsidiary of Cities, and the

transfer of its 5 remaining subsidiaries to Cities. These subsidiaries

are expected to be divested promptly in accordance with the plan of

corporate simplification noted above. Since the original order of divestment was issued in May 1944,Cities has disposed of 5 direct and

40 indirect subsidiaries and has been engaged in a program of refinancing certain subsidiaries preparatory to divestment. Elimination of other subsidiaries is planned through a series of mergers and

consolidations.

Federal Light & Traction Co. (Federal), formerly a subsidiary

holding company of Cities Service Power & Light Co. and now a

direct subsidiary of Cities, has filed a section 11 (e) plan proposing

its liquidation and dissolution. Under the plan of liquidation presently pending before the Commission, Federal proposes, among other

things (1) the immediate cash payment to preferred stockholders of

their liquidating preferences ($100 per share plus accrued unpaid

dividends), (2) the deposit in escrow of the call premium of $10 per

share pending determination of the additional amounts, if any, to

which the preferred stockholders are entitled, and (3) the pro rata

distribution to common stockholders of its investment in its two

remaining subsidiaries plus $11 per share in cash.

In addition to the pending divestments referred to above, the disposition of three direct subsidiaries and an indirectly owned gas distribution system of Cities is required in order to comply fully with

Commission orders. However, Cities has indicated that it intends

to apply for an exemption order permitting the company to retain

its interest in these remaining companies.

The Commonwealth & Southern Corp.

During the year under review Commonwealth & Southern carried

out a number of transactions in furtherance of a general program for

compliance with section 11 (b) (1) and 11 (b) (2) of the act. This

general program was set forth in a plan dated March 25, 1946 submitted by Commonwealth." That plan, in brief, had as its objectives:

(a) That the northern operating subsidiaries become independent

operating companies whose common stocks would be held by the

public; (b) that the common stocks of the southern operating subsidiaries be transferred to a new holding company, the Southern Co.,

which would thereafter continue to own and hold such securities; and

(c) that Commonwealth thereafter liquidate and dissolve by making

distributions of its assets to holders of its preferred stock and common

stock. Although this plan has been superseded by a new plan filed

July 30, 1947, the general objectives of Commonwealth are substantially unchanged. .

While the plan filed in March 1946 set forth the pattern proposed

by Commonwealth for compliance with section 11, the company stated

that it proposed to carry out the various transactions incidental thereto

by filing separate plans or applications. Among the transactions

JT HoldIng Company Act release No. 5825 (1945).
THmTEENTH ANNUAL REPORT 77

were the issuance and sale at competitive bidding of additional common stock by Ohio Edison Co. in June 1946 and bY'Consumers Power

Co. in November 1946, primarily to provide funds for construction

and also to establish public markets in these common stocks to facilitate the over-all plan. Another incidental step was the repurchase

and retirement by Commonwealth of 40,753 shares of its preferred

stock during the period October to December 1946 through use of

approximately $5,000,000of treasury funds.

Another plan filed by Commonwealth as part of its over-all program provided for the transfer of its interests in Alabama Power

Co., Georgia Power Co., Gulf Power Co., Mississippi Power Co., and a

nonutility subsidiary, Savannah River Electric Co., to the Southern

Co. In connection with this plan Commonwealth and the Southern

Co., agreed, subject to the Commission's approval of the plan and its

finding that the electric properties of the four southern operating

companies constitute a single integrated public utility system retainable under common control: (a) That Commonwealth will dispose of

its direct or indirect interests in all subsidiaries other than the four

operating companies and Savannah River Electric Co. to be transferred

to the Southern Co.; (b) that Commonwealth and the Southern Co.

will cause the disposition of their direct or indirect interests in the gas

and transportation properties of Alabama Power, Georgia Power,

and Gulf Power; and (e) that Commonwealth will dispose of any

remaining interest in Southern as soon as possible after retiring the

Commonwealth preferred stuck.

On August 1, 1947, the Commission approved this plan subject to

certain conditions, and in its findings concluded, among other things,

that the electric properties of Alabama Power, Georgia Power, Gulf

Power, and Mississippi Power constitute a single integrated public

utility system retainable under common control."

Still another section 11 plan was filed by Commonwealth which

provided for a voluntary exchange of a portion of the portfolio common stocks held by Commonwealth for a maximum of 400,000 shares

of its preferred stock. This plan was approved by the Commission

on April 11, 1947,tDand the common stocks of Consumers Power Co.,

Ohio Edison Co. and Southern Indiana Gas and Electric Co. were

thereupon offered in exchange for preferred stock of Commonwealth.

However, Commonwealth subsequently stated that the response to this

offer had not been satisfactory and that this voluntary plan had been

abandoned.

On July 30, 1947 Commonwealth submitted a new plan under section 11 (e) which provides, in brief: (a) That the common stocks of

two northern operating companies, Consumers Power Co. and Central Illinois Li~ht Co., will be distributed in full discharge of all of

Commonwealth s preferred stock; (b) that the preferred stock will

also receive a specified cash payment on account of dividend arrearages; (c) that the common stock of the Southern Co. and Ohio Edison Co. will be distributed to holders of Commonwealth's common

stock; and (d) that Commonwealth will liquidate and dissolve. Commonwealth has stated that this new plan supersedes the plan dated

March 25, 1946, earlier mentioned.

18 Holding Company Act release No. 76111(1947). 18 Holding Company Act release No. 7347 (1947).
78 SECURITIES AND EXCHANGE COMMISSION

Electric Bond & Share Co.

When the parent of this system, Electric Bond & Share Co. (Bond &

Share), registered under the act in 1938, it controlled 121 domestic

subsidiaries including 5 major subholding companies: American

Power & Light Co. (American) ; American & Foreign Power Co., Inc.

(Foreign Power); American Gas & Electric Co. (American Gas);

Electric Power & Light Corp. (Electric); and National Power &

Light Co. (National). Of these, the American Gas system ceased

to be a subsidiary of Bond & Share during the past year, and National

disposed of substantially all of its interests in electric and gas utility

companies. By June 30, 1947 Bond & Share had divested itself of

78 direct and indirect subsidiaries having assets of $1,650,000,000and

had filed plans calling for the retirement of its preferred stocks and

the divestment of all its remaining public utility investments in the

United States 20 in order to become, prospectively, an investment

company.

Pursuant to plans approved by the Commission and by the district

court, Bond & Share has paid an aggregate of $100 per share to the

holders of its $5 and $6 preferred stocks and in addition delivered to

each of such holders a certificate evidencing his right to receive any

additional amounts which the Commission or the courts may approve

or direct," Funds for these payments were derived from a bank

loan and from disposition of all of its holdings of the common stock

of Pennsylvania Power & Light Co. and substantially all of its holdings of American Gas common stock, principally by means of rights

offered to Bond & Share's common stockholders. As a result of such

disposition Bond & Share ceased to be a holding company with respect

to both Pennsylvania and American Gas. In addition, the company

proposes to dispose of its holdings of Carolina Power & Light Co. and

Birmingham Electric Co., the proceeds from such disposition to be

used to retire its bank loan. The Commission has already authorized

the sale of Carolina Power & Light Co. common stock.22

On November 25, 1946,the Supreme Court upheld the constitutionality of section 11 (b) (2) of the act 23 and affirmed the Commission's

order of August 22, 1942,which directed the dissolution of American

and Electric." During the year American and its subsidiaries took

the following major steps toward compliance with section 11:

On September 6, 1946, American, joined by Bond & Share, filed a

plan providing for the retirement of American's $5 and $6 preferred

stocks either through an exchange for portfolio securities or for cash;"

The plan also provides for the compromise and settlement of certain

claims between American and its subsidiaries and Bond & Share and

certain of its subsidiaries. Under the plan American would dispose

of all of its interest in Texas Utilities Co. as required by the Commission's order permitting the creation of that company." Beginning on

October 22, 1946, hearings on the plan were held from time to time

and concluded as to all major issues on March 11, 1947. A common

•• Holding Company Act release No. 5970 (1945). n On April 7, 1947, Bond & Share filed plan I!-B In-which It proposed to make no further payments to the holders of these certlficates. Hearings on this matter were in process after the close of the fiscal year. n Holding Company Act release No. 7383 (1947). n 329 U. S. 90 (1946) . •• Holding Company Act release No. 3750 (1942) •• Holding Company Act release No. 6902 (1946) •. .. Holding Company Act release No. 6158 (1945).
THIRTEENTH ANNUAL REPORT 79

stockholders' committee opposed the company's plan and submitted

a plan proposing the allocation of .American's portfolio securities

among the company's preferred and common stockholders. Briefs

were exchanged and on May 27,1947, the two plans were argued before

the Commission.

On April 24, 1947,the Commission authorized the merger of Northwestern Electric Co. into Pacific Power & Light Co. and the retirement of the two companies' preferred stocks through a new preferred stock issue by Pacific, the survivor." Subsequently, Pacific

refunded its debt and the debt of Northwestern which has been assumed under the merger agreement."

The compromise section 11 (e) plan filed by Electric Power &

Light Corp. and Bond & Share, described in the last annual report,

was pending before the Commission at the end of the fiscal year.29

Hearings have been completed and the plan has been briefed and

argued.

American Gas has divested itself of all holdings in companies held

to be unretainable under section 11 with the exception of the common

stock of Atlantic City Electric Co. The Commission has approved

a plan for the disposition of Atlantic City whereby .American Gas

will divest itself of all interest in that company by December 31,

1948.30 The Commission also approved the acquisition by American

Gas of the common stock of Indiana Service Corp., holding that the

latter company might properly be considered. a part of the Central

System approved by the Commission during 1946.31

The plan of reorganization filed by .Foreign Power under section

11 (e) of the act on October 26, 1944,in which Bond & Share joined,"

was amended by a plan of reorganization filed on May 22, 1947, in

which Bond & Share also joined." The proceedings were reconvened

and hearings on the amended plan began on June 24,1947. On July

16, 1947, the record in the proceedings was closed on all matters except as to certain fees and expenses, and counsel for parties and participants agreed on a program for submission of briefs -and for oral

argument.

Engineers Public Service Co.

This system at the time of its registration in February 1938 had

included 20 subsidiaries with consolidated assets of $370,000,000.

Operations were conducted in 13 States. During the past year the

Commission approved a plan for the sale and distribution of nearly

all the assets of Engineers and for its dissolution. A certificate of

dissolution was filed and recorded on June 30, 1947, and Engineers'

only remaining asset consists of about 5 percent of the common stock

of Virginia Electric & Power Co.

The plan originally filed by Engineers in this matter provided for

the retirement of its preferred stocks at their voluntary liquidating

price of $100 plus accrued. dividends. Funds to retire the preferred

were expected to come from treasurx cash, from proceeds of an offering of rights to Gulf States Utilities Co. common stock to the

:IT Holding Company Act release No. 7369 (1947) .. Holding Company Act release No. 7564 (1947) .. Holdlnlr Company Act release No. 6768 (1946) .. Holding Company Act release No. 7335 (1947). 11 Holding Company Act release No. 7054 (1946) .. Holding Company Act release No. 6388 (1m).

II Holding CODlp&nYAct release No. 7450 (1947).

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80 SECURITIES AND EXCHANGE COMMISSION

common stockholders of Engineers, and from a bank loan of $3,000,-

000. The bank loan was to be repaid over a 3-year period, and it was

proposed that the common stock of Virginia Electric & Power Co.

be retained by the liquidating trustees of Engineers as security for

such loan. The common stock of EI Paso Electric Co. (Texas) was

to be distributed to Engineers' common stockholders as a part of the

plTte Commission issued its findings and opinion regarding this plan

on December 5, 1946.34 Approval of the bank loan was WIthheld on

the grounds that funds could readily be obtained from other sources

which would not prolong for 3 years the control of the $65,000,000assets of Virginia Electric & Power Co. The Commission also found that

the impact of section 11 was responsible for the dissolution of Engineers and that the charter provisions for retirement of its preferred

stock thus did not apply. An examination was accordingly made of

the investment value of such stock. It was found that this value was

at least equal to the respective call prices of the various series of preferred stock, and Engineers' proposal to retire these shares at $100

plus accrued dividends was denied approval.

Engineers subsequently filed an amended plan eliminating the bank

loan and providing for distribution to its common stockholders of the

common stock of Virginia as well as that of EI Paso. The amended

plan also provided for retirement of the preferred stock at the respective call prices. The plan as amended was approved oy the Commission on January 8, 194'7,35and an application was filed in the district

court to enforce and carry out, the plan. On May 15, 194'7,the court

disapproved that part of the plan calling for the payment of the full

voluntary redemption prices, but permitted consummation of the plan

by the payment of $100 plus accrued dividends to the preferred stocks

and the escrowing of an amount sufficient to cover the difference between the involuntary liquidation price and the voluntary redemption

prices in the event that it should be determined, on appeal, that the

preferred stockholders were entitled to the larger amounts. The

amount escrowed also made provision for interest on the escrowed

premiums and for fees and other expenses connected with the plan."

As indicated earlier, the Commision and others have appealed from

the decree of the court, and these appeals are now pending in the

Circuit Court of Appeals for the Third Circuit.

General Public Utilities Corp. (Formerly Associated Gas & Electric Corp.)

At the time the Associated Gas & Electric system registered under

the act in March 1938,its consolidated assets were stated at over $1,150,-

000,000. The system included 1'70subsidiary companies operating in

29.States and the Philippine Islands, as well as nume;ous other affilI!l~e~companies, In contrast, th~ ~r~ent system of General Public

Utilities (GPU) consists of 26 subsidiaries with consolidated assets of

$660,OqO,~00and operating in only 3 Sta~es and the Philippines. The

Commission has not yet determmed which of these remaming properties may be retained by GPU under section 11 (b) (1)

.. Holding Company Act release No. 7041 .. Holding Company Act release No. 7119. 86 In re Engineer, PullUo Service OomPG"1I, 71 F. Supp. 797 (Del.).

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THIRTEENTH ANNUAL REPORT 81

During the past fiscal year four former subholding companies in the

system were dissolved: Associated Utilities Co., Gas & Electric Associates, General Gas & Electric Corp. and NY P A NJ Utilities Co.

A recapitalization plan pursuant to section 11 (b) (2) was consummated by New England Gas & Electric Association (NEGAS) which

resolved complex claims and counterclaims between NEGAS and

various companies in the Associated system. As indicated in the

Twelfth Annual Report of the Commission, an amended plan was developed through discussion by all interested parties which was approved by the Commission and the appropriate district court. The

plan called for the public sale of debentures and common stock the

latter at not less than $11 per share or, at the option of GPU, whose

claims were affected by such price, at not less than $10 per share.

When it developed that even the lesser amount could not be realized

for the NEGAS common, an alternate plan was filed providing for

the issuance of collateral trust bonds, convertible preferred stock

and common stock. This alternate plan was likewise the result of

discussions among all interested parties, including protective committees. In its findings and opinion the Commission indicated that

the use of preferred stock could be considered appropriate only in

the light of the imminent maturities of the outstanding NEGAS

debentures and the fact that the earlier amended plan was no longer

.feasible. 57 The plan was consummated during April 1947. After

the close of the fiscal year GPU sold at competitive bidding its holdings of NEGAS common which had been received under the plan.

International Hydro-Electric System

This company (IRES) is under a Commission order to liquidate

and dissolve. However, litigation has been in process over claims

asserted by IRES against its former parent, International Paper

Co., delaying such liquidation and dissolution. A settlement of these

claims was approved by the district court in December 1945 and an

appeal was taken by a stockholder and a director of mESo On

November 14,1946, the Circuit Court of Appeals for the First Circuit

affirmed the decree of the district court." .Appellants filed a petition

for a writ of certiorari in the Supreme Court of the United States,

which was denied on February 10, 1947.89 A petition for rehearing

was filed which was denied by the Supreme Court on March 10, 1947,40

and payment in the amount of $10,000,000 was thereupon made in

accordance with the settlement provisions.

A further step toward the dissolution of IHES was taken in the

acquisition and merger by Eastern New York Power Corp. of Hudson

River Power Corp. and System Properties, Inc., all subsidiaries of

mESo As a result of this merger the assets of these companies and

the capital structure of the surviving company were better adapted to

subsequent divestment by mESo The plan was approved by the

Commission on December 14, 1946.41

As indicated in the Twelfth Annual Report, the Commission approved a plan under section 11 (b) (2) for the simplification of the

If Holding Company Act release No. 7181 (1947). • Ladd v. Bricklev, llS8 F. (2d) 212• ... 67 S. Ct. 67lS. to 67 S. Ct. 964. ... Holding Company Act release No. 7042.
82 SECURITIES AND EXCHANGE COMMISSION

New England Power Association (NEPA) system. The order of the

district court approving this plan was affirmed on appeal 42 and the

plan was consummated in June 1947. As a result of this plan four

subholding companies were merged with NEPA to form a new holding

company, New England Electric System (NEES). A fifth subholding company was dissolved. The securities of NEES now consist of

$85,000,000 of funded debt and 6,695,075 shares of common stock, as

compared with the 18 classes of holding company securities previously

outstanding in the system.

Prior to consummation of the above plan, IHES owned 88 percent

of the NEP A. common stock representing 51.5 percent of the voting

power. IHES interest in NEES amounts to less than 8 percent of

the total voting power as a result of the redistribution provided for

in the plan.

The Middle West Corporation

Pursuant to a section 11 (b) (1) order of the Commission, the

Middle West Corp. (Middle West) was directed to divest itself of its

interest in all companies except Central Illinois Public Service Co.,

Kentucky Utilities Co., and Public Service Co. of Indiana, Inc.43

Hearings were held from time to time regarding the retainability by

Middle West of these latter three subsidiaries and raising issues as to

the continued existence of Middle West. In May 1947 the management of Middle West deemed it advisable for the benefit of the stockholders to dissolve the corporation and is presenting an appropriate

resolution to its stockholders for approval. If such resolution is

approved, it is Middle West's intention to distribute or sell its remaining investments and assets.

During the prior fiscal year the Commission approved and the district court ordered enforcement of a plan of merger of Central & South

West Utilities Co. and its subsidiary, American Public Service Co.,

both subsidiaries of Middle West. The plan was consummated in

February 1947 and the surviving company, Central & South West Corp.

(Central), controls a group of operating companies whose electric

properties have been held to be an integrated system. Divestment of

certain nonutility properties remains to be carried out. Central is no

longer a subsidiary of Middle West by virtue of the distribution by

Middle West to its stockholders of the stock of Central received by it

under the plan.

An amended plan under section 11 (e) was filed by North West

Utilities Co. (North West) in February 1947 proposing to distribute

to its preference stockholders the common stock of Wisconsin Power

& Light Co. held by North West and to terminate the corporate existence of North West. Hearings were concluded in June 1947 and

briefs were filed and oral argument heard after the close of the fiscal

year.

New England Public Service Co.

On November 23,1946, New England Public Service Co. (NEPSCO)

filed an amended plan for corporate simplification by retirement of its

prior lien preferred stock and a further amended plan was filed 011

March 10, 1947.

"Lahti v. New England Power Association, 16 F. (2d) 845 (C. C. A. 1, 1947) .. Holding Company Act releases Nos. 4846 (1944) and 6010 (1945). •
THIRTEENTH ANNUAL REPORT 83

At the close of 1946,the $7 prior lien preferred stock of NEPSCO

bad dividend arrears of $71.31 per share and the $6 prior lien stock

had arrearages of $61.12 per share. In addition, NEPSCO had $6

and $7 series of so-called "plain preferred" with respective arrearages

of $88.25 and $102.95 per share. The plan in question called for the

retirement of the prior lien shares by cash payments at the call price

plus accrued dividends. It was also proposed that the ;r;>riorlien

stockholders have the option of taking common stock of Public Service

Co. of New Hampshire in lieu of cash. NEPSCO was not bound by

the plan to provide this option, however, if market or other conditions made disposition of the New Hampshire stock seem inadvisable.

NEPSCO had realized substantial capital gains from sale of its

industrial properties, as indicated in the Twelfth Annual Report, and

was entitled to the benefits under supplement R of the Internal Revenue

Code only if such funds were used for certain specified purposes within

a 24-month period.

One of the major objectives of the above plan was the utilization

of such funds in retirement of the prior lien stock by October 30,1947,

in order that NEPSCO would not incur a capital gains tax estimated

at $3,200,000. Thus in approving the plan on June 27, 1947,44the

Commission sought to minimize the possibilities of delay in its consummation by requiring that payment to prior lien stockholders be

limited to $100 per share plus accrued dividends and that an amount

corresponding to the aggregate call premium, the payment of which

was controversial, be placed in escrow.

The North American Co.

On January 6, 1947,the North American Co. (North American) submitted new plans," designated as plans I, II, and ill, pursuant to

section 11 (e) of the act, withdrawing plans previously submitted and

proposing: (a) the settlement of all system claims and counterclaims

affecting Illinois Power Co. and the liquidation and dissolution of

North American Light & Power Co. (Light & Power) ; (b) to obtain

funds to payoff bank loans and to make advances to enable Light &

Power to complete its liquidation; and (G) to effect the divestment

by North American of its entire public utility holding compally system. The portion of plan I pertaining to the settlement of the Illinois

Power Co. claims has been approved by the Commission 46 and has

been consummated. The remaining portion of plan I, as amended,

pertaining to the dissolution of Light & Power has been approved by

the Commission 47 and is presently under consideration by a court

upon application for judicial enforcement."

During the year North American has disposed of its interests in

Cleveland Electric Illuminating Co. through the issuance of purchase warrants to holders of North American common stock 49 and

the sale of the residual shares on the open market. Its interest in St.

Louis County Gas Co. was sold at competitive bidding 50 and North

.. Holding Company Act release No. 71111. .. Holding Company Act release No. 7124 (1947). .. Holding Company Act release No. 7238 (1947).• .. Holding Company Act release No. 7514 (1947) .. D. C. Del., Civil Action No. 1033 (1947) .. Holding Company Act release No. 7526 (lQ47). GO Holding Company Act release No. 7236 (1947).

767629-48--7

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84 SECURITIES AND EXCHANGE COMMISSION

American has made the first of several proposed distributions to its

stockholders of the common stock of Wisconsin Electric Power CO.51

Washington Railway & Electric Co. submitted a plan pursuant to

section 11 (e) of the act which, as amended, has been approved by the

Commission 52 and the District Court for the District of Columbia,"

Upon consummation, the plan will result in the dissolution of Washington Railway & Electric Co. and the consolidation of its electric

utility assets in Potomac Electric Power Co. Of its other assets, the

common stock of Capital Transit Co. has been made the subject of a

rights offering to Washington Railway's common stockholders,"

while Great Falls Power Co. (a land company) has been acquired by

Potomac Electric Power Co. and will be held temporarily subject to

an order requiring its divestment.

Standard Power & Light Corp.-Standard Gas & Electric Co.

During the past year Standard Gas & Electric Co. (Standard Gas)

disposed of its interests in Mountain States Power CO.55and California-Oregon Power CO.56thus reducing the area in which its system

renders electric or gas service to 7 States as compared to 19 at the

time of its registration in 1938.

An amended dissolution plan was filed under section 11 (e) by

Louisville Gas & Electric Co. (Delaware), a subholding company, enlarging the participation of its class A stock in the distribution of its

assets prior to dissolution. All of the class A stock is publicly held.

The company also proposed to invest substantially all its net current

assets in additional stock of its subsidiary, Louisville Gas & Electric

Co. (Kentucky). Such shares plus its present holdings would then be

distributed to its class A and class B stockholders. Hearings have

been held, the record closed, and oral argument scheduled.

Proceedings pursuant to section 11 (b) ~;~:f the act were instituted

with respect to Philadelphia Co., a subholdi company controlling 15

direct and 40 indirect subsidiaries." Such proceedings were consolidated with those under section 11 (b) (1) previously instituted against

Standard Gas and its subsidiary companies. Hearings in the con.

solidated proceedings have been held and the record closed. Briefs

and requested findings are being prepared and oral argument has been

requested.

The United Corp.

On June 12, 1946, the Commission instituted proceedings under

sections 11 (b) (1) and 11 (b) (2) with respect to Public Service

Corp. of New Jersey (Public Service), a holding company subsidiary

of United. In September 1946, Public Service filed an application,

pursuant to section 11 (e), for approval of a plan calling for its dissolution. The plan provides that the dividend preference stock of

Public Service Electric & Gas Co. (Electric & Gas), the principal sub-

•• Holding Company Act release No. 7461 (1947) • .. Holding Company Act release No. 7410 (1947) . .. D. C. Dlst, of Col., Civil Action No. 2076-47 (1947) .. ,!,he North American Co. agreed to purchase any unsubscribed shares and did, in fact.

acquire a total of 106,446 shares of which 12,791 shares represented the unsubscribed

portion of the oft'erlng. .. Holding Company Act release No. 7061 (1946) . .. Holding Company Act release No. 6707 (1946). IT Holding Company Act release No. 7025 (1946).

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THIRTEENTH ANNUAL REPORT 85

sidiary of Public Service, be exchanged for the latter's noncallable

preferred stock in the hands of the public, that debentures of Electric

& Gas be exchanged for the perpetual certificates of Public Service

and that the common stock of Electric & Gas and of South Jersey Gas

Co. (a subsidiary of Public Service) be distributed to Public Service's

common stockholders. As a part of the plan, the ownership of Public

Service Coordinated Transport, now a subsidiary of Public Service,

will be transferred to Electric & Gas, and County Gas Co., also a subsidiary of Public Service, will be disposed of after a recapitalization

has been effected."

During the fiscal year, the Commission permitted declarations to become effective providing for open-market purchases by United of

its preferred stock in an amount not to exceed $5,000,000. Further retirement of its preferred was provided for in two plans filed during the

year. In January 1947 United proposed to offer in exchange for each

share of its preference stock, to the extent of 200,000 such shares, (a)

four shares of common stock of Columbia Gas & Electric Corp., a subsidiary of United, and (b) $2 in cash. The Commission permitted

the withdrawal of this application and in June 1947 United filed a new

plan providing for the retirement of all of its preferred stock in exchange for a package of securities and cash, the character and amount

of which were to be disclosed by further amendment. This amendment was filed in July and provided that for each share of the preference stock of United there would be exchanged (a) one share of the

common stock of Public Service Electric & Gas Co. and (b) one-tenth

of a share of the common stock of South Jersey Gas Co., provided the

amended plan in the matter of Public Service Corp. of New Jersey

and its subsidiary companies should, in the interim, have become effective; otherwise, (a) one share of the common stock of Public Service Corp. of New Jersey, (b) one share of the common stock of Columbia Gas & Electric Corp., (c) one-fourth share of the COmmonstock

of the Cincinnati Gas & Electric Co., and (d) $6 in cash. 59

The United Light & Railways Co.

Since its registration in February 1938, this system has divested

itself of 38 of its 56 subsidiary companies and has reduced its area

of operation from 13 States to 7. These subsidiaries are grouped under

two subholding companies, one of which, American Light & Traction

Co. (American), filed a plan for its dissolution in 1945. As indicated

in the Twelfth Annual Report, the Commission withheld approval of

this plan on the grounds that it inadequately compensated the holders

of American's 6 percent cumulative noncallable preferred stock. Reargument has been heard on this question.

On September 20, 1946, the COmmission approved an application

which involved the investment by American of $310,000 in the common stock of Michigan-Wisconsin Pipe Line Co., its subsidiary, to

finance that company in securing autb.ority from the Federal Power

Commission to construct a natural gas pipe line from the Hugoton

Gas fields in Oklahoma to Michigan. Inapproving the application,

.. Holding Company Act releases Nos. 6883 (1946l. 7336 (1947) and 7478 (1947) .. Holding CompanY Act releases Nos. 7496 and 7557 (1941). •
86 SECURITIES AND EXCHANGE COMMISSION

the Commission stated that this financing should not permit any delay

in the liquidation of American."

On June 26, 1947, Railways and .American filed a plan under

section 11 (e) which, in general, provides for (1) continuance, without

change in its capital stock structure, of American as a registered holding company owning a gas utility system consisting of the propert~es

of Michigan Consolidated Gas Co., Milwaukee Gas Light Co., MIlwaukee Solvay Coke Co., Michigan-Wisconsin Pipe Line Co., Austin

Field Pipe Line Co., and such additional properties as hereafter may

be acquired by American or its subsidiaries with the approval of

State and Federal regulatory bodies having jurisdiction over such

acquisition; (2) the disposition by American through distribution to

its stockholders and/or by sale to the public of its holdings of the

common stock of the Detroit Edison Co. and Madison Gas & Electric

Co.: and (3) disposition by Railways of its interests, direct or indirect, in, and its holdings of stock of, American and its subsidiaries,

including Madison Gas and Detroit Edison, through distribution to

Railways' common stockholders in dividends and through sale to the

public.

REGULATION OF SECURITY ISSUES

Volume of Financing

The past fiscal year witnessed a continuation of the high level of

activity in security issues under sections 6 (b) and 7 of the act. The

Commission declared effective 191 such applications and declarations 61

as against 197 during the previous year, representing a level nearly

twice as high as the average for the period 1935-45. The dollar amount

of securities covered by effective applications and declarations, however, declined from $2,374,865,967in the year ended June 30, 1946, to

$1,148,696,608in fiscal 1947.

This decline was due largely to the shift in emphasis :from refunding issues to those sold :fornew money purposes, the latter type of issue

being ordinarily smaller than a refunding operation o:fthe same company. While refunding issues accounted for about half of the entire

volume of effective applications and declarations during this past

year, their volume was only a fourth as large as that :for fiscal 1946.

It was to be expected that refundings would diminish in this way,

partly because most companies had already refinanced and partiy

because of firming tendencies in money rates. Moreover, the refundmg process became more expensive with the termination of excess

profits taxes, as unamortized debt discount and expense, as well as

call premiums on the refunded issues, had been deductible in computing

such taxes.

'There is shown below the break-down by type and purpose of issue,

of the securities covered by_effective filings during each of the past

2 years and :for the period November 1, 1935 to June 30, 1947:

eoHolding Company Act release No. 6905 (1946) . .. At the beginning of the 1947 fiscal year.t 106 applications and declarations under sec- tions 6 and 7 were pending and 228 were nled during the year. Of these. 234 were de.

clared effective. 4 were withdrawn, leaving 96 pending at the close of the fiscal year. Of

the 234 etrective declarations and applications, 191 pertained to security issuance. 35 to

alteration of rights, and 8 to assulIlPti~n of liab~lty. .
THIRTEENTH ANNUAL REPORT 87

8ummaru of effective security issues under sections 6 (11) and 7 of the Public

Utility Hol(~ing Company Act ot 19351

July 1, 1946, to June 30, 1947 July 1, 1945, to June 30, 1946 Nov. 1, 1935, to June 30, 1947

- Num- Per- Num- Per. Per- Amount ber or Amount beror Amount

ISSUes cent issues cent cent

-- -- -- ---- -- 'l'ype or issue: Bonds _____________ $2b2, 556, 000 31 22.9 $1,063,197,000 43 44.8 $5,481,059,778 50.5 Debentures ________ 302, 446, 950 6 26.3 36,000,000 2 1.5 618,sw, 750 5.7 Notes. ____________ 223, 155,000 61 19.4 438,277,000 46 18.5 I, 501, 030, 325 13.8 Preferred stock ____ 143, 544, 000 17 12.5 418, 185, 000 37 17.6 1,369,380,038 12 b

Common stock _._ 216,994,658 60 18.9 419, 206, 967 49 17.6 I, 872, 883, 146 17.4

TotaL ______._._ 1,148,696,608 175 100.0 2,374,865,967 177 100.0 10, 843, 253, 037 lUO 0

Purpose of issue:

Refundmg and re- financing .. ______ 557, 192, 662 ------- 48.5 2, 007, 929, 190 ------- 846 7,773,996,536 71. 7 Reorganization 271,309,262 -----.- 23.6 216, 853, 555 ..-.- 9.1 1,817,003, 137 16.8

Acqurart ton of

property or other assets _____. 33,578,884 --.---- 2.9 148,186,016 --.---- 62 675,241,954 G 2 New flnanemg _____ 286, 615, 800 ------- 25.0 1,897,206 --.--- 0.1 568, 611, 130 52 Miscellaneous _____ 0 --.---- - 0 ------- - 8,400,280 .1

TotaL. __________ ---- -- I, 148, 696, 608 --.--.- 100.0 2, 374, 865, 967 --.---- 100.0 10, 843, 253, 037 100 0

I These figures do not include outstanding issues whose rights were altered under sections 6 (a) (2) and 7 (e),

nor do they include the guarantee of other issues.

New Financing

New financing has assumed greater importance over the past year

than in any year since the effective date of the act. The heavy construction program now under way, which by responsible estimates will

increase the generating capacity of the electric utility industry by 30 to

40 percent within the next 5 years, gives promise that new financing

will increase still further in volume over this period. During the past

fiscal year new financing under sections 6 (b) and 7 was made up as

follows:

New financing under sections 6 {II) and 7 (fiscal year July 1,1946 to June 30, 1947)

A,mount Number Percent of issues

--- Bonda., ___________ __________________ __ $31,013,001 1 15 10.8 Debentures . _. _. . 10,477,360 I 3 3.7 N otes . . . _. . _. _., . _. _' '109,471,000 38 38.2 Preferred stock, .• . 17,303,400 I 7 6.0 Common stock. . . 118, 351, 039 30 41.3

TotaL _____. ___.. _. ____.. _________. _________________. _________ --- 286, 615, 800 93 100 0

1 Includes issues whose proceeds were used both for new financing and refunding P\lll108eS.

As indicated by the above table, notes and common stock were the

vehicles principally employed to raise new money. Of the note issues,

32 were placed with banks and insurance companies in an aggregate

amount of $88,821,000. The remaining 6 issues, amounting to $20,-

650,000, represented loans from the parent company. With respect

to common stock money, funds of parent companies bulked even larger.

____ --

__________' ____• • •____• •____•

_________• ___ __' ____________________________•• _____

____ ____ _______ ___• ___________ __• __• __ _____• _••

____________ •___•___________•__•_________•______ ________ ________ _________• __• __________• ___~______
88 SECURITIES AND EXCHANGE COMMISSION

Twenty-five issues of common stock amounting to $88,002,566 were

purchased by parent companies leaving only 5 issues totaling

$30,348,473for sale to the public.

Although a large part of the funds needed for construction purposes has thus far been derived from parent companies and from internal sources such as depreciation reserves, it must be anticipated

that an increasing proportion of these needs will have to be met by

public financing. Such financing can, of course, alter materially the

existing capitalization ratios of an expanding company, and the increased volume of new money issues thus places upon the Commission

an enlarged responsibility for maintaining sound capital structures

in companies under its jurisdiction. Particularly if the market for

junior securities is dull, the combined efforts of the industry, the

Commission, and other regulatory agencies will be required to keep

the issuance of debt securities within prudent bounds.

PROTECTIVE PROVISIONS FOR SENIOR SECURITIES

During recent years the Commission has evolved comprehensive

protective provisions relating to bonds and preferred stocks. These

provisions have been written into bond indentures or corporate charters, as the case may be, with respect to issues approved under sections

6 (b) and '( and have given new and wider protection to investors.

The extensive refunding program of the last few years has accelerated

the pace at which these provisions have been put into effect. However,

because many operating companies are being removed, under section

11, from the jurisdiction of this Commission, much of the prospective

new financing for construction purposes will not contain these provisions unless they are accorded the support of other regulatory

bodies as well.

These protective provisions cannot be set down in final, definitive

form, since they must retain the elasticity necessary for successful

adaptation to many different companies. Moreover, these provisions

and particularly the technicalities of legal phrasing in which they

find expression in the indenture are subject to continuous reexamination by the Commission. Inoutline, however, typical provisions and

some of the purposes which they are designed to serve are as follows:

Provisions Relating to Bond Issues

Issuance of additional bonils.-The issuance of additional bonds is

limited to 60 percent of the cost or fair value of net bondable additions

to fixed property. While the Commission endeavors to limit the

amount of debt initially outstanding to 50 percent of new fixed property, the standard of 60 percent with reference to additional bonds is

designed to give the issuer sufficient flexibility to meet future exigencies

while at the same time requiring it to provide a reasonable proportion

of junior capital in meeting its growth requirements. Issuance of

additional bonds is also conditioned 'upon the adequacy of the earnings

coverage for the entire amount of bonds to be outstanding. This

coverage is computed on the basis of earnings before income taxes and

a coverage of at least two times is usually required.

"Net additions" are carefully defined to exclude from gross property

additions any property or cash certified or delivered to the trustee in

satisfaction of any other provisions of the mortgage, such as require-
THffiTEENTH ANNUAL REPORT 89

ments of the maintenance and depreciation fund or the sinking fund.

Also excluded is the amount, if any, by which retirements exceed the

depreciation requirement of the maintenance and depreciation fund.

Property previously used as a basis for the issuance of additional bonds

is likewise deducted in arriving at "net additions."

M ainienance and depreciation fwnd.- The purpose of creating a

maintenance and depreciation fund is to assure, as certainly as possible, that the net value of the property securing the mortgage will

not decrease materially. The issuer is required to set aside for this

fund each year either a fixed precentage (frequently 15 percent) of

gross operating revenues or a percentage of its fixed property. This

amount is annually accounted for to the trustee in terms of-

(a) Cash expended for maintenance.

(11)The cost or fair value of property used to replace property retired from

service.

(c) The cost Orfair value of property additions.

(It) Bonds secured by the mortgage and surrendered for cancelation.

(e) Cash deposited with the trustee.

Property used in accounting to the trustee under (b) and (a) above

may not be used for any other purpose under the indenture.

Sinking f'lJlfUi8.-The primary function of a sinking fund is to improve the ratio between debt and net property. Thus It is particularly

necessary where, for one reason or another, a satisfactory ratio cannot

be obtained at the time securities are issued. The Commission ordinarily requires a sinking fund of 1 percent of the largest principal

amount of the issue at any time outstanding; where the initial ratio is

unfavorable, this percentage is increased. If the issuer is faced with

heavy serial payments on unsecured debt, the operation of the sinking

fund on the bonded debt is ordinarily postponed until a date subsequent

to that of the final serial maturity.

Since most utility companies are and have been under the necessity

of increasing their facilities and thus in constant need of cash for

such purposes, the Commission has seldom required that sinking funds

be operated on a cash basis. Instead, a company may certify property

additions, which may not then be used for any other purpose under the

mortgage. The amount of certified property necessary to meet the

sinking fund requirements is made equivalent to that necessary for the

issuance of additional bonds, i. e., under the typical 60-percent provision, $1,666.67 of property must be certified in lieu of each $1,000 in

cash or surrendered bonds.

Dividend re8triations.-Dividends on the common stock, with the

frequent exception of 1 year's dividend requirements, may be paid only

out of earned surplus accumulated subsequent to the date of the mortgage in order to prevent dissipation of the existing equity by excessive

dividend payments. If operating expense for a given year has been

charged with maintenance and depreciation in an amount less than a

stipulated percentage of gross revenues or of fixed property, earned

surplus is further restricted by the amount of such deficiency. In

some cases the dividend restriction is based upon the company's net

income available for dividends~. as defined in the indenture, rather

than upon earned surplus. Ordinarily, these restrictions apply only

to common-stock dividends, but may be made applicable to preferred

as well.
90 SECURITIES AND EXCHANGE COMMISSION

Provisions Relating to Preferred Stock Issues

Defa:ult in dimidend payments.-Upon defaults aggregating 1 year's

dividends, the preferred stock as a class is given the rig-ht to elect a

majority of the board of directors. Since preferred dividend arrearages bear no interest and since the disadvantages they bring upon the

common stockholder are not always sufficiently acute to insure maximum efforts in clearing such arrearages, the transfer of control upon

default is an essential minimum protection for preferred stockholders.

This provision becomes operative no later than the annual stockholders' meeting following the default and an earlier special meeting

may be called in some instances. When all dividend arrearages on

the preferred have been paid, control is returned to the common

stockholders.

Issuance of umseoured debt.-A majority vote of the preferred stock

is required as to the issuance of unsecured debt in excess of 10 percent

of the aggregate secured debt, capital, and surplus of the company.

This limitation is designed to protect the preferred from imposition

of excessive prior ranking debt while leaving to the management

reasonable latitude in temporary financing. A vote is not required,

however, if the unsecured debt is to be used for the retirement of preferred stock. Neither is the preferred given a vote with reference to

any issuance of secured debt, since the latter is circumscribed by indenture provisions which serve to protect the stockholder as well as the

creditor.

Issuance of prior ranking preferred stock.-A two-thirds vote of

the preferred stock is required before any prior ranking preferred

may be authorized.

Issuance 01 equally rarJcing preferred stook.-A two-thirds vote

of the preferred" stock is necessary to authorize the issuance of additional preferred of equal rank unless earnings coverage and common

stock equity meet certain standards after giving effect to the proposed issuance. These standards are1. Interest on long-term debt and dividend requirements on botb the present

and the new preferred must be covered at least 1% times.

2. Common stock and surplus must at least equal the combined involuntary

llquldatlng value of the present and the new preferred.

Merger 01' consolidation.-Since the position of a preferred stockholder may be prejudiced by merger with a financially unsound

company, a majority vote of the preferred stock is required to authorize a merger or consolidation.

Restriction on common. stock divideruls.-If common stock equity

is or becomes less than 25 percent of total capitalization and surplus,

a dividend restriction on the common stock automatically becomes

operative. This restriction is an important protection of the preferred stockholder's equity cushion. Dividends are restricted as

follows:

1. If common equity is at least 20 percent but less than 25 percent, common

dividends may not exceed 75 percent of net income otherwise available for such

dividends.

2. If common equity is under 20 percent, common dividends are limIted to 50

percent of net income otberwise available for such dividends.

8. Except to the extent permitted in (1) and (2) above, no common dividend

may be paid which would reduce common equity to less than 2."ipercent of total

capitalization and surplus. .
THIRTEENTH ANNUAL REPORT 91

Amendment of the articles of incorporation.-A two-thirds vote of

the preferred stock is required to change the terms and conditions of

such stock, the above protective provisions being examples, in any

manner substantially prejudicial to the preferred stockholder.

COMPETITIVE BIDDING

The past year has seen the first extended period in which the Commission's competitive bidding rule has been called upon to function

in a falling market. It has been recognized from the outset, of course,

that the competitive bidding procedure is not necessarily adapted

to all securities and all market conditions, and exemption provisions

were thus made an integral part of rule U-50. However, it has been

necessary to grant exemptions in only a few cases even under the

relatively unfavorable market conditions of the year just past.

Although the volume of offerings under rule U-50 dropped sharply

from the previous year, the total of $466,265,349 for the 12 months

ended June 30, 1947 was exceeded only in the 1945 and 1946 fiscal

years, when refunding operations were at their height," From the

standpoint of equity securities alone, the 1947 volume was surpassed only by that of 1946.

EXEMPTIONS FROM THE PROVISIONS OF THE ACT

During the fiscal year the commission approved five applications for

exemption from the provisions of the act pursuant to sections 2 and 3.63

In addition, five orders were issued pursuant to section 5 (d) of the

act declaring that the registrations of certain holding companies had

been terminated."

Twenty-eight holding companies filed statements during the year

claiming exemption under rule U-2 as being predominantly operating

or intrastate companies. Ten banks claimed exemption pursuant to

rule U-3, and 21 small holding companies claimed exemption under

rule U-9.

REGULATION OF UTILITY ACCOUNTS

During the past year the Commission set up an original cost section

in its Public Utilities Division. The duty of this section is to examine

and review the filings which have been made pursuant to rule U.27.

This rule states that companies not required by the Federal Power

Corinnission or a State regulatory body to conform to a classification

of accounts must keep accounts according to systems prescribed by this

Commission. Among other things the prescribed systems of accounts

require that plant, property, and equipment be set forth on an original

62 Securities sold under rule U-50 from May 7. 1941. its e1fectlve date. to June 30. 1947,

total $3,952,705,349, comprising 222 Issues . .. Otncinnati MiZUng Machine 00.; The Factory Power 00., file No. 31-538; PredonShaffer MiUing 00., file No. 31-542; (}reat Northern Gas 00., ue; file No. 31--439; American Gas & Eklctrfo 0'0., file No. 31--425; Ind.ustrlal Btectrioo: MelDicana, S. A., 1l1eNo. 31-544 . .. Texas Public Service 00., formerly Peoples Light & Power 00., file No. 30-88; Estate

of Midland Utilities 00., successor Trustees.!. file No. 30-54; Eastern New York Power

Oorp., file No. 30-22; Northeastern Water vo., formerly Northeastern Water & Electric

Oorp., file No. 30-118; Arkansas-Missouri Power ooru., file No. 30-89.
92 SECURITIES AND EXCHANGE COMMISSION

cost basis. Extensive field investigations and examinations have been

made of the original cost reports submitted by some of the companies

subject to rule U-27. The results are nearing completion.

Long-standing orders of the Commission involving Florida Power

& Light CO.65with respect to certain accounting requirements were

affirmed on review by the circuit court." Florida is a subsidiary of

American Power <.~ Light Co. and Electric Bond & Share Co. The

Commission had ordered that, pending final determination under rule

U-27 of the total and the disposition to be made of the amounts in

utility plant acquisition adjustment account (account 100.5), Florida

should begin to appropriate out of earned surplus to a contingency

reserve at least $700,000 per year, and should classify in account 107

and eliminate from the plant account by charge to earned surplus not

later than December 31, 1944, an amount of $1,815,655 consisting of

capitalized intra system profits paid to affiliated companies as construction and engineering fees. These orders were attacked as being

beyond the powers of the Commission, based on sections of the act

alleged to be unconstitutional, unwarranted by the evidence, and contrary to generally accepted accounting principles. The court first

disposed of the issue of constitutionality and found that the accounting

provisions of sections 15 and 20 of the act were designed to prevent the

evils set out in section 1 of the act and were constitutional. The reasoning and decisions of the Supreme Court in Electric Bona and Share

Oompany v. S. E. 0.67 and The North American Oompany v, S. E. 0.68

were cited to support the validity of the regulatory power of the Commission. The court then proceeded to find that sections 15 and 20 of

the act were sufficiently inclusive to permit the adoption by the Commission of an "original cost" system of accounts and sustained the

Commission's order requiring a contingency reserve to be accumulated

to offset probable write-offs upon completion of the original cost study

now being conducted pursuant to rule U-27.

COOPERATION wrrn STATE COMMISSIONS

Ithas been the long established policy of the Commission to work

for effective cooperation with the State commissions in all matters

where their respective jurisdictions interlock and in all additional

matters where such cooperation is desirable and appropriate in the case

under consideration. The Commission has found that the State commissions are equally interested in the interchange and harmonization

of views on mutual problems. During the past year there have been

many cases in which this cooperative approach has been helpful.

.A. number of State commissions have availed themselves of the provision of section 19 of the act which requires the admission "as a party

(of) any interested State, State commission, State securities commission, municipality, or other political subdivision of a State" in proceedings before the Commission. One example of this type of cooperation concerned the formation of the Southern. Co. to hold the

southern properties of the Commonwealth & Southern Corp. Requests

to intervene in these proceedings were made by the attorney general

es Holding Company Act releases Nos. 4719 (1943), 4824 and 4825 (1944).

"158 F. (2d) 771 (C. CAl. 1946), petrtion tor rebearmg denied Jan. 8,1947, cer- norart denied 61 S Ct. 1348 (1941) 117 303 U. S. 419 (1938).

"327 U. S. 686 (1946).
THIRTEENTH ANNUAL REPORT 93

of the State of Alabama. the Public Service Commission of the State

of Georgia, and the Public Service Commission of South Carolina.

A representative of the Georgia commission conferred with the staff

of this Commission and with representatives of the management and

also testified as an expert at the hearings. The South Carolina Commission requested postponement of the hearings to enable it to consider the proposal, and subsequently conferred with the staff of this

Commission and the management. As a result of these conferences

the plan was changed in certain respects and has been approved by

the Commission.

In the case of the reorganization of Kings County Lighting Co. the

opinion of the Commission differed from that of the New York Public

Service Commission. In August 1945, Kings County Lighting Co.

simultaneously filed a plan of recapitalization with the Commission

and with the New York commission and hearings were held thereon

before each commission. On February 5, 1946, the New York commission issued an opinion in which it criticized the plan in certain respects. Itrecommended, among other things, that (1) the proposed

capital structure be modified and that (2) all the new preferred and

new common stock be issued to the existing preferred shareholders,

except possibly for a nominal amount to the holders of the existing

common stock.

In April 1946 the company filed an amended plan with both commissions in which the proposed capital structure was changed to conform more closely to the views of the New York commission. The

amended plan provided for the issuance of all the new preferred stock

and 90 percent of the new common stock to the existing preferred

shareholders and the remaining 10 percent of the new common stock

to the existing common shareholders. The New York commission

determined that the proposed allocation to present common shareholders was excessive and that such stockholders were entitled to no

more than a nominal participation upon the basis of the book values

of the assets of the company. This Commission in a series of letters

and conferences pointed out that, under the decisions of the United

States Supreme Court which were binding upon it, primary weight

in determining the fairness of the allocation must be accorded earnings rather than book asset values. This Commission, in its findings

and opinion, adopted the view of the New York commission with respect to the capital structure of the company, but concluded that, on

the basis of indicated earnings, the existing preferred shareholders

should receive all the new preferred stock and 92% percent of the new

common stock and that the balance of the new common stock should

be allocated to the existing common shareholders. This allocation

was acceptable to all security holders, both preferred and common.

A draft of the Commission's findings and opinion was submitted to

the New York commission for comment and subsequently several conferences were held in an effort to reconcile the opposing views. The

Commission subsequently issued its findings and opiruon 69 and, as

provided by section 11 (e) of the act, applied to the district court for

enforcement of the plan. The New York commission entered its

order disapproving the plan and appeared at the hearing in the district

court to oppose enforcement of the Commission's order. The matter

was under advisement by the court at the close of the fiscal year .

... Holding Company Act releases Nos. 1060 (1946) and 71~2 (1947).
94 SECURITIES AND EXCHANGE COMMISSION

The Commission endeavors to obtain the view of the State commissions with respect to any transactions proposed by registered

holding companies or their subsidiaries where it appears that the

local authorities may have jurisdiction over or an interest in the proposed transactions. This practice has been very helpful. Itwas employed in passing upon the plan of American Gas & Electric Co. to

acquire the common stock of Columbus & Southern Ohio Electric

Co. and in considering the proposal to merge Kansas City Gas Co.

and the Wyandotte County Gas Co. into the Gas Service Co. Similarly, when Iowa-Illinois Gas & Electric Co. presented a plan under

which it proposed to issue $22,000,000 of bonds to the public and to

sell $3,500,000of additional common stock to its parent, the Commission deferred action pending disposition by the State commission.

In the application of the Central Illinois Light Co. for permission

to reclassify its common stock and transfer a portion of its earned

surplus to common capital stock account, the Illinois Commerce

Commission was requested to state its views prior to our final

determination."

•• Holding Company Act release No. 7459 (1947).
PART IV

PARTIOPATION OF THE COMMISSION IN CORPORATE

REORGANIZATIONS UNDER CHAPTER X OF THE BANK.-

RUPTCY ACT, AS AMENDED

Chapter X of the Bankruptcy Act, as amended in 1938, in setting

up appropriate machinery for the reorganization of corporations

(other than railroads) in the Federal courts provides for participation

by the Commission in proceedings thereunder at the request of or

with the approval of the court for the purpose of providing independent expert assistance to the court and to investors and for the

preparation by the Commission of formal advisory reports on plans

of reorganization submitted to it by the courts in such proceedings.

The Commission's functions in chapter X proceedings are of a purely

advisory character. The Commission has no authority to veto or

to require adoption of a plan of reorganization or to render a decision

on any other issue in the proceedings. It has no right of appeal in

such proceedings, although it may participate in appeals taken by

others and has, as a matter of fact, participated in many appeals as

a party or as amicus curiae.

SUMMARY OF ACTMTIES

The Commission actively participated during the year in 98 reorganization proceedings involving the reorganization of 124 companies (98 principal debtor corporations and 26 subsidiary debtors).'

The aggregate stated assets of these 124 companies amounted to $1,-

933,599,000 and their aggregate indebtedness was $1,274,131,000.2

During the year the Commission filed its notice of appearance in nine

new proceedings under chapter X, two of which were filed at the request of the judge and the remaining seven upon approval by the

judge of the Commission's motion to participate. These nine new

proceedings involved 14 companies (9 principal and 5 subsidiary debtors) with aggregate stated assets of $15,457,000and aggregate stated

indebtedness of $13,135,000. Proceedings involving 24 principal

debtor corporations and 6 subsidiary debtors were closed during the

yeAar.h I f he vearv the C .. ti I ... t t e c ose 0 t e year, the omrmssionwas ac rve y participating

in 74 reorganization proceedings involving 94 companies (74 principal

and 20 subsidiary debtors), with aggregate stated assets of $1,716,189,-

000 and aggregate stated indebtedness of $1,097,928,000.

1Appendix table 24 contains a complete list of reorganization proceedings in which the

Commission participated during the fiscal year ended June 30, 1947.

Appendix table 24, pts. 1 and 2, classify these debtors according to industry and size of

indebtedness.

95

•
96 SECURITIES AND EXCHANGE COMMISSION

COMMISSION'S FUNCTIONS UNDER CHAPTER X

A detailed discussion of the Commission's duties and policies in

connection with its functions under chapter X appeared in the Twelfth

Annual Report (pp. 81 to 93). The Commission maintains expert

staffs of lawyers, accountants, and analysts in various regional offices

where they keep in close touch with hearings, issues, and parties and are

readily available to the courts. Some of the legal and financial questions encountered in typical bankruptcy and reorganization proceedings in which the Commission participated during the past fiscal year

are described in the following paragraphs.

Problems in the Administration of the Estate

It is recognized that the trustee has the responsibility not only to

examine into the debtors' past operations to ascertain the reasons for

its financial difficulties but also to determine whether any causes of

action exist against the old management or other :persons and, if so, to

prosecute them diligently. Inview of that principle, during the past

fiscal year the Commission has on various occasions supported requests

that the trustee be authorized to bring suit on such corporate causes of

action.

Where a fair offer of compromise was made, the Commission has, of

course, supported the settlement of such suits, but not otherwise. In

one case, the trustee had proposed, several years ago, a compromise

of certain claims filed against the debtor for alleged services and advances by the promoter of the debtor." The Commission had opposed

the proposed compromise on the ground that evidence justified the

disallowance of the claims in their entirety and indicated the possibility of causes of action by the estate against the promoter. Disapproval

of the compromise was recommended by the special master. During

the past fiscal year, however, the trustee submitted the proposed compromise to the court. In the meantime, an audit of the debtor's books

urged by the Commission revealed, in the Commission's view, startling

misconduct on the part of the promoter during the time he was in

control of the debtor. The Commission thereupon, after prior notice

to the trustee, filed a petition with the court asking that the trustee

be instructed to withdraw his request for approval of the compromise

and to prosecute all causes of action against the promoter. The matter has not yet been heard by the court.

In a significant case involving a suit for $39,000,000 by chapter X

trustees against directors, officers, and the controlling stockholder of

the debtor, the Commission appeared as amicus curiae and vigorously

supported the trustees' contention that the Federal court had jurisdiction over the suit although it was not the court where the reorganization proceedings were pending and although no diversity of citizenship was alleged. The Commission urged that the Congress intended

in chapter X cases to remove the restrictions contained in the Bankruptcy Act which might otherwise bar access to the Federal courts in

suits brought by a reorganization trustee. It was the Commission's

view that the Bankruptcy Act had been purposely modified so as to

afford the reorganization trustee a wider choice of forum than the

bankruptcy trustee, having inmind the typical suit involving diversion

• International Mining .£ Milling Company, District of Nevada.
THIRTEENTH ANNUAL REPORT 97

of assets and related wrongs by insiders in large corporations with a

national public interest. The district court did not agree with this contention and granted the defendants' motion to dismiss for want of

jurisdiction.' On appeal, however, the Circuit Court for the Second

Circuit reversed 5_and the Supreme Court affirmed this decision."

In administering the debtor's estate, it is the trustee's function to

recommend to the court the assumption or rejection of executory contracts of the debtor, including leases. In the reorganization proceedings involving Mount Gaines Mining Co., the question arose as to the

applicability of section 70 (b) of the Bankruptcy Act which provides

for a 60-day period for the assumption or rejection of the contracts of

a bankrupt, including leases. On the theory that this time limitation

is inconsistent with the provisions and purpose of chapter X, the Commission urged that it was not applicable. The difference between the

purpose of bankruptcy to liquidate the estate and of chapter X to rehabilitate and preserve the enterprise was pointed out and the impracticability of applying the short limitation period in reorganization was emphasized. The district court adopted this view and, on

appeal, the Circuit Court for the Ninth Circuit affirmed.'

Responsibilities of Fiduciaries

Trading in securities of a debtor in reorganization by trustees, directors, attorneys, committee members, or other fiduciaries is a practice which has generally been condemned by the courts and which has

always been decried by the Commission in its opinions and reports.

The access to inside information and, frequently, the control or influence over the course of reorganization which are possessed by these

"insiders" are urgent considerations for enforcing judicial sanctions

against them strictly. One such sanction which has been availed of

during the past fiscal year in several cases in which the Commission

participated is the prohibition against payment of any fees or reimbursement of any expenses where a fiduciary bought or sold securities

of the debtor. These cases will be mentioned below. Another sanction is the prevention of any profiting by such a fiduciary through

the limitation of his securities to the cost thereof or requiring him to

account for any profits from securities sold by him.

In the reorganization proceedings involving National Realty Trust

and Federal Facilities Realty Trust objections were filed to the final

accounts of a former trustee of these debtors based in part upon the

doctrine underlying limitation to cost. In these proceedings, the former trustee had permitted certain employees of his, with his knowledge and consent, to trade in the securities of the debtors and their subsidiaries. These employees, the promoter of the enterprise and his

associate, had active supervision of the affairs of the debtors and their

subsidiaries entrusted to them by the former trustee. In many instances, they purchased bonds from members of the public and sold

them to the former trustee at a profit. After extensive hearings the

matter has been presented to the special master for report. The Commission has urged that the former trustee should be surcharged to

the extent of the profits he permitted his employees to make on the

Austrian v. Williams, 67 F. Supp. 223 (S. D. N. Y. 1!146).

"159 F. (2d) 67 (C. C. A. 2, 1946).

Decided June 16. 1947. 1 TItle Insurance and Guaranty Co. v. Hart, 160 F. (2d) 961 (C. C. A. 9, 1947).

•

•
98 SECURITIES AND EXCHANGE COMMISSION

ground that he had completely ignored and breached his trust obligations and he or his associates should not profit by his culpable conduct.

Inthe proceedings in reorganization involving Pittsburgh Railways

Co., the Commission actively supported the trustee's request for authority to investigate possible grounds for subordinating or limiting

to cost various claims of the parent company, Philadelphia Co.

Philadelphia Co., after unsuccessfully attempting to prevent the inquiry into its management of the debtor, endeavored to extend the

scope of the investigation to public security holders who may have

purchased the debtor's securities at less than par. In opposing this

contention, the Commission pointed out that, apart from special cases,

security holders are treated equally regardless of when or at what price

their securities were purchased. Unless this were the general rule reorganization securities would become unmarketable since no one would

purchase securities at a price which would be the maximum he could

obtain in distribution. It was urged by the Commission that the

possibility of subordinating or limiting Philadelphia Co. was in no

way relevant to the treatment to be accorded security holders buying

at a discount-public holders should not recover less merely because a

fiduciary who has committed wrongful acts recovers less. The district

court upheld the Commission's position and denied Philadelphia Co.'s

request. On appeal, the Circuit Court for the Third Circuit affirmed

the order of the district court," An application for certiorari, opposed

by the Commission, was denied by the Supreme Court on May 5, 1947.

Activities with Respect to Allowances

In a proceeding involving Midland United Co., the Commission

urged that an attorney who bought and sold preferred stocks and

bonds of subsidiaries of a public utility holding company in reorganization while representing a protective committee for debenture

holders should be barred from any compensation. The Commission

pointed out that, as a fiduciary, the attorney owed an obligation not

to acquire interests adverse to those he purported to represent nor to

use information acquired in a trustee capacity to personal advantage.

The Commission argued that these principles applied equally to a

situation where the securities acquired, or sold, were those of a subsidiary, particularly where, as in this case, the subsidiary had substantial claims against the parent company and where other adverse

interests existed. The Commission also took the position that the

prohibition against trading by a fiduciary is equally applicable to his

near relatives and business partners. The district court sustained the

Commission's position and denied compensation to the applicant,"

On appeal to the Circuit Court for the Third Circuit, the district court

decision was affirmed." The circuit court held that the specific prohibitions of section 249 were intended to augment and not limit the

jurisdiction of the court and that, under general equitable principles,

trading in the stock of a subsidiary where a conflict of interest existed

barred the applicant from compensation. The court also pointed out

that since the subsidiary had claims against the parent debtor, the

attorney had in fact purchased an indirect interest in a claim against

«t« re Pittsburgh Railways 00., 159 F. (2d) 630 (C. C. A. 3.1946). PTn re .Ilid/and Umted co.. 64 F. Supp. 399 (Del. 1946). v t» rp MId/and United Oompany, 159 F (2d) 340 (C. C. A. 3, 1947).
THIRTEENTH ANNUAL REPORT 99

the debtor specifically barred by section 249. The court also held that

the rule applied to the wife of the applicant who engaged in the

transactions with his approval and knowledge, even though she used

her own funds.

Another problem under section 249 with respect to allowances arose

in the proceeding involving Inland Power & Light Corp. In this case,

an investment banking house, the original underwriter of the debtor's

bonds, traded in these bonds for several years during the section 77B

reorganization proceeding, prior to the enactment of chapter X.

The investment banking house had organized a bondholders' committee

and installed an employee as secretary of the committee. Subsequently

other employees assumed the officeof secretary. The last one in office

filed an application for compensation for services rendered by himself and his predecessors but it was conceded that any award of

compensation would be turned over to the investment house. Pointing out the strategic position of secretary to a committee and his ability

to acquire inside information, the Commission urged the denial of any

indirect award to the banking house which in a real sense occupied the

secretarial office. The Commision contended that either under section

249, which was applicable to the section 77B proceeding, or under the

equitable principles it codified, compensation should be denied. Upon

the special master's recommendation, the district court disallowed the

application. The applicant sought leave to appeal from the Circuit

Court for the Seventh Circuit, which was opposed by the Commission.

After briefs and argument, the court entered an order denying the petition for leave to appeal.

INSTITUTION OF CHAPTER X PROCEEDINGS AND JURISDICTION

OF THE COURT

The Commission has striven for a liberal interpretation of the provisions of the Bankruptcy Act so that the benefits of Chapter X may

be made fully available to security holders in accordance with the

spirit and intent of the statute. In accordance with this policy, the

Commission has participated in various cases involving the question

of "good faith" in the filing of a petition. The Commission's view

in these cases was that the pendency of a prior State court proceeding

was not a bar to a chapter X proceeding since the prior proceedings in

those cases did not contain safeguards for investors comparable with

those in chapter X. The contentions of the Commission generally have

not been upheld by the courts.

During the past fiscal year, the Commission participated in another

case involving the "good faith" of the filing of the petition, the proceeding for the reorganization of Midwest Athletic Club. Also involved in

the case was the objection to the jurisdiction of the court based 011 the

contention that the debtor was a nonprofit corporation which had been

dissolved pursuant to State law in 1938. The district court approved

the petition as having been.properly filed and in good faith. In supporting the decision on appeal, the Commission argued that the debtor

had conducted a business enterprise for many years and that while

the corporation as such had been dissolved, the remaining entity was

an "unincorporated association" under the Bankruptcy Act and, hence,

767629-48-8
100 SECURITIES AND EXCHANGE COMMISSION

a proper subject for reorganization. The Commission also argued that

the petition for reorgamzation met the "good faith" requirements of

chapter X. The Circuit Court for the Seventh Circuit, however, reversed the lower court, holding that the enterprise was not an "unincorporated company" within the meaning of chapter X which could be

reorganized. The court emphasized the fact that no stockholders or

members of the company had operated the enterprise after its dissolution, but that a State court receiver, as a mere custodial officer of

the court, had conducted its business and could not he considered as

continuing the corporate entity or its corporate affairs. Therefore, the

court concluded that there was no corporation to be reorganized.

PLANS OF REORGANIZATION UNDER CHAPTER X

The ultimate objective of a reorganization is the formulation and

consummation of a fair and feasible plan of reorganization. Accordingly, the most important function of the Commission under chapter X

is to aid the courts in achieving this objective.

Fairness and Feasibility

A proceeding involving the fairness of a proposed plan of reorganization based on established principles of priorities of securities and

valuation of the debtor's estate was that of Chicago Railways Co.,

Chicago City Railway Co., and Calumet & South Chicago Ry., known

collectively as the Chicago Surface Lines, in which the Commission

rendered an advisory report and supplemental advisory report during

the previous fiscal veal'. In those reports, the Commission concluded

that the proposed plan involving a minimum upset price of $75,000,000

for the Surface Lines' properties to be offered by the Chicago Transit

Authority was fair, after certain suggested amendments had been

made. Its conclusions were based primarily upon a valuation of the

properties reached by capitalizing reasonably prospective earnings.

The proposed price was considered to be within a reasonable range of

the Commission's valuation. Since the proceeds of the sale together

with excess cash were insufficient to pay in full the claims of senior

security holders, it was also concluded that certain junior security

holders could not participate in the plan. The plan as amended was

approved by the court, accepted by security holders entitled to participate, and confirmed. Appeals were taken to the Circuit Court for the

Seventh Circuit by certain junior security holders who were excluded

from sharing in the estate by the orders of approval and confirmation.

Among their contentions, the junior security holders relied upon

the rate base valuation of the properties, upon a price fixed by formula

in the original franchises of the companies in 1907, upon book values

of the companies and upon a hypothetical figure that might be awarded

in a condemnation proceeding. All of these amounts were substantially higher than the proposed purchase price and the valuation estimated by the Commission. The Commission, in its brief, replied to

these contentions, arguing that reorganization values are dependent

upon probable future earnings, and that OR the basis of the record and

the applicable priority rules, the junior securities had no right to

. such earnings and were properly denied participation in the estate.

The circuit court affirmed the lower court's approval of the plan,

holding that a valuation of the enterprise, if it is to be freed from
THIRTEENTH ANNUAL REPORT 101

the heavy hand of past errors, miscalculations or disaster, requires

consideration of past earnings, factors affecting earnings, probable

future earnings and an appropriate rate of capitalization.v The circuit court stated that the district court had clearly considered every

proper factor suggested by the parties and in addition had the benefit

of the expert and disinterested advice of the Commission in its advisory

report in reaching its findings. Application for certiorari, oPl?,osed

by the Commission, was demed by the Supreme Court on April 14,

1947.

In the reorganization proceedings involving Childs Co., the Commission had occasion to invoke the general equitable rule enforced in

ordinary bankruptcy that, where full payment is made, prior distributions are to be applied first to accrued interest and then to principal.

This view has been adopted by the trustee and approved by the district

court.

Following its policy of according to senior creditors all their rights

before permitting participation in the estate by junior creditors, the

Commission supported the claim of first mortgage bondholders to

interest on overdue interest as provided for under the terms of the indenture in the proceedings involving Inland Gas Corp. The Supreme

Court, however, in Vanstoa Bondhoid ers Protective Oommittee Y.

Green, 329 U. S. 156 (1946) held that interest on interest under the

CIrcumstances of the case would not be equitable. The court pointed

out that the failure to make interest payments promptly when due

was a result of judicial action and that bondholders should not receive

added compensation or a penalty, by way of interest on interest, by

reason of the court's supervision of the estate and its prohibition

against payment of interest on the due date.>

MODIFICATION OF PLAN

In the proceedings involving Equitable OfficeBuilding, a plan of

reorganization had been confirmed under which debenture holders

were to receive new convertible debentures for ll: portion of their

claim and old common stockholders were to receive a small amount

of the new common stock. Just before this plan was to be consummated by transfer of the property to the new reorganized company

and by distribution of the new securities, two common stockholders

appeared with a financing proposal under 'which stockholders would

receive an option to buy the stock of the new company, an underwriter would buy all unsubscribed shares, and the proceeds would

be used to pay the old debentures in full, principal and interest.

Thus, under the new proposal, the stockholders would be afforded an

opportunity to payoff the debenture holders and retain their equity

in the property. The marked improvement in the real-estate field

since the date of confirmation made possible the underwriting pro11 In re Ohicago RailwaY8 Oompany, 160 F. (2d) 59 (C. C. A. 7, 1947). 12 It may be observed that the Commission's brief before the Supreme Court contained

the following statement in a note:

"The validity, as a matter of public policy, of a covenant for interest on interest, as applied to interest accruing since the date of a Federal equity receivership or bankruptcy proceedings, might conceivably be regarded as a proper subject for independent decision

by the Federal court, even in the absence of direct legislation. The consequence of such a holding would be to all'ord greater uniformity and certainty in dealing with a problem which appears to be arising with increasing frequency in reorganization proceedings and

occasionally in the State courts. We recognize, however, that there is no precedent for

such a rule. The closest analogy would appear to be those cases holding that the equitable status of certain claims is a matter of bankruptcy law."
102 SECURITIES AND EXCHANGE COMMISSION

posaI. Stockholders not exercising their rights to subscribe would

receive the same stock interest as in the confirmed plan and, in addition, would have the privilege of selling their rights.

The debenture holders vigorously opposed this proposal, since the

market price of the debentures had risen far above the amount of

principal and interest. This rise in price, of course, reflected the

market's appraisal of the value of the new stock to be issued under the

confirmed plan. The Commission took the position that the district

court should have a full hearing on the merits of the proposed modification, since it now appeared that there was an equity in the property

for common stockholders which they could salvage; that debenture

holders had no vested interest in the confirmed plan; and that payment to them of principal and interest in full would satisfy the debtor's

obligation to them.

The district court refused to consider the stockholders' proposal,

holding in effect that it was too late to modify the confirmed plan.

After some appellate litigation regarding a stay of proceedings. which

was finally granted, until the issue could be heard on its merits, the

Circuit Court for the Second Circuit considered the matter. In upholding the Commission's views as set forth in its brief and argument

before the court, it was held that the plan could be modified even after

confirmation, that the debenture holders had as yet no legally protected interest beyond principal and accrued interest and had no right

to rely upon sharing in an equity in the property above that amount

and deprive stockholders of whatever chance might remain of realizing upon their property." The circuit court stated that the long delay

in effectuating a plan was not a good reason, so long as the rights of

r-reditors were fully preserved, to deny stockholders a reasonable

chance to protect their own interests.

ADVISORY REPORTS

During the fiscal year the Commission prepared a formal advisory

report and two supplemental advisory reports with respect to proposed

plans of reorganization in proceedings involving Childs Co., which

owns and operates a large chain of restaurants. The advisory report

concluded that certain aspects of the trustee's plan were unfair and

unfeasible. The plan was said to be unfair to debenture holders and

other unsecured creditors' in failing to compute their claims on a

proper basis and unfair to common stockholders in allocating too much

of the new common stock to preferred stockholders. In proposing

an all-common stock plan for the reorganized company, the trustee was

held to have provided a sound capital structure for this enterprise, but

the Commission opposed the issuance of long-term option warrants

to common stockholders and considered unnecessary a proposed bank

loan.

Plans and amendments proposed by common and preferred stockholders were also considered but the Commission found them unfair

principally because of their unfair allocation of new stock. A plan

suggested by a debenture holders' committee was viewed as unfair

because of U; proposed offering of new common stock to debenture

holders at too low a price as well as unfair in its allocation 0:£ new

'3 Knight v. Wertheim, 158 F. (2d) 838 (C. C. A. 2, 1946).
THIRTEENTH ANNUAL REPORT 103

stock between common and preferred stockholders and in its use of

long-term warrants.

The Commission's report dealt with the complicated questions of

valuation of the enterprise, the company's working capital position,

its rehabilitation program, the question of the need for a bank loan, the

unsoundness of issuing long-term option warrants and the treatment

of creditors and stockholders under the trustee's plan and the various

other proposals. The method of computing interest on creditors'

claims was questioned. First, the Commission was of the opinion that

all debenture holders should be treated equally on a 6 percent interest

basis in that those who had voluntarily agreed to accept new debentures

at 5 percent had done so on condition that in any judicial proceeding

they would receive no worse treatment than those who had not accepted

a reduction in interest. Second, it was felt that interest should be paid

to the date of payment on the aggregate claim of principal and accrued

interest at the time of commencement of the proceeding as in the

Realty Aseociates Securities case. Third, it was the Commission's

view, as indicated in a previous paragraph, that prior, partial payments to creditors be applied first to interest and then to principal.

Another important question dealt with in the report involved the

basis of the preferred stockholders' claim. The Commission differentiated their claim in a chapter X proceeding from the preferred

stockholders' position in a reorganization under the Public Utility

Holding Company Act and concluded that the liquidating preference

of preferred stock is the controlling factor in measuring the extent

of its claim under chapter X. In considering the allocation of new

stock to the preferred and common shareholders, the Commission

pointed out what it considered to be a reasonable range-on the basis

of all common stock and on the basis of a new preferred stock and

common stock.

In its first supplemental report, the Commission considered amendments to the trustee's plan and two plans submitted by a security

holder. While the trustee's amendments were held to cure several of

the Commission's objections, the plan was still considered deficient

in several major respects. The security holders' plans were viewed as

fair and feasible since they embodied the Commission's suggestions.

In its second supplemental report, additional plan amendments by

the trustee were reviewed by the Commission. These amendments

adopted fully the Commission's views as to the rights of creditors.

They also eliminated the long-term option warrant feature and revised the allocation of new common shares. As to such allocation, the

Commission felt it was not so far outside the range suggested by the

Commission as to require disapproval.

Subsequently the plan was approved by the court and submitted to

security holders. The preferred stockholders accepted the plan but

the required percentage of common stockholders was not obtained.

Thereafter the trustee filed a new plan which has been submitted to

the Commission for its advisory report.
•
PART V

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939

SCOPE OF ACT

The Trust Indenture Act of 1939 outlaws the exculpatory clauses

used in the past in trust indentures underlying corporate debt seeurrties. Many of these clauses eliminated liability of the trustee for misconduct to such an extent that the word "trustee" was meaningless as

applied to indenture trustees. The act is designed to insure that the

trustee will act in the interest of the bond or debenture owners and to

insure his complete independence of the issuer and the underwriters.

To secure its objectives, the act requires that bonds, notes, debentures,

and similar debt securities publicly offered for sale, sold, or delivered

after sale through the mails or in interstate commerce, except as specifically exempted by the act, be issued under an indenture which meets

the requirements of the act and has been duly qualified with the Commission. The provisions of the Securities Act of 1933 and the Trust

Indenture Act are so integrated that registration pursuant to the Securities Act of 1933 of securities to be issued under a trust indenture

is not permitted to become effective unless the indenture conforms to

the requirements expressed in the Trust Indenture Act of 1939, and

such an indenture is automatically "qualified" when registration becomes effective as to the securities themselves. An application for

qualification of an indenture covering securities not required to be

registered under the Securities Act of 1933, which is filed with the

Commission under the Trust Indenture Act, is processed substantially

as though such application were a registration statement filed pursuant to the Securities Act of 1933.

STATISTICS OF INDENTURES QUALIFIED

The number of indentures filed with the Commission during the

year for qualification under the Trust Indenture Act of 1939,together

with the disposition thereof and the amounts of indenture securities

involved, are shown in tables I and II below and the totals in table III.

TABLE I.-Indentures filed in connection with repistration. statements under the

/iJecut'ities Act of 1933

Number

Indentures pending at June 30, 1946__________________ 13

Indentures filed during the fiscal year________________ 96

Total 109

Disposition during fiscal year: Indenturesqualified 84

AJuount reduced by amentment____________________ --

Indentures deleted by amendment or wlthdrawn.L; 10

Indentures pending at June 30, 1947-______________ 15

Total ----------- 109

Aggregate Amount

$274,205,300

2,544,712,200

$2,818,917,500

$2,517,412,700

27,769,600

43,730,400

230,004,800

$2,818,917,500

105
106 SECURITIES AND EXCHANGE COMMISSION

TABLE H.-Indentures filed tor securities not required to be registered under the

Securities A.ct at 1933

Number

Indentures pending at June 30, 1946

Indentures filed during the fiscal ~.ear----------------- 12

Disposition during fiscal year : Indentures qualified______________________________ 12

Indenture pending at June 30, 1947-

Agg,'egate Amount

None

$147,258,661

$147,258,661

None

T.\HLE HL-Total number ot uuientures (iled under the Trust Indenture A.ct at

1939 (table III is the smn at tables I and II)

Number Aggregate Amount

Indentures pending at June 30, 1946____________________ 13 $274,205,300

Indentures filed during the fiscal year 108 2,691,970,861

~otal 121 $2.966,176,161

Disposition during fiscal year: Indentures qualified________________________ 96

Amount reduced by amendment..

Indentures deleted by amendment or withdrawn.L, , 10

Indentures pending at June 30, 1947-_______________ 15

$2,664,671,361

27,769,600

43,730,400

230,004,800

~otal 121 $2,966,176,161

During the fiscal year the following additional material relating to

trust indentures was filed and examined for compliance with the appropriate standards and requirements:

Five indentures as to which the Commission, under its authority granted by

the Public Utility Holding Company Act of 1935, applies the standards of the 'I'rust

Indenture Act of 1939 although such indentures are exempted from 'the ~rust

Indenture Act; . One hundred thirty-four statements of eligibility and qualification under the

Trust Indenture Act;

Twenty-one amendments to trustee statements of eligibility and qualifications;

Ninety-three Supplements SoT, covering special items of information concerning

indenture securities registered under the Securities Act of 1933 ;

Thirty-five amendments to Supplements S-T;

Twenty-srx applications for findings by the Commission relating to exemptions

rrom special provisions of the Trust Indenture Act of 1939; and

Three hundred sixty annual reports of indenture trustees pursuant to section

313 of the Trust Indenture Act of 1939.

PROBLEMS ENCOUNTERED IN ADMINISTRATION OF ACf

Although the Trust Indenture Act is designed as an adjunct to

the Securities Act of 1933, it presents problems of administration

which are peculiar to itself. These problems arise from the fact that

the primary purpose of safeguarding investors pursuant to the Trust

Indenture Act is sought by assuring that all indentures qualified

thereunder shall contain specified protective provisions and only incidentally by resort to disclosure requirements as such.

The exemptive provisions of. the act incorporate most but not all

of the exemptions contained in the Securities Act and several exemptions in addition thereto. Thus, some offerings exempt from regist ration under the Securities Act (exchanges with existing security

holders exempt under section 3 (a) (9) and securities issued in reorganizations exempt under section 3 (a) (10» must be qualified

under the Trust Indenture Act and information contained in the application for qualification must be examined to determine whether

_

_

-

-
THIRTEENTH ANNUAL REPORT 107

Securities Act registration is required. Conversely, Securities Act

registration statements will include debt securities which are not

to be issued under an indenture qualified under the Trust Indenture

Act, and it is necessary then to determine whether there is an exemption from qualification under one of the exemptions specified in section 304 of the Trust Indenture Act, including:

(1) Nondebt securities;

(2) An investment contract;

(3) A mortgage insured under the National Housing Act;

(4) Foreign government issues;

(5) Any guarantee of an exempted security;

(6) An aggregate of $250,000 principal amount of security issued not under

an indenture, within a period of 12 consecutive months;

(7) An indenture limiting the amount outstanding thereunder to $1,000,000

or less ; not more than $1,000,000 to be issued thereunder in 36 consecutive months;

(8) Secondary offerings by controlling persons.

EXAMINATION PROCEDURE

In examining a registration statement or application including an

indenture to be qualified, it is necessary to examine the document for

the purpose of determining (1) whether the indenture contains the

required provisions in proper form, that permissive provisions are

in proper form, and that there are no inconsistent provisions; (2)

that the disclosure requirements specified in section 305 (a) (2) of

the act are complied with in the prospectus or application; and (3)

that the trustee is eligible and qualified. Any inadequacies found

upon examination customarily are corrected after the staff sends the

applicant a letter of comment, or holds conferences with counsel for

the applicant, and only in rare cases has it been necessary to institute

remedial proceedings. (See sees. 305 (b), 307 (c), 321 (a), and

322 (bj ). This examination procedure may be briefly explained for

convenience in the numerical order listed above.

(1) The examination of the indenture requires a careful reading.

For example, variations in statutory language are sometimes injected.

If such variations appear to be in derogation of statutory objectives,

it is necessary to insist that the statutory language be more closely

followed. The Commission finds that as time goes on injections of

this character tend to diminish. On the other nand, because of the

great variety of provisions and purposes of indenture agreements, considerable latitude has been exercised with respect to the insertion of

some statutory language (e. g., sec. 314 (d) certificates of fair value),

althou~h such latitude is not extended to provisions relating to the

trustee s qualifications and standards of conduct. Here again experience has permitted the working out of indenture provisions which

in the ordinary case have become more or less standardized. In instances where the requirements of the act would appear to

work a hardship, the Commission may grant exemptions from onerous

provisions as to indentures having securities outstanding issued prior

to the effective date of the act and indentures of foreign issuers (sees,

304 (c) and (dj ), Applications for such exemptions generally relate

to section 316' (a) of the act, which permits the holders of not less

than a majority of outstanding bonds to direct the trustee in the exercise of his trusts or powers (many old indentures according this power

to holders of less than a majority).
108 SECURITIES AND EXCHANGE COMMISSION

(2) The disclosure requirements of the act relate to defaults, the

authentication of bonds, the release of property, satisfaction and discharge, and evidence of compliance with the requirements of the indenture to be furnised to the trustee. No particular problems have

arisen in the examination and analysis of material filed under these

requirements.

(3) Information with respect to the eligibility and qualifications of

the trustee, required under section 310 of the act, is provided for

primarily in the Commission's Forms T-1 and T-2, which must

be prepared and filed by the trustee or trustees. A number of difficult

problems as to conflicts of interest proscribed by section 310 (b) of

the act have arisen. However, for the most part they have heen

resolved by administrative interpretation. Section 310 (b) (1) provides for administrative proceedings by the Commission to permit

the trustee to act under more than one indenture of the same obligor.

Usually applications for such permission are of routine nature. Besides, the Commission's Rule T-IOB-3 provides machinery for a prior

determination of conflicts of interest arising from affiliations between

the trustee and an underwriter for the issuer.

Significance of Commission's ExaDlination

Particular care must be taken with respect to the original examination into these situations because once the indenture is qualified its

enforcement becomes a matter of contract between the parties. The

Commission may not enforce its provisions (see sec. 309 (ej ). However, trustees are required to report annually to their bondholders

as to certain matters specified in sections 313 (a) and (b) of the act

and copies of their reports are required under section 313 (d) to

be filed with the Commission, which calls the attention of the trustees

to any material discrepancies which the staff finds upon examination

thereof.
PART VI

ADMINISTRATION OF THE INVESTMENT COMPANY ACT

OF 1940

SCOPE OF Acr

The Investment Company Act of 1940 requires the registration and

provides for the regulation of investment companies, which are, generally, companies engaged primarily in the business of investing, reinvesting, owning, holding, or trading in securities. Among other

things, the act requires disclosure of the finances and of the investment policies of these companies to afford investors full and complete

information with respect to their activities; prohibits such companies

from changing the nature of their business or their investment policies

without the approval of the stockholders; bars persons guilty of security frauds from serving as officers and directors of such companies;

prevents underwriters, investment bankers, and brokers from constituting more than a minority of the directors of such companies; requires

management contracts in the first instance to be submitted to security

holders for their approval; prohibits transactions between such companies and their officers and directors and other insiders except on the

approval of the Commission; forbids the issuance of senior securities

of such companies except in specified instances; prohibits pyramiding

of such companies and cross ownership of their securities; and requires face-amount certificate companies to maintain reserves adequate to meet maturity payments upon their certificates.

ADVISORY REPORTS UPON PLANS OF REORGANIZATION

One of the functions of the Commission under the Investment Company Act arises from its authority to prepare advisory reports for the

benefit of security holders upon plans of reorganization of registered

investment companies. Such reports may be rendered upon request of

the company or of the holders of 25 percent of any class of its outstanding securities. In addition, the Commission is authorized to institute

proceedings to enjoin reorganization plans if they are grossly unfair.

Last year the Commission prepared such an advisory report covering a

plan of reorganization of an investment company upon the request of

stockholders, following a refusal of the management of the company

itself to request the report at their instance. That part of the Commission's report dealing with the effect of the plan on the shareholders

called attention to the more important factors which the stockholders

should evaluate in order to form a sound investment judgment as to

whether they would assent to the plan. It included, for example, a

discussion of the pro forma earnings of a new company which was to

result from a proposed consolidation, and called particular attention to

the effect of the recent war on sales, costs of operations, and profit margins of the iron-ore producing business of the corporation with which

It was proposed to consolidate the investment company; the cyclical

nature of operations not only for the iron-ore business but also of the

steel industry in which the investment company was heavily invested;

and the element of leverage inherent in the capital structure of the new

company by virtue of its uncommonly high proportion of senior securities.

109
110 SECURITIES AND EXCHANGE COMMISSION

NEW RULES ADOPTED UNDER THE ACT

The Commission last year accomplished certain further srmplification of its rules and regulations under this act.

Rule N-5-Procedure With Respect to Applications

On May 23, 1947, the Commission adopted rule N-5, which provided a simplified general procedure designed to expedite the disposition 'of proceedings initiated by application or upon the

Commission's own motion pursuant to any section of the act or any

rule or regulation thereunder. The rule does not apply, however,

in a very limited number of cases where a more appropriate procedure

is provided. The purpose of the rule is to provide for the expeditious

disposition of proceedings which are not contested by any interested

person. The rule makes provision for the publication in the Federal

Register of the initiation of such proceeding and affords ample opportunity for any interested persons to request a hearing.

Rule N-17A-2-Exemption of Transactions by Banks

On December 3, 1946, the Commission adopted rule N-17A-2 to

exempt certain commercial transactions occurring in the usual course

of business between banks and persons engaged principally in the

business of installment financing. It is believed that these exemptions

are consistent with the protection of investors. Interest and discount

rates will probably be set competitively and not exceed the rate permitted locally. The adoption of the rule was intended to preclude the

multiplicity of proceedings arising from individual applications for

exemptions which were burdensome both to the parties involved and

to the Commission with no compensating public interest involved.

Rule N-17 A-3-Exemption of Transactions With Subsidiaries

On May 23, 1947, the Commission adopted rule N-17A-3, which

provides an automatic exemption from section 17 (a) under the act

for transactions with or between fully owned subsidiaries of registered

investment companies. The rule was adopted to provide an automatic

exemption for such transaction since such subsidiaries are completely

owned by the registered investment company and there is no public or

investor interest involved in transactions WIthin the group. The rule

eliminates the necessity of filing an application with the Commission

for the exemption of such transaction.

Rule N-17D-I-Bonus, Profit-Shardng, and Pension Plans

On May 23,1947, the Commission amended rule N-17D-1 regarding

bonus, profit-sharing, and pension plans and arrangements. The

amendment to this rule eliminated the special procedure for the handling of applications thereunder and thereby makes the procedure

provided by the new rule N-5 applicable thereto.

STATISTICS RELATING TO REGISTEREQ INVESTMENT COMPANIES

As of June 30,1947, there were 352 companies registered under the

Investment Company Act of 1940. During the fiscal year 12 companies

registered under the act, and the registration of 21 companies was terminated. The assets of the 352 registered investment companies aggregated approximately $3,600,000,000. These companies are classified

under the act as follows:
THIRTEENTH ANNUAL REPORT

b{anagenaent open-end______________________________________ 125

!danagenaent closed-end_____________________________________ 115

lJnit_______________________________________________________ 96

Face 8Inount_______________________________________________ 16

111

Total ~____ 352

The 12 companies that registered during the fiscal year are classified

under the act as follows:

!{anagement open-end______________________________________ 9

Management cIosed-end_____________________________________ 2

lJnit_______________________________________________________ 1

Total________________________________________________ 12

The 21 companies whose registrations were terminated during the

fiscal year were classified under the act as follows:

!{anagement open-end______________________________________ 5

Management closed-end_____________________________________ 13 lJnit ~___________________________________________ 3

Total________________________________________________ 21

During the fiscal year 91 applications were filed under various provisions of the act, 74 of these for orders of the Commission relating

to exemptions from requirements of the act and the remaining 17 for a

determination of the Commission that the applicant has ceased to be

an investment company within the meaning of the act. At the beginning of the fiscal year, 60 applications were pending. These applications, together with the 91 filed during the year, totaled 151 applications pending before the Commission during the year; 101 of these applications were disposed of during the year and 50 were pending at

June 30,1947. The various sections of the act under which these applications were filed, and the disposition of the applications during the

fiscal year, are shown in the following table (since an application may

involve more than one section of the act, the numbers are not totaled) :

Number Filed Number

Section of the act under which pending during Disposed of pending application was filed at June during year at June

30,1946 year 30,1947

2 (a) (9) Determination of question of control. 1 4 1 withdrawn 4 3 (b) (2) Determination that applicant is not an invest- 7 4 2 granted 9 ment company. 6 (b) Employees' security company exemptions. 2 2 1 granted; 2 1

withdrawn.

6 (c) Various exemptions not specifically provided for 16 20 19 granted; 4 13

by other sections of t he act. withdrawn.

6 (d) Exemption for small closed-end companies offering 1 ---------. ------ ------------ 1

securities in intrastate commerce, 8 (tl Determination that a registered investment com- 8 17 20 granted 5

~ny has ceased to be an investment company. 9 ) Exemption ofIneligible persons to serve as otliceIll, 13 ---------- -- -- -- -.-----_ ..._-- 13

directors, etc. 10 (f) Exemption of certain underwriting transactions. 1 2 3 granted ---------- 11 (a) Approval of terms of proposed security exchange 1 1 2 granted ---------- oilers.

17 (b) Exemption for proposed transactions between 16 30 29 granted; 2 10

investment company and affihates. denied; 5withdrawn.

17 (d) Approval of certain bonus and profit-sharing 2 16 15granted 3

plans. 23 (c) (3) Terms under which closed-end investment 1 3 1 granted; 1 2

company may purchase its outstanding securities. withdrawn.

25 (b) Request for advisory report on proposed plan of 2 1 report made; 1 ...... --....--.... reorganization. withdrawn.

hcuritlea &ali 6:%CQ&A('

Oomm1•• ioa

Libral1
112 SECURITIES AND EXCHANGE COMMISSION

110

158

1,752

71

19

45

70

90

100

60

17

50

60

91

101

50

Figures as to the number of documents filed under the act by

registered investment companies, together with other related statistics,

during the fiscal years ended June 30,1946 and 1947, are given in the

following table: Fiscal

tlear ended

June

30--

1H7 19.6

361 366

12 13

21 18

352 361

12 13

12 12

18 31

226 213

20 26

790 780

718 710

Number of registered investment companies: Beginning of year

!tegistered during year

Terminations of registration during yearNumber of companies registered at end of year Notifications of registrations

Registration statements

Amendments to registration statements

llnnual reports

Amendments to annual reports

(Juarterly report~------------------------------------------- Periodic reports, containing financial statements, to stockholders __

Reports of repurchases of securities by closed end management companies_________________________________________________ 102

Proxy statements_____________________________________________ 162

Copies of sales literature 1,935

Applications for exemption from various provisions of the acL___ 74

Applications for determination that registered investment com- pany has ceased to be an investment company

Amendments to applications

Total applications: Beginning of year

Filed during year

Disposed of during year

Pending at end of year

_

_

_

_

_

_

_

_

_

_

_

_

_

_

_
PART vn

ADMINISTRATION OF THE INVESTMENT ADVISERS

ACT OF 1940

The Investment Advisers Act of 1940 requires the registration of

investment advisers: persons engaged for compensation in the business of advising others with respect to securities. The Commission

is empowered to deny registration to or revoke registration of such

advisers if they have been convicted or enjoined because of misconduct

in respect of security transactions or have made false statments in their

applications for registration. The act also makes it unlawful for

investment advisers to engage in practices which constitute fraud or

deceit; requires investment advisers to disclose the nature of their

interest in transactions executed for their clients; prohibits profitsharing arrangements; and, in effect, prevents assignment of investment advisory contracts without the client's consent.

Investment advisers' registratwn statistics, 1947 fiscal year

E1fective registrations at close of preceding fiscal year___________________ 853

Applications pending at close of preceding fiscal year___________________ 12

Applications filed during fiscal year -__ 188

Total 1,053

Registrations canceled or withdrawn during year______________________ 81

Registrations denied or revoked during year_____________________________ 0

Applications withdrawn during year__________________________________ 1

Registrations effective at end of year 952

Applications pending at end of year__________________________________ 19

Total 1,053

LITIGATION UNDER THE ACT

The single court action under the act during the fiscal year was

S. E. O. v. Todd, in which the Commission sought an injunction to

restrain alleged frauds on the defendant's investment advisory

clients.' The complaint alleged that the defendant had three classes

of clients: those who subscribed to his weekly investment advisory

letter, those who for an additional fee obtained more personalized

advice, and those for whom he managed discretionary accounts. It

was alleged that the defendant would first purchase some inactive security for his discretionary accounts, at the same time orally recommending its purchase to the clients receiving the personalized advice,

and then several days later would recommend its purchase to the subscribers of the weekly letter. Since the security was inactive, the

market would be raised by the subscribers' purchases and the defend1Civil No. 6149, Mass., Nov. 14, 1946.

113

-

~
114 SECURITIES AND EXCHANGE COMMISSION

ant would then sell the security in his discretionary accounts, meanwhile continuing to recomemnd its purchase in the weekly letter. The

Commission alleged that this constituted a practice or course of business which operated as a fraud or deceit upon his clients within the

meaning of section 206 (2). A final judgment was entered with the

consent of the defendant. The judgment was thereafter vacated at the

defendant's request to be permitted to proceed with a trial of the case

on the merits. The matter was pending at the close of the year.
PART vm

OTHER ACTIVITIES OF THE COMMISSION UNDER THE

VARIOUS STATUTES

THE COMMISSION IN THE COURTS

Civil Proceedings

A complete list of all cases in which the Commission appeared before

a Federal or State court, either as a party or as amicus curiae, during

the fiscal year, and the status of such cases at the close of the year,

is set forth in appendix tables 24 to 35.

At the beginning of the 1947 fiscal year 22 injunctive and related

enforcement proceedings instituted by the Commission were pending

before the courts, in connection with fraudulent and other illegal

practices in the sale of securities, 24 additional proceedings were instituted during the year, and 20 cases were disposed of, so that there

remained 26 of such proceedin~ pending at the end of the year. In

addition, the Commission participated in a large number of reorganization cases; 1 in 25 proceedings in the district courts under section

11 (e) of the Holding Company Act; and in 21 miscellaneous actions,

usually as amicus curiae or intervenor, to advise the court of its

views regarding the construction of provisions of statutes administered by the Commission which were involved in private law suits.

The Commission also participated in 70 appeals. Of these, 24 came

before the courts on petition for review of an administrative order;

31 arose out of corporate reorganizations in which the Commission

had taken an active part; 7 were appeals in actions brought by or

against the Commission; 10 were appeals from orders entered pursuant to section 11 (e) of the Public Utility Holdiag Company Act ;

and 4 were miscellaneous appeals.

The Commission's Tenth Annual Report included a table of all those

cases involving the statutes administered by the Commission (excluding ch, X cases) decided by the courts through June 30, 1944.

Appendix table 38 of this re'port continues that table through June

30, 1947. The only cases omitted are those in which no opinion was

rendered and which, in addition, did not involve a novel legal problem.

The civil proceedings under the different acts in which the Commission participated during the fiscal year are discussed at length

in the sections of this report covering the respective acts.

Criminal Proceedings

The statutes administered by the Commission provide for the transmission of evidence of statutory violations to the Attorney General

who, in his discretion, may institute appropriate criminal proceedings. As a matter of practice the Commission, largely through its

10 regional offices, thoroughly investigates suspected VIolations and,

See Part IV and tables 24, 25, and 37.

767629-48-9 115

•
116 SECURITIES AND EXCHANGE COMMISSION

in cases where the investigation appears to disclose a foundation for

criminal proceedings, prepares detailed reports of investigation which

are forwarded to the Attorney General. When it is decided to institute criminal proceedings, the Commission may assign such of its employees as have participated in the investigation to assist in the

preparation of the case for presentation to the grand jury, in the

conduct of the trial and in preparing briefs on appeal. Parole reports on convicted offenders also are prepared by members of the Commission's staff. Where the investigation discloses violations of statutes other than those administered by the Commission, relerence is

made to the appropriate Federal or State agency.

Up to June 30, 1947, indictments had been obtained against 2,484

defendants in 399 criminal cases developed by the Commission," By

the end of the 1947fiscalyear, 372 of these cases had been disposed of

as to one or more defendants, and convictions had been obtained in

335, or 90 percent, of such cases against a total of 1,222 defendants.

During the past year 15 indictments were returned against 35 defendants. Convictions were obtained against 20 defendants in 11

cases during the year,"

In the criminal appeals decided during the past year judgments of

conviction were affirmed as to 15 defendants.' One appeal was voluntarily withdrawn.

The status of all criminal cases pending during the past fiscal year

is set forth in appendix table 29.5

The criminal cases developed by the Commission and prosecuted

during the past fiscal year were, as in previous years, extremely varied

in nature. Some of these cases are described below. In general, they

include frauds perpetrated by brokers and dealers in securities; fraudulent schemes in connection with the sale of oil, gas, and other mineral

interests; fraud in the promotion of new businesses, inventions, and

mining ventures; and fraudulent purchases of securities by corporate

"insiders" and others.

Several of the cases prosecuted during the year involved fraud in

connection with Rurchases of securities in violation of section 10 (b)

of the Securities Exchange Act of 1934 and rule X-10B-5 thereunder," The first conviction under these provisions was obtained

during the past year in U. S. v. Edgar M. Grisrwold (N. D. Ohio) in

which it was charged that the defendant defrauded various persons,

principally tavern owners, in transactions relating to the stock of

a prominent distilling company. Whisky purchase rights had been

attached to the stock. Griswold, it was alleged, represented to purchasers that the stock would be worthless after the whisky rights were

exercised and that it could not be retained by the purchasers after

such exercise. According to the indictment, Griswold, by virtue of

these false representations and his failure to disclose that the stock

had a market value of not less than $24 a share after exercise of the

whisky rights, was enabled to obtain the stock for his own use ~nd

. Adjusted as of June 30, 1947. Including pleas of guilty or nolo contendere. Three of these eases are still open as to other defendants . These appeals involved a total of four cases. Convictions were reversed only as to two corporate defendants in a single case on jurisdictional grounds. Appendix table 31, pt. 2, relates to criminal contempt proceedings. The indictments in these cases also charged violations of the mail fraud statute (sec.

215 of the Federal Criminal Code).

•

•

•

•

•
THmTEENTH ANNUAL REPORT 117

in fraud of the original purchasers thereof," An indictment charging

a similar scheme to defraud with respect to stock of the same corporation was also returned in U. S. v. Oharles J. Rubrecht (W. D. Pa.),

which is still pending. ,

Another type of fraud violative of section 10 (b) and rule X-10B-5

was alleged in the indictments returned in U. S. v. Ellis R. Taylor

(N. D. m.i and U. S. v. American Oone &: Pretzel 00. (E. D. Pa.).

In these cases the fraud charged related to the allegedly deceitful

efforts of corporate insiders to acquire securities of the corporations

which they controlled. In both cases it was charged, among other

things, that defendants, Jj~:dents of their respective corporations,

purchased the stock holdi of minority stockholders by making

false representations with respect to the value of the shares of stock,

the financial condition of the corporations, and by concealing facts

as to the true value of the shares and their identity as the actual purchasers of the stock. These cases are now pending.

Charges of fraud and unlawful conduct on the part of brokers

and dealers in securities were involved in U. S. v. Florida Bond and

Share, Inc. (S. D. Fla.) ; U. S. v. Gilbert lIf. Bates (N. D. Iowa) ; and

U. S. v. Stanley Grayson (S. D. N. Y.). In the Florida Bond and

Shares and Bates 9 cases, convictions were obtained for fraud predicated upon the sale of securities to uninformed customers at prices'

not reasonably related to the prevailing market prices without appropriate disclosure. The defendants in the Florida Bond and Share

case also were charged with employing a fraudulent "switch" scheme.

It was alleged that they intensified the losses suffered by their customers by causing them to "switch" repeatedly from one security to

another.

In the Grayson case, in which a fraudulent "switch" 'scheme was

also alleged, the fraud was based in part on the sale to investors of

various fractional undivided interests in oil, gas, and other mineral

rights, at prices substantially in excess of the maximum recoverable

returns which estimates indicated investors could possibly obtain from

the mineral assets underlying such securities. According to the indictment, investors were induced to divulge lists of their security

holdings on the pretense that the defendants wouldhafter analysis,

provide them with free investment advice. It was c arged that the

defendants then induced the investors to sell such securities and to

purchase instead from the defendants the mineral securities mentioned above,"

.A. number of cases pending during the past fiscal year involved

charges of fraud in connection with the sale of various interests in oil

properties. These were U. S. v, James F. Boyer (S. D. Fla.) ; 11 U. S.

v, Thomas P. Mul/vaney (S. D. Iowa) ; 12 U. S. v. Bart Oeoil Lucas

(S. D. N. Y.); 18 and U. S. v, Aubrey M. Poynter (La.).H

Griswold was found guilty by the court after trial without jury and sentenced to 18

months Imprisonment. The sentence was later reduced to 15 months. I Four defendants In this case were found guilty, and one defendant, a salesman, was acquitted.

Bates pleaded gnllty. :Ill Grayson was found guilty after trial and has appealed. Three other defendants

pleaded guilty. n One defendant found ItUllty after trial for violations of the mail fraud and conspiracy statutes (secs. 215 and 87 of the Federal Criminal Code). The other defendant was reported a snlclde. 11 Four defendants pleaded gnIlty. The case is pending as to one remaining defendant. 11 Defendant pleaded gn\lty to the indictment whicl1 charged violation of the mail fraud statute (sec. 215 of the Federal CrIminal Code).

"Pending.

•

•
118 SECURITIES AND EXCHANGE COMMISSION

In the Boyer and Poynter cases the defendants were charged with

employing what is colloquially described as a "reloading" scheme.

The indictments in these cases charged, inter alia, that the defendants

induced investors to make repeated purchases of oil leases by causing

fictitious offers to be made to investors for their holdings at prices

which would have yielded them tremendous profits, which offers however were conditioned upon the investors obtaining additional leases

from the defendants.

In U. S. v, Gasomuer (Iorp, (D. Del.), in which fraud was charged

in the sale of securities, the jury returned a verdict of guilty as to

three defendants." The company was engaged in promoting an

invention to substitute the use of fuel oil for gasoline in internal

combustion engines. After the close of the fiscal year, the court set

aside this verdict and granted the motions of these defendants for

acquittal. In U. S. v. Olifford S. Johnson (Mont.), one defendant was

convicted during the year on his plea of nolo contendere for a fraudulent promotion In connection with the sale of royalty interests in an

ice shaving device, known as Cliff's Ice Shaver."

Fraudulent promotions of new businesses were charged in U. 8. v.

Thomas A. Neely (N. D. TIl.) and U.8. v. JohnB. Boal (N. D. Cal.}

in which indictments were returned during the past year. Both of

these cases are now pending.

In U. S. v. Robert B. Kells (Col.), a conviction was obtained for

the fraudulent promotion of a new business," It was alleged that

the defendant organized a purportedly philanthropic and nonprofit

organization which he used as a medium through which he fraudulently sold the stock of a corporation organized by him.

Fraudulent sales of securities of an alleged fraternal association

was the basis for the indictment in U.8. v, Preston E. Douglass (N. D.

Ill.) .18 According to the indictment} Douglass, by means of various

false representations, induced investors to purchase stock purportedly

issued or to be issued by the Frederick Douglass Afro-AmerIcan Cooperative Industry Builders Association, Inc., a nonprofit Illinois

corporation (which was by statute prohibited from issuing stock),

which association had been organized by Douglass supposedly for the

purpose of improving the economic status and welfare of the Negro

race and to furnish Investors with employment in cooperative stores

and on farms which the association would develop and establish.

In U. S. v. Barry J. Mallen (N. D. ru: the defendant was convicted for a fraudulent promotion in connection with the sale of

stock of a gold mining corporation. It was charged, among other

things, that the defendant converted to his own use large portions of

the money received from the sale of such stock after he falsely represented to investors that the funds obtained from such sales would

be used for corporate purposes. Another allegedly fraudulent mining

promotion (silver mine) resulted in an indictment in U. 8. v. Magnw

G. Thomle (Mass.).19 The defendants were charged, among other

115 Two other defendants, salesmen; had previously been acquitted by direction ot the court. 11Another defeudant was previonsly convicted on a slmllar plea. The Indictment was dismissed as to the remaining defendant in the case. 11Kells was convicted on his plea of nolo contendere. The case is pending as to three

remaining defendants, one of Whom is a fugitive. "Pending . .. Pending. The Indictment in this case also charges a violation ot the reristration pro- visions of the Security Act of 1988.
THIRTEENTH ANNUAL REPORT 119

things, with employing the "Ponzi" type of swindle, wherein purported "dividends" were paid to investors out of the capital funds of

the mining company which was the subject of the promotion.

In a number of cases Canadian mining company stocks were sold

to residents of the United States by persons residing in Canada who

operated from across the border without compliance with the statutes

of this country. The Commission has been cooperating with the State

Department and the Department of Justice in efforts to secure a

treaty with Canada which would permit the extradition of persons

violating the Federal and State securities laws. The treaty was ratifield by the United States Senate in April 1942, but to date it has not

been ratified by the Canadian Parliament. Numerous cases of this

type have been the subject of investigation by the staff of the Commission. Indictments have been obtained in a number of these cases.

The criminal appeals decided during the past fiscal year were:

Baker v. U. S., 156 F. (2d) 386 (C. C. A. 5, 1946), certiorari denied,

67 S. Ct. 123 (1946), in which the convictions of 9 defendants for

fraud in the sale of various interests in oil and gas properties were

affirmed; U. S. v. Wernes, 157 F. (2d) 797 (C. C. A. 7, 1946), in which

the court sustained the convictions of the defendants for the fraudulent sale of unregistered securities of a limited partnership and its

subsidiary; Oollins v. U. S., 157 F. (2d) 409 (C. C. A. 9, 1946), wherein

judgments of conviction were affirmed for conspiracy to violate the

antifraud provisions (sec. 17 (a) (1» of the Securities Act of 1933

and the Mail Fraud Statute (sec. 215 of the Federal Criminal Code)

in connection with the manipulation in the over-the-counter market of

the stock of Union Associated Mines Co., a defunct corporation whose

shares had at one time been listed on the Salt Lake Exchange; and

Danziger v. U. S., 161 F. (2d) 299 (C. C. A. 9, 1947), in which the

court upheld the conviction of Danziger for fraud and conspiracy in

the sale of oil securities."

COMPLAINTS AND INVESTIGATIONS

During the 1947 fiscal year the Commission received 6,386 items of

mail concerned with alleged securities violations. These communications are classified administratively as "complaint enforcement"

correspondence. While they relate to complaints and alleged violations of various Jaws administered by the Commission, the bulk of

them deals with the enforcement of the Securities Act of 1933 and

the registration provisions of the Securities Exchange Act of 1934.

This material constitutes an important source of information concerning possible securities violations. Investigations made by the

Commission's staff and contacts maintained with other governmental

(Federal, State, and local) or private agencies provide additional

sources of such information. Where it appears on the basis of any

such data that any securities violation may have occurred, the Commission conducts appropriate investigations by means of correspondence or the assignment of cases to field investigators to ascertain the

facts of the particular case. .

The extent of the investigatory- activities of the Commission during

the past year, under the Securities Act of 1933, the Securities Ex-

.. In the same appeal, convictions of two corporate defendants were reversed on the

gronnd that jnrisdiction had not been obtained as to these defendants, process having been

improperly served upon them.
120 SECURITIES AND EXCHANGE COMMISSION

change Act of 1934, sections 12 (e) and (h) of the Public Utility

Holdmg Company Act of 1935, the Investment Company .Act of 1940,

and the Investment Advisers Act of 1940, is reflected in the following

table:

Investigations of securities violations 1

Preliminary Docketed' Total

Pending at June 30,1946______________________________________ 258 835 1,003

Opened July 1,1946to June 30,1947: New cases________________________________________________ 284 214 498 Transferred {rom prelimlnary _____________________________ --.----------- 19 19

Total number o{cases to be accounted {or_______________ 542 1,068 1,610

Closed. _______________________________________________________ 109 141 250 Translerred to docketed __________________________, __________ 19 ----------927- 19 Pending at June 30,1947______________________________________ 414 1,341

I These investigations or socunttes violations Include the oil and gas Investigations which are separately tabulated and discussed ill Part I of this report . • Investigations carried on through correspondence and limited field work • Invesnganons assigned to field Investigators.

Securities Violations File

To assist in the enforcement of the various statutes which it administers, and to provide a further means of preventing fraud in the

purchase and sale of securities, the Commission has established a

securities violations file. This file constitutes a clearing house of information concerning persons who have been charged with violations of

various Federal and State securities statutes. It is kept up-to-date

through the cooperation of the United States Post Office Department,

the Federal Bureau of Investigation, parole and probation, officials,

State securities commissions, Federal and State prosecuting attorneys,

police officials, members of the National Association of Better Business

Bureaus, Inc., and members of the United States Chamber of Commerce. By the end of the 1947 fiscal year this file contained data concerning 47,930 persons against whom Federal or, in the vast majority

of cases, State action had been taken in connection with securities violations. During the past year alone additional items of information

relating to 2,763 persons were added to these files, including information concerning 1,006 persons not previously identified therein.

Extensive use is made of this clearing house of information. During

the past year, in connection with the maintenance of the files, the

Commission received 2,941 "securities violations" letters or reports

(apart from those mentioned above which are classified as "complaint

enforcement") and dispatched 2,423 communications in turn to cooperating agencies.

ACfIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDmNG

The several Acts administered by the Commission vest it with broad

authority in matters of accounting and auditing, including important

functions with respect to the financial statements to be furnished, requirements as to certification of the statements by independent public

accountants, and the basis, form and content of such statements. Under the Holding Company Act of 1935 it may prescribe, and has prescribed, certain uniform systems of accounts. In the exercise of its

statutory powers under the Securities Act of 1933, the Securities Ex-

•

•
THmTEENTH ANNUAL REPORT 121

change Act of 1934, and the Investment Company Act of 1940, it has

adopted a basic accounting regulation governing the form and content of most of the financial statements filed pursuant to those acts.

This regulation is widely known as Regulation S-X.

While the Commission's requirements are comprehensive they do

not, indeed could not, establish a large body of accounting principles

or prescribe the accounting principles or methods to be followed in

any but a few basic respects. To the extent that these matters have

been dealt with by rule or regulation they have evolved for the most

part under the influence of both formal and informal decisions in

particular cases, discussions and correspondence with registrants, their

accountants and counsel, and cooperation with practicing accountants,

committees of professional societies and similar organizations, other

Government agencies, and various interested individuals.

As has been suggested, however, much of the Commission's activity

in the field of accounting lies in areas where specific rules and regulations are neither practicable nor desirable. In this, by far the largest

segment of the Commission's accounting work, the chief reliance for

the protection of investors and the public therefore rests largely in

the administrative determination of applicable accounting and auditing principles and procedures properly to be followed. In making

these determinations the Commisson draws heavily on the guides that

are found in accounting principles that have been recognized as sound

by professional accountants generally and on the advice and experience

of the persons and organizations mentioned above.

The organization of the accounting staff of the Commission is especially designed to facilitate informal consideration of accounting matters. The chief accountant acts as the Commission's chief adviser

and consulting officer on accounting matters and has general supervision over the establishment and execution of Commission policy with

respect to accounting and auditing principles or practices. He is

assisted directly by an assistant chief accountant and, in addition, an

assistant chief accountant is assigned to and directly responsible for

the examination of financial data and other accounting work in the

three operating divisions, namely, the Corporation Finance Division,

the Trading and Exchange Division, and the Public Utilities Division.

Examination of Financial Statements

The majority of accounting problems arise as a result of examination

of financial statements required to be filed with the Commission.

Where the examination of the statements reveals that the rules and

regulations of the Commission have not been complied with or that applicable accounting principles have not been followed, the examining

division directs the attention of the registrant to the deficiencies by letter. These letters of comment and the correspondence or conferences

that follow continue, as in the past, to be a most convenient and satisfactory method of effecting corrections and improvements in financial

statements, both to registrants and to the Commission's staff. Itwould

be difficult to express in quantitative terms the extent of the Commission's treatment of accounting questions by these administrative means.

However, a very large portion of the time of the accounting staff is

spent in the discussion of such cases by letter and in conference with

registrants and their accounting and legal advisers. There is also a

large, and in recent years growing, volume of inquiries as to the
122 SECURITIES AND EXCHANGE COMMISSION

propriety of particular accounting practices from accountants and

from companies not presently subject to any of the acts administered

by the Commission who wish to have the benefit of the Commission's

views, and thus utilize and apply the Commission's experience to the

facts of their own case.

Again this past year the Commission received a very large volume

of registration statements covering the sale of securities to the public.

As has been indicated in an earlier section of this repo~ over 560

registration statements were received during the year. Continuing

the experience of the last year, although perhaps not to the same

marked degree, many of the companies were selling securities for the

first time since the enactment of the Securities Act of 1933. The lack

of experience with Commission practice on the part of the corporate

executives, and in frequent cases on the part of independent accountants and counsel, continued to contribute to the number of problems

which ordinarily arise. In addition there continued in evidence

during jhe year, particularly in the Securities Act filings, a number

of problems of war or reconversion origin.

Revision of Regulation S-X

Mention was made in the last report of the progress that had been

made toward revision of the accounting requirements applicable to

management investment companies as prescribed in article 6 of regulation S-X. This article was first added to the regulation in January

1942 following passage of the Investment Company Act of 1940. The

restatement has been completed and was published in November 1946

as Accounting Series Release No. 57.

This restatement was undertaken after a critical review of financial

statements filed by management investment companies indicated that

such statements might be prepared in a manner which would bring

more forcefully to the attention of investors the special characteristics

of this type of company and the significant aspects of its financial

condition and results of operation. Itis of special interest not only

because of the improvements accomplished but also because it codifies

many innovations or departures from conventional accounting.

Although this restatement preceded the operation of the Federal

Administrative Procedures Act of 1946, the process of its adoptionfollowing widespread discussions, a formal public conference and the

preparation of tentative drafts over the course of more than 3 yearsmore than met all of the standards of that act.

Some indication of the extensive preparation for the revision is

evident from the fact that a 1944 draft, for example, was sent out

for comment to approximately 335 persons, including 239 management

investment companies, a number of accounting and professional societies, accountants, attorneys and other interested individuals, and

the National Association of Investment Companies. Replies received

from 133 of the 335 persons circularized contained approximately

600 written comments. Of these 133 replies, 78 represented manage-.

ment investment companies. Subsequent to the public hearing, which

was held on July 9,1946, representatives of the National Association

of Investment Companies and the staff of the Commission discussed

further the remaining differences, and mutually agreeable solutions

were worked out as to most of them.
THIRTEENTH ANNUAL REPORT 123

The most striking departure from convention, in the revised article

6, is a provision as to the balance sheet with respect to the carrying

of assets at market values rather than at cost. This provision is made

a requirement as to so-called open-end companies, those which agree

to redeem their capital stocks at any time. All other management

companies .!Jlayuse it if they wish. Other important changes involve . the disclosures to. be made as to the capital and surplus accounts.

Many of the changes adopted resulted from suggestions made by the

industry. As one example, where a value balance sheet is used, a

"statement of changes in net assets" may be substituted for the orthodox surplus analyses.

As was anticipated in the announcement of the revision, the new

rules have done much to secure a reasonable degree of uniformity in

the accounting practices of these special companies and to obtain more

informative and useful financial statements.

Some Cases Before The Commission

Inthe last annual report mention was made of a case considered by

the Commission in which it was found that the auditor was not independent and the audits made were not in accordance with generally

accepted auditing standards applicable in the circumstances. During

the past year the Commission concluded its consideration and issued

two findings and opinions with respect to the registrant, Red Bank

Oil Company.21 In the first of these the Commission indicated that

the deficiencies in the financial statements contained in the annual reports were substantially cured by amendments which disclosed in informative detail the relationships and the nature and effect of the"

numerous transactions between the registrant or its subsidiaries and

the insider interests. These statements were certified by another firm

of accountants. The opinion stated that there remained serious question whether exchange trading should be resumed until sufficient time

had elapsed for notice of the numerous material deficiencies which

had existed in the financial statements filed in the reports to reach the

investing public, and until investors had had sufficient time to assimilate the information which then was supplied for the first time in

the revised financial statements. Action by the Commission proved

unnecessary, however, in view of the action of the New York Curb

Exchange in continuing its suspension of trading in the Red Bank

common stock. In the second opinion the Commission issued a stop

order suspending the effectiveness of the Red Bank registration statement filed under the Securities Act. This action was taken because of

the "numerous serious deficiencies in the earlier financial statements,

which have been on file, uncorrected, for a considerable period of time"

and the desirability of calling "to public attention the material deficiencies in the earlier statements."

I'll,the M aster of Hayes Manufacturin[l Corporation. 22 was a case involving the sale to the public of securities which had been issued for

the acquisition of another business from, primarily, a small group of

promoters. This group expected to realize large profits from the sale.

The Commission found tliat much information which was vital to a

wise investor decision was not disclosed. This failure extended both

n Securities Exchange Act Release No. 3902 (1947). and Securities Act Release No. 3197

(1947)

.. Secnrities Act Release No. 81111(1946). •
124 SECURITIES AND EXCHANGE COMMISSION

to the financial statements and to the other numerous items of information called for in the registration statement filed. By successive material amendments filed after the institution of the Commission's proceedings, the registrant freely admitted the existence of substantial

deficiencies in the registration statement among which was the fact

that both Hayes and the acquired companies operated at a loss in the

period after the date of the last profit and loss statement originally,

filed, a fact known to the management at the time of the first filing.

Since these amendments; substantially corrected the material deficiencies proven to exist, it was determined that it was not necessary in the

public interest to issue a stop order and the registration statement

therefore became effective. It was deemed in the public interest,

however, to call attention to certain of the original deficiencies particularly with respect to the recent history of American Engineering

Co. and its subsidiaries which were acquired by Hayes through the

issue of stock thus registered, together with the history of the activities

of the promoters and their dealings with Hayes' management.

In a memorandum and order dated April 16, 1947, the Commission

discontinued proceedings against Transamerioe Oorp. as the result.

of the filing by the corporation as part of its annual report for 1946

of certain information su,Pplementing that contained in its previous

filings." The basis for this action was the Commission's belief that

the reports and amendments thereto of Transamerica now on file,

including the additional supplemental information contained in the

1946 report, meet the requirements of setting forth sufficient public

information to enable investors to appraise the presently relevant

facts, thereby making it unnecessary in the public interest and for the

protection of stockholders and investors to continue the proceedings.

Some of the items as to which questions had been raised in the

order for hearing were eliminated by Commission action prior to

the discontinuance of the proceedings. Although Transamerica has

not filed supplemental material covering all the remaining items as

to which questions had been raised, those of the remaining' items

not covered by the supplemental material are not relevant to the

present financial statements of Transamerica Corp.

The Commission's release dismissing the proceedings against Transamerica Corp. summarized the issues involved in the detailed supplemental information now included in Transamerica Corp.'s annual

report for 1946 and the Commission's conclusions thereon.

Changes in Forms for Registration

FormS-1.-0n January 8,19471 the Commission adopted a simplified revision of Form S-1, its principal form for registration of securities under the Securities Act of 1933.24 The intention to make this

revision had been announced in advance as part of a general program

of revision and simplification. A preliminary draft of the proposal

.. Securities Exchange Act release No. 3946. These proceedings were instituted on November 22, 1938 by the Issuance of an order by the Commission for a hearing to determine whether the application of Transamerlca Corp. .filed in August 1937 jlursuant to section 12 of the Securities Exchange Act of 1934 for the registration of Its ,2 par value common capital stock on the New York and Los Angeles Stock Exchanges and (by later

amendment) on the San Francisco Stock Exchange should be suspended or withdrawn under

the authority of section 19 (a) (2) of the act. On November 22~ 1940, the Commission

issued an amended order for hearing and a supplemental amended order which super- seded the 1938 order. The registration became effective September 10, 1937, and has re- mained effective at all times . .. Securities Act release No. 3186.
THIRTEENTH ANNUAL REPORT 125

was widely distributed for comment and a considerable number of

very helpful suggestions were received, all of which were given careful consideration by the Commission in preparing the final draft

of the form. With the adoption of this revision Form A-2, which

had quite a long and rather famous history of use by many large corporations, first as the sole principal form and later as an optional

form to the old Form 8-1, was discontinued.

The new Form 8-1 is so designed that the complete form becomes

the general prospectus, with additional information not required in

the prospectus to be filed in the form of exhibits. Of particular

accounting interest is the omission from the form, and hence from the

prospectus, of historical financial information. This information is

to be supplied as an exhibit, but may be omitted whenever the information has previously been filed with the Commission under either

the Securities Act or the Securities Exchange Act and has been maintained up to date by the annual reports required under the Securities

Exchange Act.

The old Form S-l provided for the omission of financial statements of subsidiaries and 50 percent-owned persons which were not

significant. Under regulation S-X, 5 percent is the test of significance.

Inthe revised S-l, financial statements of unconsolidated subsidiaries

and 50 percent-owned persons may be omitted if the aggregate revenues and assets of all such persons do not exceed 15 percent of the

amounts shown by the corresponding statements of the parent and its

consolidated subsidiaries. This rule conforms to the rule in Form

10-K for annual reports under the Securities Exchange Act as it

has been administered since an amendment of December 1942.

These changes, and others made in the body of the form, should

make possible a very substantial reduction in the size of filings with

the Commission and in the prospectuses to be put before investors.

Form 10-K.-Several other fairly important changes, some of an

accounting nature, were made with respect to forms. Form 10-K,

the principal annual report form under the Securities Exchange Act

for many issuers, was amended so as to bring to the form certain of

the changes adopted in the revised Form S- J.25 The requirements for

financial statements were changed to permit a registrant to file either

consolidated or individual statements where the registrant's own assets and revenues comprise more than 85 percent of the corresponding amounts shown in the consolidated statements. Heretofore, both

individual and consolidated statements were required. The amendment effects a corresponding simplification in the requirements of

Form l-MD, since that form calls for the financial statements required of registrants on Form 10-K.

Forms 10, ..4.-1, and E-1.-Gertain minor changes in the way of

simplification were made in Form 10, which is the general form prescribed for use by corporations in filing applications for registration

of securities on a national securities exchange," Form A-I, used for

the registration of securities where no other form was specifically

prescribed, and Form E-l, which was prescribed for the registration of securities sold or modified in the course of reorganization,

were rescinded .

.. Securities Exchange Act release No. 3908 (1947) . .. Secw:ities Exchange Act release No. 3966 (1941).
126 SECURITIES AND EXCHANGE COMMISSION

F01'm S-7.-Early in the fiscal year the International Bank for

Reconstruction and Development indicated that it intended to issue

and sell its first securities. Since such securities were to be registered

with the Commission, it became necessary for the Commission to

promulgate a form which the International Bank could use. Accord.

mgly Form S-'l was devised for that purpose," Requirements as to

financial statements of the bank, together with supporting schedules,

are a part of such form. In the preparation of that portion of the

form relating to the form and content of the financial statements

several novel problems were encountered. Among the special features of the bank which were taken into consideration were the following: (1) subscriptions to capital stock of the bank are payable in

gold, United States dollars, or in members' currency; (2) capital contributions paid in in members' currency are required to be maintained

at a fixed value stated in terms of United States dollars of the weight

and fineness in effect on July 1, 1944; and (3) under certain conditions a member may substitute its demand, nonnegotiable and noninterest bearing notes for its own currency held by the Bank.

Developments In Accounting Principles and Procedures

One of the functions of the accounting staff of the Commission is

to isolate and study the many important accounting problems which

arise. Frequently, a specific and sometimes greatly detailed study is

necessary in order to consider the question presented on factual,

theoretical, and practical grounds which are comprehensive and objective. Problems of this character may develop in connection with

the financial statements of a particular company or may be suggested

by general business or economic conditions. Often there is a strong

mutual interest in the subject, both among individual professional

accountants who have the problems to deal with and within professional societies, with the result that cooperation in reaching a solution is advantageous to all concerned.

One problem which the Commission had to consider during the year

was the proper accounting- to be followed with respect to emergency

war facilities which had been fully amortized not only for tax purposes pursuant to wartime legislation but also for financial purposes.

The study of this question was undertaken last year, as was reported.

Further consideration led to the adoption of a policy to be applied

administratively. Coincident with the Commission's consideration

of the matter, the Committee on Accounting Procedure of the American Institute of Accountants also studied the problem. In November

1946 the committee issued its Bulletin No. 27. This publication, with

respect to which frequent conversations were had between Institute

representatives and the Commission's staff, discusses the special conditions under which, and the manner in which, fully amortized emergency facilities may properly be restored to the accounts. The views

contained therein reflect substantially the policy which the Commission

had been in the process of developing through a series of particular

cases.

Another question in which the Commission was greatly interested,

and with respect to which there was a wide exchange of views with

the accounting committee of the Institute, concerns the proper acIT On June so, 1947, the first issue of securities was registered on the new form.

•
THmTEENTH ANNUAL REPORT 127

counting for the use of special reserves created by many industrial

companies during the war years. The Commission was quite concerned lest the practice develoJ? of using these reserves in the postwar years for purposes not originally intended and not, except by

very broad interpretation, related to war periods with the result that

profits might be equalized as between years.

Rather strong, divergent opinions existed on this question. One

group favored a concept that the war reserves should be considered

available not only for normal termination costs, plant conversion,

and rehabilitation, etc., but also for "other expenses, costs or losses

which usually arise in a disrupted postwar situation or in the economic

dislocations which are the aftermath of a war." The Commission's

view, joined in by a large majority of those expressing themselves

on the subject, was that charges to the reserves should be restricted

to pertinent expenditures made during a relatively short period after

the termination of war production. The Commission specifically

objected to the theory that the costs of strikes occurring in years well

removed from the war might, by generous reasoning, be charged,

not against the income of the year of occurrence, but against reserves

which had been retained after the war.

The Institute's committee issued Bulletin No. 26 on this subject in

October 1946 and expressed opinions much in accordance with those

held by the Commission, including a statement disapproving of the

use of such reserves for strike costs "occurring after the resumption

of peacetime operations." The Commission does not as a practical

matter anticipate that it will object in the numerous instances in which

expenses of strikes which occurred early in 1946were charged against

war reserves. Moreover, financial information available as to current

practices seems to indicate a disposition on the part of many companies to return the reserves to surplus, thereby eliminating the

problem.

Near the close of the last fiscal year considerable discussion was in

progress concerning the form of the balance sheet. This had been

preceded by a few years by similar interest in possible recasting of

the order or method of presentation of profit and loss data. In connection with both matters the Commission's staff had held many

conversations with members of the accounting profession and other

interested individuals. Apropos of the profit and loss statement, one

group of accountants appeared informally before the Commission

and urged that the Commission's rules be changed so as to permit wide

freedom in the form and order of casting profit and loss statements.

After further study of the matter the Commission reached the conclusion with respect to that proposal that its rules as to form and

order of statements should not be changed. .

Three reasons were given. First, it was felt that a convincing case

had not been made in favor of the proposed new form and order.

Second, it was believed that the new ideas had not yet gained sufficient

recognition in actual practice to warrant adoption by the Commission

in the face of its own doubts. And, third, the opinion was held that

the proper place for experimentation of this kind was not in reports

required to be filed with the Commission, but rather in the annual

reports furnished by companies to their stockholders.

The Commission emphasized that it did not wish to be regarded

as opposing constructive changes, as such, that it was receptive to
128 SECURITIES AND EXCHANGE COMMISSION

proposals of this character, and that if and when the proposed form

of profit and loss statement became generally accepted its decision

would be reconsidered. The staff has applied these principles to the

current proposals as to changes in the form of the balance sheet. It

was agreed, however, as in the case of the 'profit and loss statement,

that no objection would be made to the filing with the Commission

of financial statements prepared in a form other than that required

by regulation S-X, provided that such statements were not misleading

and were furnished as supplementary data and not in lieu of the

prescribed statements.

So far as is known, members of the profession have agreed that

this solution was a reasonable one. It should be pointed out that the

stockholders' reports of most registered industrial companies are not

subject to the jurisdiction of the Commission and therefore, insofar

as the Commission is concerned, may be quite adaptable to the experimentation in question, assuming, of course, that the divergencies

between the two sets of statements are not so great as to raise questions

as to the propriety of certification of both of them by independent

accountants as fair presentations of the data involved.

A problem that has been of considerable concern to the Commission

for a number of years and with respect to which substantial study

has been undertaken concerns the proper accounting treatment of

employees' pensions. In the great majority of cases these pension

plans are voluntary on the part of the company and may be altered

or discontinued without legal consequence entirely at the will of the

management. The Commission has come to feel that serious consideration should be given to the proposition that even under voluntary plans in which there is no strict legal liability to continue pension

payments a corporate management expecting to remain in business

and enjoy good labor relations would not-if in fact it could- abandon a pension plan, and therefore a realistic approach is to recognize

the liability. However, in the absence of a clear-cut legal liability

the Commission has not as yet, as a matter of policy, insisted upon the

showing of an actuarially determined liability for the accruing pensions. Instead, a clear footnote explanation is accepted.

Where the plan provides for the purchase of annuity contracts

from an insurance company or the establishment of a trust fund, in

either case based on past service of eligible employees or former employees now on pension, considerable diversity of opinion as to the

proper accounting has been found. The funding of pension costs for

past service may be accomplished by lump sum or installment payments

to the trustee concurrent with payments covering accruals for the current year. Payments covering the current year are clearly profit and

loss charges. Payments based upon past service of employees currently

on the payroll are claimed by some to be proper charges to earned

surplus on the grounds that the payment is for service rendered in prior

years. Others, including the Commission's staff, have considered such

payments to have been made for a current benefit in the form of better

employee relations, reduced labor turn-over, and similar benefits

currently and in the future, and hence have felt that they should be

charged to profit and loss. However, where the payments were substantial and would have seriously distorted current income figures no

objection has been raised to direct charges to earned surplus, although even in this situation the preferred method would seem to
THIRTEENTH ANNUAL REPORT 129

be to treat these items as extraordinary charges to profit and loss.

Further study is being given to all phases of the problem with a view

to obtaining consistent- and informative financial statements.

Considerable attention was given during the year to an important

problem as to inventories-the propriety of the creation from income

of reserves for future inventory price declines and losses. After carefully considering the procedure and the many arguments pro and

con it was concluded that its effect was to reduce current profits improperly and increase profits of subsequent periods. The Commission

took the position: (1) That provisions made to reserves for inventory

losses may properly be charged against income only to the extent that

the losses have actually taken place but have not been realized by use

or sale of the materials involved; (2) that any reserve so provided,

being a valuation reserve, should be deducted from the inventory on

the balance sheet; and (3) that a reserve for losses expected to occur

in the future constitutes merely a segregation of earned surplus and

should be so treated.

Developments in Auditing Practices and Professional Conduct

For the past 2 or 3 years there has grown up a practice of including

in registration statements filed under the Securities Act of 1933and in

the applicable prospectuses summary earnings tables covering a period

usually of 10 years. These tables, which are a highly condensed form

of profit and loss statement, are not required by any rule or regulation

of the Commission but they are desirable and, it is believed, necessary

in most instances as a means of comparing the operation of a business

in the prewar, war, and postwar periods. However, there have been

unusual cases where such violent and radical 'changes in the business

of the registrant have occurred that a long summary of past earnings

might well be misleading, and in several such cases the registrant has

been requested either to delete the summary entirely or to furnish only

a brief statement of the over-all, aggregate results without a breakdown as between the several years.

These summary tables are not required by the Commission's rules

to be certified by independent accountants. It has been, nevertheless,

common practice to introduce the summary with language indicating

that it has been ''reviewed'' by independent accountants. This use of

an accountant's name in connection with the summary is designed

and tends to give added authority to the material presented. It is

important, therefore, that there be a clear understanding and disclosure of the scope of the examination made by the accountant in such

cases and the extent of the responsibility which he, as an expert accountant, assumes.

Because of the uncertainty that has existed with respect to the

nature of the accountant's "review" in such cases, the Commission

published an opinion of the Chief Accountant indicating the circumstances under which independent public accountants may properly

express an opinion, and the form of such opinion, with respect to summary earnings tables to be included in registration statements filed

under the Securities Act. The opinion, published as Accounting

Series Release No. 62,states, in brief, that

* * * it is generally improper and misleading for an accountant to permit his

name to be used in connection with any period covered by a summary earnings

table or to undertake to express his professional opinion as to the fairness of the
130 SECURITIES AND EXCHANGE COMMISSION

representations made for such period in a summary earnings table unless he has

made an examination for such period in accordance with generally accepted

auditing standards applicable in the circumstances. * * * In cases where the

accountant has performed sufficientwork to make it appropriate for him to permit

the use of his name in connection with a summary earnings table * * * it

would appear that the accountant's certificate thereon should assume a compar- able form [to tbe certificate required by rule 2-02 of regulation S-Xl. and should

be included with the summary or made a part of his report as to the three-year

certified statement.

During the past year the problems of accounting for registered

security broker-dealers continued to cause considerable concern. Because this is such a highly specialized field of accounting, and since all

like transactions have a uniform effect upon each broker-dealer's financial position, detailed reporting requirements and specific minimum

audit requirements have been adopted by the Commission by rule.

These are contained, respectively, in Form X-17A-5 and in rule

X-17A-5. The audit requirements include physical examination of

securities and other items on hand and the obtaining of written confirmations with respect to numerous accounts, most of which are peculiar to the securities business, including accounts with customers, partners, officers, and directors.

The fact that many of these broker-dealer establishments are small

and are audited by accountants with limited experience in Commission

requirements may partially account for the fact that this field has

produced a relatively large number of cases in which it was felt necessary to suspend the accountants involved from practice before the

Commission. Accounting Series Release No. 59, published January

23,1947, dealt with one of these cases in which it was found necessary

to deny a public accounting firm and its senior partner the privilege of

appearing or practicing III any way before the Commission for a

period of 1 y.ear.28

The case was based almost entirely on the accountants' failure to

comply with generally accepted audit requirements, including those

specifically enumerated in the instructions to Form X-17A-5. Although a hearing was scheduled, the accountants did not appear but

admitted in writing certain failures in procedure and consented to

the issuing of an order against them. Auditing deficiencies included

the following: (1) Instead of a physical examination of all securities

on hand, only a test check of securities held for some customers was

made without sealing the safety deposits boxes during the audit;

(2) the broker's position in some but not all securities was balanced;

(3) written confirmations of customers' accounts were not obtained;

and (4) a second bank reconciliation was not made. Despite these

omissions the accountants gave an unqualified certificate including

the statement that they had complied with the audit requirements of

the Securities and Exchange Commission.

From time to time accountants' certificates which accompany financial statements of public utility companies filed with the Commission contain the following qualification, or one similar thereto:

* * * Subject to the adequacy of the provision and the reserve for depreciation, as to which we are not in a position to express an opinion, the ac- companyingbalance sheet * * * presents fairly * * *

II In the Matter of Williams & Kingsolver.
THmTEENTH ANNUAL REPORT 131

Ten years ago this might have been a proper reservation for an

accountant to make in his certificate covering the accounts of a publicutility company; it has been that many years since depreciation accounting has generally displaced the retirement reserve or other

methods of providing for the exhaustion of the service life of utility

property. During this period accountants have had much opportunity

to familiarize themselves with the property accounts and depreciation

problems of utilities and there seems to be no doubt that they have

taken full advantage of this opportunity. Under these circumstances

there would appear to be little, if any, justification for accountants to

avoid the assumption of full responsibility for the adequacy of depreciation provisions or reserves of these companies except, perhaps,

in very unusual situations.

Inview of this the staff of the Commission made an extensive review

of the history of present practices as to certification of utility depreciation accounts by independent accountants. A study was made to

determine the past justification of the qualification practice and the

practicability and other issues involved in the extension of auditing

responsibility to this area of general qualification. The conclusion

reached was that past practice constituted a tacit understanding by

which speeific professional rules were waived, that reluctance to assume this final responsibility may well have been justified in past years,

but that the arguments in support of qualification of certificates no

longer are persuasive. The Commission therefore concluded that in

the future it would apply the following policy with respect to financial statements filed pursuant to its requirements: If, in the opinion

of the accountant, the depreciation reserve is inadequate he should so

state jn his certificate; the amount of inadequacy, if known, should be

stated; in any event the reader of the certificate should be left with

no doubts as to whether the depreciation reserve as shown on the balance sheet and the provisions for depreciation included in the income

statement are, within reason, adequate.

During the year two cases arose, both in connection with Form 8-1

registration statements, in each of which the audit of the accountants

was not made in accordance with generally accepted standards applicable in the circumstances, and, at least in one case if not both, the audit

did not include all the procedures deemed necessary by the accountant. Because of special circumstances in one case and in each the fact

that the withdrawal of the registration statement was permitted, it

was not believed desirable to take formal action against the accountants. As an educational as well as a disciplinary measure the deficiencies in the audits performed were discussed at length with a partner

of the accounting firm involved in each case. Itis believed that these

discussions proved beneficial to the two firms and that in appropriate

cases this approach may assist in promoting the expert auditing which

is demanded by the Commission.

STATISTICS AND SPECIAL STUDIES

Saving Stud,.

The Commission continued its series of quarterly releases on the

volume and composition of saving by individuals in the United States.

These releases show the aggregate volume of individuals' saving, that

767629-48-10
132 SECURITIES AND EXCHANGE COMMISSION

is, the increase in their assets less the increase in their liabilities, exclusive of gains or losses from revaluation of assets. The figures also

show the components contributing to this total, such as changes in

securities, cash, insurance, consumers' indebtedness, and consumers'

durable goods.

Financial Position of Corporations

The series of quarterly releases on the working capital position of

all United States corporations, exclusive of banks and insurance companies, was continued. These releases show the principal components

of current assets and current liabilities and an abbreviated analysis

of the sources and uses of corporate funds. Semiannual supplementary tables were also released showing a detailed break-down of current assets and liabilities for various industry and size groups of

corporations registered with the Commission. Beginning with the

March 31, 1947, report, registered corporations have been reporting,

in addition to current assets and current liabilities, a few income accounts and the remaining balance sheet items. It is intended in subsequent reports to present more detailed data on the sources and uses

of corporate funds, thus giving an up-to-date analysis of the financial

condition of 'corporations as well as a complete picture of the volume

and composition of corporate saving.

The Commission, together with the Department of Commerce, also

continued the series of quarterly releases on the plant and equipment

expenditures by United States businesses other than agriculture.

Shortly after the close of each quarter, these releases present industry

totals on the actual capital expenditures of that quarter and anticipated expenditures for the next two quarters. It is intended in future

reports to. present additional data showing more detailed classifications of industry groups and a size-of-company break-down. These

data provide a useful index of present and future activity in the

capital goods industries and capital markets and a valuable barometer

of business activity in general.

Survey of American Listed Corporations

During the past fiscal year, the Commission again released for

public and Government use statistical data filed with the Commission by registrants under the Securities Exchange Act of 1934 and the

Securities Act of 1933. These data are summarized in a series of

reports known as the "Survey of American Listed Corporations" showing individual data for each company as well as industry totals for

1,668 registered companies in 120 industry groups.

One of the series of reports, "Data on Profits and Operations, 1944--

1945," was completed in the fiscal year. Principal items furnished

in these reports on profits and operations are annual data on sales,

costs and/or operating expenses; 0l?erating profits; net profit before

and after income taxes; depreciation, depletion, etc.; maintenance

and repairs; selling, general and administrative expenses; and return

on net worth before and after taxes. Each of these companies' reports

also shows data on renegotiation of war contracts, the amounts and

effects of "carry-backs" of taxes, data on termination of contracts

whenever reported~ and reported war costs, losses and expenses. A

summarization of data on profits and operations for the period 1936-
THIRTEENTH ANNUAL REPORT 133

45, inclusive, was also publicly released. These data for registered

corporations, both on an individual company and industry basis, are

currently being carried through 1946.

Another of the reports, entitled "Registrants and Subsidiaries, 1945/'

shows the relationship between 2,095 registered companies and their

13,868subsidiaries. The report is so designed as to show the corporate

systems of which any corporation is a component part.

Investment Company Data

Data for closed-end and open-end management investment companies were compiled and released to the public quarterly showing

purchases and sales of their own stocks and bonds and changes in their

portfolios and in their principal asset items.

Brokers and Dealers

During the past fiscal year, a study was made of the financial condition of 3,276 registered brokers and dealers reporting under rule

X-17A-5 under the Securities Exchange Act of 1934. The study

showed their cash, aggregate indebtedness and net capital, customers'

free credits, bank loans and firm securities, exempt and nonexempt,

from which the ratios of the firms' cash to free credit balances, the

firms' nonexempt securities to net capital, and aggregate indebtedness

to net capital can be computed. The study is being carried through

1947, and the results to date are included as appendix table 6.

Quarterly Sales Data

Data showing quarterly sales of registrants under the Securities

Exchange Act of 1934 have been released to the public by the Commission, covering approximately 1,400 corporations in 156 industry

groups. The data are shown for both the individual companies and

industry groups and show the trend of sales for a large segment of

national industry.

Stock Market Statistics

The Commission continued to publish indexes of weekly closing

prices of common stocks on the New York Stock Exchange; the

monthly market value and volume of sales on registered and exempted

securities exchanges; daily and w~ekly round-lot stock sales on the

two New York Exchanges, includmg short sales, weekly round-lot

stock transactions on the New York Stock Exchange for accounts

of members and nonmembers, weekly round-lot and odd-lot transactions on the New York Curb Exchange for accounts of members and

nonmembers, and daily odd-lot stock transactions on the New York

Stock Exchange for odd-lot accounts of odd-lot dealers and specialists.

A number of these series are presented in appendix tables. The Commission's staff continued its studies of various aspects of trading

in securities, including floor trading, purchases and sales of domestic

securities for foreign account, purchases and sales.of security options,

and general research on exchange rules and practices.

OPINION WRITING OFFICE-FORMAL OPINIONS

The Opinion Writing Office aids the Commission in the preparation of findings, opinions and orders promulgated by the Commission
134 SECURITIES ANt> EXCHANGE COMMISSION

in contested and other cases and controversies arising under the Securities Act of 1933, the Securities Exchange Act of 1934, the Holding

Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of

1940 as are assigned to it from time to time by the Commission.

Formal opinions are issued in all cases where the nature of the matter

to be decided, whether substantive or procedural, is of sufficient importance to warrant a formal expression of views. In addition, this

officehas been assigned the function of joint responsibility with the

officeof the Solicitor of the Commission IIIdealing with the problems

arising under the Administrative Procedure Act, and has also been

assigned responsibility for the preparation of compilations of annotations of the various statutes administered by the Commission.

The Opinion Writing Office is an independent staff office of the

Commission which is directly responsible to the Commission. It receives all assignments and instructions from and makes recommendations and submits its work to the Commission directly. It is headed

by a director, who is assisted by an assistant director, supervising attorneys and a staff of drafting attorneys and a financial analyst.

While engaged in the preparation of opinions, the attorneys are

completely isolated from persons actively participating in the proceedings. It is an invariable rule that the attorney assigned to prepare an opinion must not have had any connection with any previous

phase of the case with respect to which the opinion is to be prepared.

The director or assistant director of the Opinion Writing Office,

together with the members of the staff of the officewho are assigned

to work on a particular case, attend oral argument made to the Commission in that case. Following oral argument, or if no oral argument has been held at such time as the case is ready for decision, the

Opinion Writing Office is instructed by the Commission respecting

the nature and content of the opinion and order to be prepared.

In preparing the draft of the Commission's formal opinion, the

entire record is read by a member of the Opinion Writing Officestaff

and in most cases he also prepares a narrative abstract of the record

in the proceedings. Upon completion of It draft opinion and abstract

of the record, and after their review and revision within the Opinion

Writing Office,they are submitted to the Commission. If the study

of the record in the case by the Opinion Writing Office has revealed

evidence of violations warranting a reference to the Attorney General

for criminal prosecution, or has disclosed the desirability of the adoption or amendment of rules, regulations or forms or the need for any

changes in administrative procedures or techniques, appropriate recommendations are made to the Commission at the time the draft

opinion in the case is submitted.

The draft opinion as submitted may be modified, amended or completely rewritten in accordance with the Commission's final instructions. When the opinion accurately expresses the views and conclusions of the Commission, it is adopted and promulgated as the official

decision of the Commission. In some cases concurring or dissenting

opinions are issued by individual commissioners who wish to express

their separate views on matters covered by the opinion adopted by

the majority of the Commission. In such cases the Opinion Writing
THffiTEENTH ANNUAL REPORT 135

Office is occasionally instructed to prepare drafts of such concurring

or dissenting opinions and confers respecting them with the individual Commissioners involved, submits drafts directly to them, and

makes such modifications and revisions as are directed.

The findings of fact, opinions and orders thus prepared, adopted

and promulgated by the Commission serve as an aid and guide to

the bench and bar. With minor exceptions (e. g., certain opinions

dealing with requests for confidential treatment) all are publicly released and distributed to representatives of the press and persons on

the Commission's mailing list. In addition, findings and opinions

are printed and published by the Government Printing Office in

bound volumes under the title "Securities and Exchange Commission

Decisions and Reports."

In addition to the preparation of findings, opinions and orders in

cases assigned to the Opinion Writing Office exclusively, this office

may assist the operating divisions of the Commission's staff in the

preparation of opinions in cases in which participation by the staff

of the division in the decisional process is proper (i. e., cases as to

which the Administrative Procedure Act does not require separation

of functions). The Opinion Writing Office also assists the Office of

the Solicitor in the preparation of cases on appeals taken from formal decisions prepared by the Opinion Writing Office.

Some of the more significant opinions are commented upon in this

report under. the discussion of the various statutes.

PUBLICATIONS

Public Releases

Releases of the Commission consist primarily of official announcements of filings under and actions taken pursuant to the several acts

which it administers. These consist for the most part of hearing

orders, decisions, regulations, and related matters issued by the Commission.

During the 1947 fiscal year the following number of releases were

issued under the several Acts and in connection with the Commission's

participation in cases under chapter X of the Bankruptcy Act:

Securities Act of 1933________________________________________________ 93

Securities Exchange Act of 1934-______________________________________ 140

Public Utility Holding Company Act of 1935_____________________________ 782

Trust Indenture Act of 1939__________________________________________ 5

Investment Company Act of 1940_____________________________________ 159

Investment Advisers Act of 1940______________________________________ 4

Chapter X, Bankruptcy AcL__________________________________________ 4

~otal 1,187

The following break-down of these releases for the month of June

1947 is fairly illustrative of their general nature:

Announcements of filings, orders for hearing, and notices giving oppor- tunity to request hearing__________________________________________ 41

Interim and final decisions and orders________________________________ 53

Announcements of regulations adopted and proposed to be adopted____ 14

Announcements of accounting opinions and instructions________________ 1

1:otal -_____ 109
136 SECURITIES AND EXCHANGE COMMISSION

The balance of the Commission's releases are of an informational

nature, the following having been issued during the year:

Announcements of publication of reports on corporate survey and statistical studies 31

Reports of court actions in injunction and criminal prosecution cases initiated by the COmmission________________________________________________58

Miscellaneous (announcements regarding appointments of Commissioners, Staff Officers, and related matters) 10

Total_____________________________________________________________99

In all, 1,286 releases were issued during the 1947 fiscal year.

Other Publications

Daily Registration Record.

Monthly StatiStical Bulletin.

Financial Statistics for Electric and Gas Subsidiaries of Registered Public

Utility Holding Companies.

Bound volume 13 of the Decisions and Reports (.April 1, 1943, to .August 15,

1943).

Table of Decisions and Reports covering period from .April 1, 1946, to December

31.1946.

Twelve monthly issues of the Official Summary of Securities Transactions and

Holdings of Officers, Directors and Principal Stockholders.

The Twelfth Annual Report of the Commission.

List of Securities Traded on Exchanges under the Securities Exchange Act

of 1934 as of December 31, 1946, together with Supplements thereto.

Securities Issues of Electric and Gas Utilities 1935-1946.

Working Capital of 1,186 Registered Corporations, December 1939 to June

1946,

Working Capital of 1,246 Registered Corporations, December 1939 to December 1946. . .

Survey of American Listed Corporations, Data on Profits and Operations,

1943-1944, Parts 5 and 6.

Survey of American Listed Corporations, Data on Profits and Operations,

1944-1945, Parts 1, 2, 3, 4, and 5

The Work of the Securities and Exchange Commission (as of January 1,

1947).

Index to Hearings on Stock Exchange Practices.

Index Digest to Investment Trust and Investment Companies.

Index Digest to the Study and Investigation on the Work, Activities, Personnel and Functions of Protective and Reorganization Committees.

List of Companies Registered under the Investment Company Act of 1940

(as of August 31,1946).

INFORMATION AVAILABLE FOR PUBLIC INSPECTION

The Commission maintains public reference rooms at the central

office in Washington, D. C., and in its regional officesin New York,

N. Y., and Chicago, m.

Copies of all public information on file with the Commission, contained in registration statements, applications, reports, declarations,

and other public documents, are available for inspection in the public

reference room at Washington, D. C. During the 1947 fiscallear, 2,129

persons visited this public reference room seeking such in ormation.

In addition, the Commission received thousands of letters and telephone calls requesting registered information. (This does not include requests for copies of releases, forms, publications, and so forth.)

Through the facilities provided for the sale of copies of public registered information, 2,712' orders, involving a total of 213,631 pages of

material, were filled. .
THlliTEENTH ANNUAL REPORT 137

In the New York regional office,facilities are provided for the inspection of certain public information on file with the Commission.

This includes copies of (1) applications for registrations of securities on all national securities exchanges, except the New York Stock

Exchange and the New York Curb Exchange where the applications

are available, together with copies of annual reports, supplemental reports and amendments thereto; and (2) annual reports filed pursuant

to the provisions of section 15 (d) of the Securities Exchange Act of

1934 by issuers having securities registered under the Securities Act

of 1933. During the 1947 fiscal year, 13,827 persons visited the New

York public reference room and more than 6,952 telephone calls were

received from persons seeking registered public information, copies of

forms, releases and other material.

In the Chicago regional office,copies of applications for registra-

, tion of securities on the New York Stock Exchange and the New York

Curb Exchange, together with copies of all annual reports, supplemental reports and amendments thereto, are available for public inspection'. During the 19~7fiscal year, 3,408 persons visited this public

reference room, and approximately 1,403 telephone calls were received from persons seeking registered public information, forms, releases, and other material of a public nature.

In addition to the special facilities provided in the New York and

Chicago regional offices, all regional offices maintain public files of

the following material:

All prospectuses used in public offerings of securities registered under the

Securities Act of 1933.

Duplicate copies of applications under the Securities Exchange Act of 1934 for

registratlon of brokers and dealers having principal offices within the region

administered by the particular regional office.

Duplicate copies of applications under the Investment Advisers Act of 1940

for registration of investment advisers with principal offices Within the region

administered by the particular regional office.

Copies of letters of notification and related material filed under regulation

A (which exempts small security issues from registration under the Securities

Act of 1933) filed by issuers having their principal place of business within the

region administered by the particular regional office.

In the San Francisco regional office,where facilities are provided

for the registration of securities and the qualification of indentures,

copies of the registration statements and applications for qualification of indentures filed at that officeare available for public inspection.

Copies of all applications for the permanent registration of securities on a national securities exchange are available for public inspection at the respective exchange upon which the securities are registered.

PUBLIC HEARINGS

The following number of public hearings were held by the Commission, under the Acts indicated, during the 1947 fiscal year:

Securities Act of 1933__________________________________________________ 10

Securities Exchange Act of 1934_________________________________________ 57

Public Utility Holding Company Act of 1935 166

Trust Indenture Act of 1939_____________________________________________ 1

Investment Advisers Act of 1940_________________________________________ 2

Investment Company Act of 1940________________________________________ 72

Total ~-- 308
138 SECURITIES AND EXCHANGE COMMISSION

PERSONNEL

.As of June 30, 1947, the personnel of the Commission consisted of

5 Commissioners and 1,154 employees (698 males, 461 females), 320 of

whom were assigned to the field offices.

FISCAL AFFAIRS

Appropriation title Amount Obligation UnobIlgated balarice

~~~i:g~de~~~: ::::::: -: :::: ::::::: ::::: :::::::: _:::::: $5,488.700 $5,487,229 $1,471

45,000 42,808 2,192

TotaL __________________________________________________ 5,533.700 5,530,037 3,663

Receipts for the fiscal 1/ear 19JI'/

Oharacter of fee Amount

Fees for registration of securities $679,190.03

Fees under Trust Indenture AcL_________________________________ 1,100.00

Fees from registered exchanges__________________________________ 400,024.84

Fees from sales of photo duplicates______________________________ 16,352.30

~scellaneous__________________________________________________ Q4, 748. 70

Total 1,111,415.87

1This money must be turned into the general fund of the Treasury of the United States

and is not avallabie for expenditure by the Commission.

CONFIDENTIAL TREATMENT OF APPUCATIONS, REPORTS,

OR DOCUMENTS

The Commission is empowered to grant confidential treatment, upon

application by registrants, to information contained in reports, applications, or documents which they are required to file under the Securities Act of 1933,the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Investment Company Act of

1940, and the Investment Advisers Act of 1940. Under the Securities

Act of 1933 the Commission has adopted rule 580, which provides

that information as to material contracts, or portions thereof, will be

held confidential by the Commission if it determines that disclosure

would impair the value of the contracts and is not necessary for the

protection of investors. The other four statutes referred to are, in

general, without specific restriction in this respect and empower the

Commission to hold confidential under certain conditions any information contained in any reports required to be filed under those statutes. Disclosure of information confidentially filed under the latter

statutes is made only when the Commission determines that disclosure

is in the public interest.

The following table indicates the number of applications received

and acted upon during the past year, together with the number pending

at its close:

'
THmTEENTH ANNUAL REPORT

Applications for confidential treatment-1947 ttscal year

139

Number Number Number

Act under which filed pending Number Number denied y:;nding July 1, received granted or with- une se, 1946 drawn 1947

--- --- ------ Securities Act of1933I__.____________ ._______________ 3 35 34 4 Securities Exchange Act of 1934, ___________________ 23 131 102 35 17

TotaL ________________________________________ --- --- --- --- --- 26 166 136 35 21

I FlIed under rule 580. IFlIed under rules X-24B-2 and X-13A-6B.

Although registrants may seek judicial review of decisions by the

Commission adverse to them, no petitions for such judicial review

were filed in any of these cases during the past fiscal year.

ADVISORY AND INTERPRETATIVE ASSISTANCE

References are made throughout this report to the informal assistance rendered by the staff to the public in connection with the statutes

administered by the Commission. Such assistance is usually given

by the staff in connection with specific matters involving the filing

of a registration statement, proxy statement, annual report, and so

on. Mention has been made of the prefiling conference and the deficiency letter in connection with registration statements. These represent only a small part of the total of informal assistance given the

public by the staff. It is not possible to determine the exact amount

of assistance made available to the public by the staff by means of

conference and letter. At the least, such conferences run into the

thousands, and their number is more than equaled by the number of

advisory letters prepared by the staff during the 1947 fiscal year.

In addition to the above assistance rendered by the staff in connection with specific matters, a great amount of assistance was provided

the public by a special Interpretative Section in the officeof the Chief

Counsel of the.Corporation Finance Division. This section is staffed

with lawyers prepared to give expert advice as to all questions of interpretation arismg under the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and parts

of the Securities Exchange Act of 1934. Upon presentation of all

pertinent facts involved in a particular problem, the section will furnish a detailed and informed opinion as to the application of a particular statute in a specific situation.

During the 1947 fiscal year, the section prepared 5,766 letters of

assistance, ranging from highly technical analyses of complex financial transactions at the request of lawyers and accountants to letters

from high school students requesting information for term papers.

In addition, the section rendered like assistance in many hundreds

of conferences during the year with members of the public, in person or by telephone.

•

•
140 SECURITIES AND EXCHANGE COMMISSION

INTERNATIONAL FINANCIAL AND ECONOMIC MATTERS

The Commission participates in the formulation and execution of

the foreign economic and financial program of the Government

primarily through other agencies and through special bodies concerned with foreign economic policy. The Commission is represented

on the Staff Committee of the National Advisory Council on International Monetary and Financial Problems and contributes to the

working groups of this committee. There is further cooperation with

agencies concerned with the development of the Government's foreign

economic program through the Executive Committee on Foreign Economic Policy and its subcommittees on foreign investment policy,

private monopolies and cartels, and on the United Nations Economic

Subcommittee. As heretofore the Commission, upon the invitation

of the United States Governor-of the International Bank and Monetary Fund, took part in the annual meeting of these institutions.

One aspect of foreign economic affairs with which the Commission

is primarily concerned arises under the Securities Act of 1933. Under

that Act it is necessary that foreign issuers of securities, both Government and private, register those securities. Preliminary negotiations

and discussions with such issuers and with other Federal agencies

are often necessary prior to the registration of the securities. During

the 1947 fiscal year 11 foreign governments or their political subdivisions filed registration statements under the Securities Act covering securities with a total offering price of $333,587,590. Among these

registrants were the Commonwealth of Australia, the Kingdom of

Norway, and the Kingdom of the Netherlands. In addition, 27 private

foreign issuers filed registration statements covering securities with an

aggregate offering price of $62,930,646. The Commission maintains,

through its adviser on foreign investments, facilities for liaison with

other governmental agencies which might have either jurisdiction of

or an interest in the problems involved in such registration.

As mentioned in the Twelfth Annual Report, the Commission continued its activities in connection with the International Bank for

Reconstruction and Development. The Bank made its first offering

of bonds in the private capital markets in July 1947. This culminated

a series of discussions and conferences which were held during the

fiscal year. These conferences, by the Commission and the staff with

representatives of the Bank and other agencies, covered a number of

problems arising under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939. As a result of its consideration of the various problems involved, the Commission, in June 1947, adopted a number of rules under the Securities

Act and the Securities Exchange Act to facilitate the operation of

the Bank in the domestic markets. These rules are discussed in detail in other sections of this report.

During the fiscal year, the Commission continued to make or participate inspecial studies to aid other agencies concerned with foreign

economic and financial problems. These special studies involved such

matters as the debt status of foreign countries applying for credit and

the study of foreign laws with respect to securities and investment.
THIRTEl!lNTH ANNUAL REPORT 141

INTERNATIONAL BANK. FOR RECONSTRUCTION AND DEVELOPMENT

The flotation of $250,000,000 of bonds by the International Bank in

July of 1947, representing the Bank's first flotation of securities in the

private capital markets, was the first experience the Commission has

had in the offering of securities by such an international organization. In anticipation of that offering, the Commission on June 25,

1947, issued a release announcing the promulgation of a number of

rules under the Securities Act of 1933 and the Securities Exchange

Act of 1934, as well as the rendering of an interpretation under the

Trust Indenture Act of 1939, with reference to the securities of the

Bank.

The Bank's request for this action was supported by the National

Advisory Council on International Monetary and Financial Problems.

The council was created by the Bretton Woods Agreements Act, pursuant to which the United States became a member of the Bank and the

International Monetary Fund. It consists of the Secretary of the

Treasury (who is chairman), the Secretary of State, the Secretary

of Commerce, the Chairman of the Board of Governors of the Federal

Reserve System, and the Chairman of the Board of Trustees of the

Export-Iniport Bank of Washington. Its statutory purpose is "to

coordinate the policies and operations of the representatives of the

United States on the Fund and the Bank and of all agencies of the Government which make or participate in making foreign loans or which

engage in foreign financial, exchange or monetary transactions."

The effect of the rule adopted under the Securities Act of 1933, rule

144, is to exempt from underwriters' liabilities under section 11 of

that act any broker or dealer whose interest in the distribution of the

Bank's securities is limited to the usual and customary distributors'

or sellers' commission or concession. The term "underwriters" is

defined in section 2 (11) of the act itself to exclude "a person whose

interest is limited to a commission from an underwriter or dealer

not in excess of the usual and customary distributors' or sellers' commission." The Commission had been informed that the Bank did not

propose to effect the distribution of its securities through underwriters

in the usual sense, but merely to allow the customary commission or

concession to a large number of brokers or dealers throughout the

country who would be in direct privity of contract with the Bank.

Although the absence of an intermediate underwriter between the

Bank and the brokers or dealers would ordinarily have brought the

brokers or dealers within the definition of "underwriter" in section

2 (11) of the act, the Commission deemed it an impelling reason for

a rule excluding them from that definition that the Bretton Woods

Agreements Act in effect immunizes the officers and directors of the

Bank from legal process with respect to acts performed by them in

their official capacities, except when the Bank waives this Immunity.

Since this provision relieves the Bank's officers and directors (although

not the Bank itself) from civil liability actions under section 11 of

the Securities Act of 1933, the Commission considered it appropriate

in the public interest to extend similar relief to the brokers or dealers

described in the Commission's rule.

A distributing broker or dealer, in order to obtain' the benefit of

the rule and be relieved. from underwriters' liabilities under section
142 SECURITIES AND EXCHANGE COMMISSION

11, must make a bona fide offer of his entire allotment or subscription,

at not more than the offering price specified in the prospectus, to persons other than partners, officers, directors or employees of the broker

or dealer, or persons in a control relationship with the broker or dealer,

or accounts in which the broker or dealer or any such person has a

beneficial interest. If the broker or dealer or any 'such person wishes

to obtain any of the securities for his own account without the making of such an offer and without losing the benefit of the rule, he

will have to effect his purchase on the open market on the same basis

as any member of the public.

The Commission's action does not affect the civil liability of the

distributors of the Bank's securities under section 12 (2) of the Securities Act of 1933 in the event of any material misstatements or omissions in any prospectus or oral communication by means of which the

securities are sold, as well as the liability under section 17 (a) of that

act for selling securities by means of fraudulent practices or material

misstatements or omissions.

The rules adopted by the Commission under the Securities Exchange Act of 1934, rules X-15A-3, X-15AM-1 and X-12D3-11

exempt the Bank's securities from three provisions of that act. The

first exemption is from section 15 (a), the section which requires the

registration with the Commission of over-the-counter brokers and

dealers who trade in nonexempted securities. The second exemption is from section 15A, the section pursuant to which the National

Association of Securities Dealers, Inc. is registered with the Commission as a ''national securities association." The effect of the Commission's exemptions from these two sections is to permit brokers or

dealers who otherwise deal exclusively in United States Government

or municipal securities to participate in the distribution of the bank's

securities without registering with the Commission or joining the

NASD. However, these exemptions are subject to the same condition concerning a bona fide offer of the entire allotment or subscription as the Securities Act rule. The Commission agreed with the

National Advisory Council that the interest of the United States

Government in the Bank justified treating the Bank's securities as

"exempted securities" so far as sections 15 (a) and 15A of the Securities Exchange Act are concerned. .

The third exemption under the Securities Exchange Act of 1934

is from that portion of section 12 (d) of the act which 'prohibits whenissued trading on a national securities exchange-unless Its primary purpose is to distribute the unissued security to holders of a security previously registered under the Securities Exchange Act. The Commission had been informed that the Bank would file an application to register its debentures on the New ¥ork Stock Exchange and that the

exchange intended to admit the debentures to when-issued trading

upon the effectiveness of the registration statement under the Securities Act 0:f1.933. This was done. The exemption from the when-issued

trading provisions of section 12 (d) had been requested and was

granted in order that the admission of the Bank's debentures to trading

on the New York Stock Exchange would automatically exempt them

from qualification under the "blue sky laws" of a number of States.

The three exemptive rules adopted by the Commission under the

Securities Exchange Act of 1934 leave the Bank's securities subject
THmTEENTH ANNUAL REPORT 143

to all the other provisions of that act, whether or not those provisions

apply to securities otherwise defined as "exempted securities" by section 3 (a) (12). That section authorizes the Commission by rule to

exempt any security "from the operation of anyone or more provisions" of that act "which by their terms do not apply to an 'exempted security'," and the Commission has designated the Bank's

securities as "exempted securities" only for the purpose of section 15

(a), section 15.A, and the when-issued trading provisions of section

12 (d). The Bank's request for a general exemption from all the provisions of the Securities Exchange .Act was not supported by the

council and was rejected by the Commission.

So far as the Trust Indenture .Act of 1939 is concerned, the Commission concurred in the opinion of counsel for the Bank that an exemption was available under the statute.

PART IX

APPENDIX

STATISTICAL TABLES

145

TABLE I.-Registrations und.erthe Securitie8 Act of 1988 fully effective during

the fi8cal year ended June 80, 1941

PART I.-DISTRIBUTION BY MONTHS

[Amounts inthousands of dollars)'

All effectively registered Proposed for sale for account of Issuers

Year and month

Nnmberof Number Amount Number of Number .Amount statements of Issues statements of Issues

1948 lu1y

August _______________________ 75 101 854,125 58 71 707,751

September ____________________ 51 72 469,400 39 54 171,1114

October _______________________ 29 35 229,211 24 29 211,105

N ovember 29 42 1,214,206 23 33 594,564

December _____________________ 41 55 450,597 33 42 378,106 39 53 395,339 30 38 356,762

1947 lanuary ______________________ February 29 39 225,500 22 29 147,560

March ________________________ 29 39 293,348 24 30 215,969 51 82 596,674 38 64 442, 672 ApriL ________________________ 44 63 658,145 39 48 577,029 May __________________________ 29 41 330,635 23 29 151,505 rune., ________________________ 47 64 1,015, 265 41 52 919,955

Total1lsca1 year 1947____ '493 686 6,732,447 394 519 4,874, HI

PART 2.-BREAKDOWN BY METHOD OF DISTRIBUTION AND TYPE OF SECURITY

OF THE VOLUME PROPOSED FOR CASH SALE FOR ACCOUNT OF ThE ISSUERS

[Amounts in thousands of dollars]'

Type of security

Method of distribution and group to whom offered Secured Unsecured Preferred Common Other All types bonds bonds stock stock types I

--- --- All methods of distribution _____________4,874,141 841,854 1,936,357 786,866 840,675 468,388 To general public ___________________3,835,455 831,129 1,521,967 649,377 382,854 450,128 To security holders _________________ 967,231 275 414,390 104,983 447,583 ----18;260 To other spectal gr~S--_---------- 71,455 10,450 32,507 10,238 Through investment b era___________4,030,744 814,633 1,545,165 737,009 490,764 443,173 By ~chase and resale _____________3,333,621 814,133 1,493.632 726,091 299,765 ... .._- .... o general public 3,081,119 803,683 1,467,434 631,561 178,441 .. To security holders _____________ 242,053 ---10;45() 26,198 94,530 121,325 .---- ..--... - To other special groups _________ 10,450 On best efforts basls ________________ 697,123 500 ----51;533- ---io;918' --100;900- ---443;i73 To general public _______________ 693,058 500 51,533 9,300 188,552 443,173 To security holders 2,080 1,168 912 To other specla! groups _________ 1,985 ---27;221- ---391;192- 450 1,535 By issuers __________________________ ----25;215 843,397 49,857 349,911 To general publle ___________________ 61,278 26,946 3,000 8,515 15,861 6,965 To security holdera _________________ 723,098 275 388,192 9,285 325,346

To other special groups ----18;200 59,020 ---------- ..---------- 32,057 8,703

See footnotes at end of table.

147

'l67629-{8--11

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TABLE 6.-Data relating to resources and liabilities of registered brokers and

dealers, 1946

Net capitaL

(No value glveu to fixed assets or other assets not readily convertible Into

cash. Marketable securities Included at their market value.) Aggregate Indebteduess :

(Does not include borrowings on exempt securities such as government bonds and municipals.)

AGGREGATE Oli' PRINCIPAL ASSETS

Cash In banks ._

Funds segregated pursuant to Commodity Exchange Act requirements

(Amounts which firms owe customers on transaction In regulated commodities.) Cash and exempt securities segregated

(For rarticlliar purposes pursuant to requirements of exchanges or Fed- ers and Stete regulatory ageneles.) Firms' Inventory of exempt seeuritles at market value

FIrms'lnventory of nonexempt securities at market value

Customers' debit balances In cash accounts

(Due from customers on cash transactrons In securities.) Customers' debit balances In margin accounts

AGGRlI:GATB or PRINCIPAL LIABILITIES

Customers' free credit balances

(Due and payable to customers on demand.) Customcrs' credit balances In cash accounts

(Funds held for customers pending completion of securities transactions.)

Customers' credit balances in accounts with open contractual commitments..

(Funds received from customers In payment for seeunties not immedlately available for delivery.) Customers' credit balances In margin accounts

Borrowed On from banks on customers' securities: exempt securlties

On nonexempt securities.

Borrowed from banks on firms' and partners' securitles

(Exempt and nonexempt securities.)

Members of

Grand total the New

York Stock (3,276 rer- Exchange trants (536 regis.

trants)

$923, 886, 714 $514, 444, 875

2, 590, 681, 487 I, 548, 330, 006

602, 069, 288 418,479,278

50,453,910 47,636,031

136, 004, 659 I 33, 760, 247

863, 724, 658 403,507,914

775,685,473 376, 160, 682

281,675,257 97,055,362

752, 487, 156 731, 832, 760

712, 665, 772 661, 124, 753

153, 430, 035 41,371,123

36,375,229 31,344,346

73,067,483 70,887,087

108, 551, 138 107,094,800

247, 732, 372 214, 144, 966

1,022, 507, 231 327, 104, 320

I This table shows the aggregate net capital and aggregate Indebtedness of all registered brokers and dealers who flied financial reports with the Cornmlssion reflecting their financial condition as of a date In 1946, compiled according to the definitions set forth In rule X-15C3-1 under the Securities Exchange Act of 1934. This data has been broken down as between the grand total of 3,276 brokers and dealers and the 536 members of the New York Stock Exchange who filed such reports. For a further break-down by Commission Regional Offices, see Survey Series release 113 (1947). 1Includes $2,729,754 In exempt securities.

I Includ~ $2,714,828 In exempt securitias.

767629-48--12

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164 SECURITIES AND EXCHANGE COMMISSION

TABLE 7.-Market value and volumB of sales effeated on securities ell!changes for

the {iscal1Jear ending June 90, 1947

PART I.-ON ALL REGISTERED EXCHANGES

[In thousands]

Stocks 1 Bonds' Rights and warrants Total

Exchange market

value Market Number Market Principal Market Number

(dollars) value of value amount value of

(dollars) shares (dollars) (dollars) (dollars) units

All registered exchanges 14,700,928 13,733,163 552,774 973,725 1,350,158 84,040 44,203

Baltimore ...•••••....••••.•. 5,314 4,134 169 1,180 1,279 Boston ..•• .• •. . •.... 197,161 194,284 4,703 59 58 ""2;"818- '-"-1;435

Ohlcago Boord of Trade •... 66 66 15 0 0 -""1;ioo- .-- ... -6io Chicago Stock._ •.. _._••.. 225,448 224,242 8, 367 7 3 Cincinnatl. .• •. _. •••... 11,561 11,240 333 0 0 321 87 Oleveland, .•••.... ••.• 19,477 19,443 629 ... 34 32 Detroit. .••••...• .• , .. 46, 368 46, 368 3,494 ...... _------- ...... -0- ...... 500- Los Angeles.• •••...•..•.. 104,406 103,810 9,989 0 414 New Orleans, ••...• ._ 2,206 2, 192 63 14 13 -'-29;200' New York Curb •••.. _._._ .. .... i5;8OO 1,327,979 1,241,200 89,703 57,579 73,255

New York Stock •.••• .•..• 12, 520, 077 11,559,962 391,599 912, 496 1,273,463 47,619 24, 719 Philadelphia ••.. ...••.. 117,887 115,469 4,389 1,650 1,435 768 327 Pittsburgh, •••.••.•••.• _"" 19,515 19,488 1,112 1 1 26 8 St. Louis•••.•• ••...• ••.... 8, 183 7,975 303 1 1 207 72 Salt Lake .•..•.. _._.. •... 3,428 3,428 16,295 San Francisco Mining ..•. 1,326 1,326 7,613 ""i;252- •.. --.600 San Francisco Stock •..• ._ 177,028 175, 266 11,087 510 438 Spokane; .. ••. ••..... 1,574 1,574 2, 876 Washington ..• •... ••••... 1,924 1,696 35 ""'-228- """'212'

Break-down of fiscal year totals by months

1948 luly •.••••••• , ..• 1,296,867 1,212,599 42,801 73,743 90,500 10,525 4, 967 August ... ..••.. _._ .•... ._ 1,236,204 1,152,971 41,390 72, 691 94,121 10,642 4,525 September .. ••..••.•.. .•. 2,007,598 1,898, 081 77,688 104,881 167,352 4,636 4, 118 October _. ....... ....... _._ 1,382,524 1,293,597 52,961 85,870 131,885 3,057 1,591 November ..•...•.• .. ..... 1,184,580 1,107,635 46,191 66,551 97,458 10,394 5,477 December .. .......... •. 1,394,450 1,263,484 52,415 121,416 161,049 9,550 4, 112

1947 1anuary .• .. •.•...•• _. '_" 1,200,271 1,092, 537 45,321 100,265 136, 235 7,469 1,991 February .••. .... •••. , .•• 1,217,035 1,136,336 45,583 73,249 100,247 7,450 7,935 March ••.•. , ••••...•••• 995,419 926,240 36,591 67,531 89,604 1,648 636

tfa~:::::::::::::::::::::::: 1,049,503 969,663 41,098 69,013 94,736 10,827 4,043954,687 878, 995 38,243 71,024 98,350 4,668 1,951 lune •. •.. _., ••••.. , ... 871,790 801,025 32,492 67,491 88, 531 3,274 2, 857

--- •••• '

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THmTEEN'l'H ANNUAL REPORT 165

TABLE 7.-Market value and volume of sales effected on securities exchanges f(}r

the fiscal year ending June SO, 1947-Continued

PUT 2.-0N ALL EXEMPTED EXCHANGES

[In thousands]

Stocks I Bonds' Rights and warrants Total

Exchange market

value Market Number Market Principal Market Number (dollars) value of value amount value of (dollars) shares (dollars) (dollars) (dollars) units

---- All exempted exchanges 11,437 11,412 769 25 24 --------_ ...

Colorado Springs ____________ Honolulu 274 274 193 -------_ .. 6, 161 6,136 372 25 24 ---------- -------_.- Minneapolis-St. Paul 3,932 3,932 189 Rlchmond __________________ Wheeling 672 672 9 0 0 ----------

398 398 6 ---------- ----------- ---------- ----------

Breakdown of fiscal year totals by months

1946 1uly _________________________

August ______________________ 966 966 70 0 0 ---------- ---------- 910 910 55 0 0 ---------- ---------- September __________________ October 1,158 1,158 68 0 0 ----------

November I, 129 1, 129 65 0 0 ---------- ---------- 1,069 1,069 70 0 0 December 932 932 67 0 0

1anuary _____________________ 1947

February 935 935 69 0 0 ..---.- March 940 921 77 19 18 ...

970 969 67 1 1 -- ..._-_.- ----------

tr:::::: :::::::::::::::::::: 821 821 52 0 0 ---------- ----------

1une ________________________ 823 823 56 0 0 --.------- ---------- 784 779 53 5 5 ---------- .-.-.-.---

I "Stocks" Include voting trust certificates, American depositary receipts, and certificates of deposit for

stocks. , "Bonds" Include mortgage certificates and certificates of deposlt for bonds.

NOTII:.-Value and volume of sales effected on registered securities exchanges are reported In connection

with fees paid under section 31 of the Seeurrties Exchange Act of 1934. For most exchanges the figures

represent transactions cleared during the calendar month. Figures may differ from comparable figures In

the Statistical Bulletin, due to revision of data by exchanges. For earlier data see the twelfth annual re- port of the Commission, p. 154; the eleventh annual report, p. A-17: the tenth annual report, pp. A-19 and A-20; the ninth annual report, p, A-16; the eighth annual report, p, A. 9; the seventh annual report, pp. 288-295; the sixth annual report, pp. 276--283; the fifth annual report, pp. 222-227; the fourth annual report, pp. 166-171; the third annual report, insert facing p, 156; the second annual report, insert facing p,

116: and the first annual report, pp. 87-91.

TABLE S.-Special offeri1l(Js effected, on national securities exchanges for fiscal

1/ear ended June 80, 1911'"

Number of shares Value Ag- Number of ollerings

of gregate by duration

shares special

Num- sold comExchange ber In (thou- mission Termi. Others Not

made orlg- Sub- sands (thou- nated term i- termlSold sands m15 nated nated inal scribed of dol- of dol. min- same same oller lars) lars) utes day day

------------------ --- .All Exchanges: TotaL __________________ 8 146, 900 110,706 104, 814 2, 852 68 4 2 2

--------------- ------ Completed __________ 6 66,900 73,299 67,407 1,909 49 4 2 0 Not completed ______ 2 80,000 37,407 37,407 943 19 0 0 2

--------- --- --- --- ------ --- Chicago Stock Exchange: 474 TotaL __________________ I 10,000 10,307 10,307 10 1 0 0

Completed __________ --------------------- 1 10,000 10,307 10,307 474 10 1 0 0 Not completed ______ 0 0 0 0 0 0 0 0 0

--------------- ------ ------ New York Stock Exchange: TotaL __________________ 7 136,900 100,399 94,507 2,378 58 3 2 2 Completed __________ 5 56, 900 62,992 57,100 1,435 39 3 2 0 Not completed. _____ 2 80,000 37,407 37,407 943 19 0 0 2

_____ ----------

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172 SECURITIES AND EXCHANGE COMMISSION

TABLE 12.-Basio forms WJed,by issuers in registering securities on nationaZ

seourities elDChangesand" for eaoh form, the number of eeourtue« registered,

and the number ot issuers involved, as of June 90, 194:6, and,June 90, 194:7

As of June 30, 1946 As of June 30, 1947

Form Description Securities Issuers Securities Issuers registered Involved registered Involved

------- ---- 7 Provisional application where no other form Is pre- scribed . 9 7 8 6

10 General eorporettona., _________________________________2,309 1,650 2,328 1,698

11 Unincorporated Issuers 22 13 20 12

12 Carriers making reports to the Interstate Commerce

Commission and communication companies making

reports to the Federal Communications Oomrnlaslcn., , 527 160 535 158

12-A Issuers In receivership or bankruptcy that would other- wise use Form 12. ____________________________________ 67 15 42 11

13 Insurance companies other than life and title Insurance __ 10 10 10 10

14 Oertnleates of deposit Issued by a committee ____________ 30 18 14 10

15 Incorporated Investment companles ____________________ 71 45 70 44

16 Voting trust certlficates . 19 17 23 18

17 Unincorporated Investment companies. ________________ 7 5 6 5

18 Foreign governments and political subdivisions tbereor., 248 81 243 76

19 American certificates Issued against foreign certificates __ 9 8 11 10

20 Stocks offorelgn private Issuers 1 1 1 1

21 Bonds of foreign private Issuers _________________________ 77 46 76 45

22 Issuers reorganized In Insolvency proceedings or their successors . 82 54 79 54

23 Successor issuers other than those succeeding Insolvent Issuers ________________________________________________ 99 58 89 56

24 Bank holding companles 5 5 5 5

Tota!. ----------- ---- 3,592 12,193 3,560 '2,219

1 Includes 3 Issuers having securities registered on 2 basic forms and I Issuer having securities registered on

3 basic forms The net number of Issuers having securities registered Is therefore 2,188 , Includes 2 Issuers having securities registered on 2 basic forms and 1 issuer having securities registered on

3 basic forms. The net number ohssuers having securities registered Is therefore 2,215.

TABLE l3.-0lassification by ind,ustries of issuers having securities registered on nationaZ securities exchanges as of June 90, 194:6, ana June SO,1947

Industry As of June As of June

30,1946 30,1947

Agriculture ._ 8 8 Beverages (distilleries, breweries, soft drlnks) ____________________________________ 47 53 Building and related companies (melnding lumber, building materials, and con- struction) _ _______________ ____________________________________________________ 83 90 Chemicals and allied products ___________________________________________________ 80 84 Financial and Investment compauies 124 127 Food and related products 107 109 Foreign governments and political subdivisions thereof. _________________________ 79 73 Foreign private issuers other than Canadian and Cuban _________________________ 54 56 Iron and steel (excluding machinery) _____________________________________. ______ 69 78 MCChine~ and tools (excludmg transportation equipment) ______________________ 173 202 Merchan ising (ehsln stores, department stores, eto.) ____________________________ 161 167 M~~t~!:~-:~u¥a~i~~~~~::::::::::::::::::::::::::::::::::::::::::::::::: 22 19

222 225 70 138

gil ~:n~ ~~ls diSirliiiitillg~~=== :========= .: .: .: 51 53 37 37 p~er and paper products _______________________________________________________ 37 38 P t1ng, publlshlug, and al!led Industrles. ______________________________________ Real estate 20 21

19 16 Rubber and leather products 32 36 Services (advertislng, amusements, hotels, restaurants) 41 49 Textiles and related products 63 66 Tobacco products . 18 18 Transportation and communication (railroads, telephone, radio, etc.) ____________ 266 245 Transportation e~uiPment ______________________________________________________ 178 173 Utility holding (e ectric, water, and gas) 39 36 Utility hOlding-opera:fc (electric, water, and gas) 14 15 Utility operating (ele C, water, and gas) 74 83

Totals 2, 188 2,215

1 During the year certam Issuers previously classified nuder "miscellaneous" were reclassified under other industry classifications.

_____ _________________________________ • _______

__• _________• _____• ______• _______

___________• ____________________

_________• _______________

__________________ • _________________ _______

______________________________•

___• ________________________________• _______

_________- _______- ___- ___-__________________________________________

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________________________________________________• ___

____________• _____________ ______________________________• ______•• _____________

__________________ ____________________________________• _______

______•__________________________________

_____________________ • ________ _____________________• _________________

__________________• _______• ___________• ____________________• _________
THIRTEENTH ANNUAL REPORT 173

TABLE 14.-Number antl amount of securities clas8ifietl accortling to basis for

admission to dealing on all eiDchangesas of June 30,1941

STOCKS

Column II Column II'

Basis for admission to dealing on exchanges

Issues Number of Issues Number of

shares shares

RegIstered ________________________________________2, 562 2,655,064,350 2,562 2,655,064,350 Temporarily exempted from registration s_________ 34 13,292,962 34 13,292,962

Admitted to unlisted trading privileges on regis- tered exchanges _________________________________ 907 1,794,393,066 366 362,llO8, 213 Listed on exempted exchanges _____________________ 131 104,443,760 85 29,722,351 Admitted to unlisted trsdlng privileges on ex- empted exchanges _______________________________ 42 11,055,186 36 5,787,872

Undupllcated total stock Issues and number

of shares admitted to dealing on alI ex- exchanges _________________________________ ----.----- ------.-.----.--- 3,083 3,066,775,748

BONDS

Issues Principal Issues Principal amount amount

Registered 998 $18,426,753,851 998 $18,426,753,851 Temporsrlly exempted from registration s _________ 24 363,995,230 24 363,995,230

Admitted to unlisted trsdlng privileges on regis- tered exchanges _________________________________ 111 1,476,725,996 97 816,630,496 Listed on exempted exchanges _____________________ 7 21,447,000 7 21,447,000 Admitted to unlisted trsdlng privileges on ex- empted exchanges _______________________________ 1 140,000 1 140,000

Undupllcated total bond Issues and.prlncl- pal amount admitted to dealing on all exchanges _________________________________ ---------- ----.------------ 1,127 $19,628,966,577

1 The purpose of column I Is to show the number and amount ofsecurities admitted to dealing under the

various bases for admission of securities to deahng on exchanges under the act. (Issues exempted under sec. 3 (a) (12)ofthe act, such as obligations of the United States, States, counties, cities) and United Statesowned eorporatlons, are not shown In this table.) Each security Is counted once unaer each basis for Its

admission to dealing. Tbus, a security which Isregistered on two exchanges and admitted to unlisted trsdIng privileges on three exchanges would be counted once under "registered" and once under "admitted to unlisted trading privileges." Because of such duplications, column I Is not totaled. , The purpose of column II Is to show the unduplleated total of all securities admitted to dealing on alI

exchanges. Each security Iscounted only once, and the elimination ofthe duplications contained Incolumn

I Is made In column II in the order In which the various bases for admlsstlon to deslmg Is given. S Includes certain securities resulting from modifications of previously listed securlttes, securities of banks

and certain securities oflssuers In bankruptcy. These securities have been exempted from reglstrstlon upon specified terms and conditions and for stated periods pursuant to rules and regulations of the Commission . Includes eight bond Issues In pounds sterling In the aggregate amount of £28,052,529. This amount In

pounds sterling has been excluded from the principal amount in dollars shown above.

•_______________________________________

•
174 SECURITIES AND EXCHANGE COMMISSION

TABLE 15

PART I.-NUMBER AND AMOUNT OF SECURITIES CLASSIFIED ACCORDING TO THE

NUMBER OF REGISTERED EXCHANGES ON WHICH EACH ISSUE WAS ADMITTED

TO DEALING AS OF lUNE 30, 1947

Stocks Bonds

Issues Shares Issues Princlpsl

amount

1. Registered on 1 exchange ______________________ 1,647 982, 673. 281 916 $16,641,315, 851 2. Unlisted on 1 exchange ________________________ 353 328, 116, 396 97 816, 630, 496 3. Registered on 2 or more exchanges _____________ 374 240,906,216 68 2, 225. 342, 500 4. Unlisted on 2 or more exchanges _______________ 13 34,791,817 0 0

6. R~~:e::_~~~_~_~~~~~~~_~~_~~!~~~_~~_~~~:_ 231 203. 818, 301 12 314,142,000

6. Registered on 2 or more erebanges and unlisted 345, 953, 500 on I exchange. . 67 121,499. 537 2 7. Registered on 1 exchange and unlisted on 2 or more 0 exchanges. 148 690, 259, li66 0 8. Registered on 2 or more exchanges and unlisted

0 on 2 or more exehanges .; ____________________ 96 615,907,449 0 9. Temporarily exempted from registration on 1 301, 138, 9BO exchange. ___________________________________ 32 5,507,721 20 10. Temporarily exempted from registration on 2

62,856.250 'Or more exchanges ___________________________ 2 7,785,241 4

Totals _____________________________________ 2,962 3, 031, 265, 525 1,119 19, 607, 379, 677

PART 2.-PROPORTION OF REGISTERED ISSUES THAT ARE ALSO ADMITTED TO UN.

LISTED TRADING PRIVILEGES ON OTHER EXCHANGES AS OF lUNE 30, 1947

Stocks Bonds

Issues Shares Issues PrIncipal

amount

All registered Issues (part I,lines 1, 3, 6, 6, 7, and 8) __ 2,562 2, 655, 064, 350 998 $18,426,753,851

Registered Issues that are also unlisted (part 1, lines $660, 096, 500 6,6,7, and 8}____________________________________ 641 l,431, 484, 853 14 Percent of registered Issues that are also unlisted __ 22.1 53.9 1.4 3.6

PART 3.-PROPORTION OF ISSUES ADMITTED TO UNLISTED TRADING PRIVILEGES

THAT ARE ALSO REGISTERED ON OTHER EXCHANGES AS OF lUNE 30, 1947

Stocks Bonds

Issues Shares Issues Principal

amount

All Issues admitted to unlisted trading privileges (part 1,lInes 2, 4, 5, 6, 7,and 8}. _________________ 907 1, 794, 393, 066 111 $1,476, 725, 996 Unlisted Issues that are also registered (part I, lines 6, 6, 7, and 8L ____________________________ . 641 1,431,484,853 14 $660, 096, 500

Percent of unlisted Issues that are also registered __ 69.6 79.8 12. 6 4.6

____•___________________• _____

________________• ____________
THmTEENTH ANNUAL REPORT 175

TABLE 15-Continued

PART 4.-PROPORTION OF ALL ISSUES ADMITTED TO DEALING ON REGISTERED

EXCHANGES THAT ARE ADMITTED TO DEALING ON MORE THAN 1 REGISTERED

EXCHANGE AS OF lUNE 30.1947

Stocks Bonds

Issues Shares Issues Principal

amount

All Issues admitted to dealing on registered ex-

~::~~s~;: ~h~~Jsixchanie-<paiii.-iiiiiines- 2, 962 3.031,265,525 1,119 $19,607,379,577

except 1. 2. and 9)_. ____________________________ 0

930 1.714.968.127 86 $2, 948,294,250

Percent oflssuesadmltted to dealing on more than one exchange ._. 31.5 56.6 7.7 15.0

TABLE 16.-Number of issuers having securities admitted to dealing on all ee- changes as of June SO,191/,/,classif/,ed according to the basis for admission ot

their securities to dealing

Column II Column III

Basis of admission of securities to dealing

Number Of Number of

Issuers Issuers

Registered • • • •• • 2,215 '2,215 Temporarily exempted from reglstratlon ______________________ 39 24 Admitted to unlisted trading privileges on registered exchanges._. 867 332 Listed on exempted exchanges_._. _._. ._. 115 73 Admitted to unlisted trading privileges on exempted exchanges 40 35

Total number of Issuers having securities admitted to dealing on all ex. changes ------------ 2,679

I The purpose of column I Is to show the-number of Issuers'having securities admitted to des1lng under

the various bases for the admission of seeurrties to dealing under the act. (Issuers whose securities are exempted under sec. 3 (a) (12) of the act. such as the United States, States, elties, counties, and United

States-owned corporations, are not shown in this table.) Each Issuer is counted once under each basis for

admission of Its securines to dealing; thus. an issuer that has Its securities registered and also unlisted IS

counted once under "registered" and once under "admitted to unlisted trading privlleges." Because of

these duplications. this column IS not totaled. IThe purpose of column II is to show the net number of Issuers having securities admitted to dealing on all exchanges. Each Issuer is counted only once. and the duplications m column I are eliminated in

column II in the order in which the various bases for adnnssion of secunttes to dealing is given.

TABLE IT.-Number of issuers having stocks only, bonds only, and both stocks

and bonds, actmitted to dealing on all e:cchangesas of June SO,191,7

Number of Percent of

Issuers total

Issuers

1. Issuers having only stocks admitted to dealing on exchanges __________________ 2,145 80.1 2. Issuers having only bonds admitted to dealing on exchanges __________________ 296 11.0

3. Issuers having both stocks and bonds admitted to dealing on exchanges _____._ 238 8.9

Total issuers -. ._ 2,679 100.0

4. Issuers having stock admitted to deallng on exchanges (llne 1 plus 3) 2,as:r 890

5. Issuers having bonds admitted to deallrig on exchanges (line 2 plus B) , __._. ___ 534 19.9

__•___•__•_______________•____ ___

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TABLE 19.-Number of issues admitted to unlisted trading pursuant to clauses2

and 8 of section 12 (1) of the Securities Ea;changeAct Of 1984 and volume of

transactions therein 1

[Stock volumes in shares; bond volumes in dollars of principal arnonnt]

Number of issues Percent Aggregate of total

1946vol- volume

Volume umeon reported

Narne of stock exchange reported each ex- for the

for the calendar Ad. Remain- calendar change in years 1937 mitted ing Jnne stocks and

total 30,1947 year 1946 bonds to 1946;

respec- inelusrve

tively

Stocks pursuant to clause 2: Boston 70 '65 663,865 130 3,077,127 Chicago 38 37 2,185,612 17.6 7,740,885 CmcinnatL-.. 30 30 79,261 23.4 567,579 Cleveland . 28 28 177,565 25.9 627,173 Detroit 70 68 638,718 10.6 2,615,457 Los Angeles . 40 39 660,267 5.0 3,048,323 New York Curb ._ 5 4 1,306,355 .9 4,222,880 Phlladelphia 93 89 580,963 12.2 1,840,418 . Pittsburgh 56 '49 223,719 7.4 1,183,431 St. Louis 4 14 21,901 8.4 21,901 Salt Lake ._ 1 1 925 29,533 San Francisco Stock . Wheelmg 37 '36 666,661 6.9 2,057,991

6 '3 326 6.2 15,156

TotaL ---478 453 7,206,138 .-----.----- 27,047,854

Stocks pursuant to clause 3:

13,986 13,986 Ohieago ._ 1 1 .1 New York Curb 7 6 866,281 .6 1,281,786

Total stocks ---'486 '460 8,086,405 28,343,626

--- Bonds pursuant to clause 2: New York Curb.; 3 1 $767,000 1.0 $12,137,000 San Francisco Stoek 2 2 106,800 93.0 1,536,300 Bonds pursuant to clause 3: New York Curb 41 17 6,675,000 8.4 114,728,000 --- Total bonds, ._._ 1046 20 7,548,800 --_ ..-._._-- 128,401,300

I For enactment of clauses 2 and 3 and procedure therennder, see tenth annual report nnder "Unlisted

Trading Privileges on Securities Exchanges." For volumes reported in each of the years 1937through 1944, see Eleventh Annual Report AllpendIx Tahle 18. , Only odd-lot trading is permitted In6 of these issues. a Only odd-lot trading 18 permitted in 1 of these issues. , Only odd-lot trading IS permitted in 3 of these ISSUes.

Only odd-lot trading 18 permitted in these 4 issues. , San Francisco Stock Exchange figures include San Francisco Curh Exchange figures prior to the 1938

merger.

, Wheeling Stock Exchange is an exempted exchange. All other exchanges shown are registered exchanges. 'Twenty.six of these issues bad been removed to Jnne 30, 1947. , This figure includes duplications arismg from adnussion of various issues to unlisted trading on more than one exchange. The net number of ISSUesadmItted as ofJnne 301947,was 248pursuant to clause 2 and

6 pursuant to clause 3. 10 Twenty-six of these issues bad been removed to Jnne 30, 1947,principally on acconnt of redemptions.

____________________________________

___________________________________ ____________________ - • • • • •

___--___ _________ ___ __________________ __________________________________ _____________________________ ________________________ __• ___________________________ ' ________________________________

__________________________ •_______ _______________________________ ______________________ __________________ •_______•_______

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_______•____________•___________ _____________________•• __

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__

•_____•__•• ________•____

•
178 SECURITIES AND EXCHANGE COMMISSION

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TABLE 23.-Number ot applications and declarations received and disposed ot

during the fiscal year ended June 30, 191/1, under the Public Utility Holding

Oompany Act ot 1935

Number Number pending at Number Number pending at Section and description beginnmg filed disposed close of of fiscal of fiscal year year

Sees. 2 and 3-Exemptions from provisions of the act; __ 34 7 7 34

Sees. 6 and 7-Issuance and sale of seeurities, alterations or rights, assumptions of liability _____________________ 106 228 238 96 Sec. IG-Acquisltlon of securities or other assets ________ 55 124 131 48 sec. 11'(b)-Proceedmgs Instituted _____________________ 62 5 5 62

Sec. 11 (e)-Plans for the simplification of registered holding companies or subsidiaries thereoL ___________ 68 12 11 69

Sec. 11 (f)-Reorganization under sec. 77B of the Bank- ruptcy Act ___________________________________________ 2 1 0 3

Sec. 11 (g) and 12 (e)-SoliCitations of consents to trans- actions _______________________________________________ 14 29 22 21

Sec. 12 (b) and rule U-45-Loans, extensions of credit,

donations and capital contributrons to associate companies ____________________________________________ 18 51 58 11

Sec. 12 (c) and rule U-46-Payment of dividends out of capital or unearned surplus ___________________________ 21 24 34 11

Sec. 12 (c) and rule U-42-Acquisition, retirement, and redemption of seeurrties by ISSuer ____________________ 62 104 126 40

Sec. 12 (d), 12 (I) and rules U-43, U-44-Sale of securi- ties and utility assets _________________________________ 120 193 239 74 Sec. 13-Servlce company regulation ___________________ 10 0 0 10

Total ____________________________________________ 572 778 871 479

TABLE 24.-Reorganization cases instituted under ch. X and sec. 77-B in which

the Oommission filed a notice o] appearance and in which the Oommission

actively participated during the fiscal year ended June 30,1947

PART I.-DISTRIBUTION OF DEBTORS BY TYPE OF INDUSTRY

Number of Total assets Total Indebtedness debtors

Industry

Subsid- Amount Amount Prill- Percent of (thousands Percent of (thousands Clpal iary of dollars) grand total of dollars) grand total

--- Agricultural 1 $180 (1) $166 (1)

MInIng and other extractive 4 3 108,850 563 74,488 5.85 Manufacturing _. ._. 10 4 29,464 1. 52 17,449 1.37 Fmanclal and Investment _____________ 6 2 93,446 4.83 55,681 4.37 Merchandislng

Real estate _. ._ -----46- ----242;298- ------i2~53- ----24i;373- -------i8~95 3 Construction and allied _______________ 1 ------.- 9,108 .47 4,734 .37

Transportation and communication ___ 12 7 381,566 1973 339,939 26.68 service _. ._. 6 ----.--- 25,075 1.30 16,212 1.27

Utilities' Light, power and gaa.; _____ 11 7 '1,043,229 53.95 522,836 41.03

Other: Religions, charitable, etc ______ 1 ----.-.- 383 .----------- 1,253 .10

--- Orand total 98 26 1,933,599 ------------ 1,274,131 --.------._-

PABT2.-DISTRIBUTION OF DEBTORS BY AMOUNT OF INDEBTEDNESS

Number of debtors Total indebtedness

Range of indebtedness (dollars) Amount Percent of

Principal SubSidiary (thousands grand

of dollars) total

L6SJl than 100,000 _. ._ 4 6 374 (J) 100,000-249,999 7 3 1,712 0.13 250,000-499,999 _. _. 9 4 5,090 .40 500,000-999,999 11 6 12,801 1.00 1,000,000-1,999,999. ________________________________.. ___ 19 1 27,380 2.15 2,000,000-2,999,999 . 9 2 27,910 2.19 3,OOO,()()()-4,999,999 .... __________________________________ 13 ---------_.- 52, 475 4.18 5,ooo,OOlI-9,999,999 , 8 ------------ 65,478 5.14 10,000,000-24,999,999 12 1 205, 559 16.13 25,000,000-49,999,999_. 2 1 101,307 7.94 Over 50,000,000 ._ _. 4 2 774,045 60.74

Orand total 98 26 1,274,131 100.00

1L6SJl than 0.05 percent.

Approximately $800,000.000 of assets and $400,000,000 of liabilities were accounted for by ASJlociatlld 01\5

& Elecmc CO. and Its subsidiary, ASJlOl)iated Oas & Ellllltr!c Corp.

___• ______________________ -------- ___• ______ __• _______________

________________• _______

________• _____• ___• _____

__• __________ _________• ___

_______• _____________

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_____• _____• ______________________• ___ _______________• ___• ____•_________________

__• __•• _____________ ___________• _____

__•• ____• ______• ___• _________________ __• _________________________________

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TABLE 26.-StatisticaZ summary 01 aU cases instituted, by the Commission under

the Securities Act of 1933, the Securities E(J)chOlngeAct of 1984, the PubZic

Utility Holding Company Act of 1985, the Investment Company Act of 1940, ana

the Investment Advisers Act of 1940

Total Total Cases Cases Cases Total Cases cases cases pending pending instituted cases closed Instituted closed pending

Types of cases up to end up to end at end at end during during during of 1947 of 1946 1947 1947 of 1947 of 1947 fiscal fiscal fiscal 1947 fiscal fiscal fiscal fiscal year year year year year year year

---- ---- ---" Actions to enjoin violations of the above acts 503 481 22 17 22 39 17 Actions to enforce subpenas

under the SecUIities Act and the SecUIities Exchange Act, 44 43 1 3 1 4 3 Actions to carry out voluntary

plans to comply with section

11 (b) of the Holding Com- pany Act 53 38 15 10 15 25 10 MIScellaneous actions 12 9 3 2 1 3 0

Totals --- ------- ---- --- 612 571 41 32 39 71 30

TABLE 27.-Statistical summary ot aU cases instituted against the Commission,

cases in which the Commission participated, as intervenor or amicus curiae, and

reorganization cases on appeal under chapter X in which the Commission participated-pending during the fiscal year ended June 80,1947

Total Total Cases Cases Csses Total Cases cases cases peuding pending Instituted cases closed Instituted closed at end at end during pending during Types of cases up to end up to end of 1947 of 1946 1947 during 1947 of 1947 of 1947 fiscal fiscal fiscal 1947 fiscal fiscal fiscal' fiscal year year year year year year year

--- ------------ Actions to enjoin enforcement of Securities Act, Securities Exchange Act and Public Utility Holding Company,

Act, with the exce~tion of snbpenas ISSued by t e Com- mission 64 64 0 0 0 0 0 Actions to enjoin enforcement of or compliance with subpenas issued by the Com- mission . . 8 8 0 0 0 0 0 Petitions for review of Commission's orders by circuit

court of [appeals under the

VarIOUS acts administered by the Commissiou. . 132 119 13 17 7 24 11 Miscellaneous actions against the Commission or officers of the Commission and cases in which the Commission par- trclpated \IS intervenor or

102 84 18 13 9 22 4 amicus CUflSe. ..

Appeal cases under eh, X in

which theC ommission par- ticipated . _. . 79 68 10 23 8 31 21

Total ---- ._-- --- --- ---- 385 343 41 53 24 77 36

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THIRTEENTH ANNUAL REPORT 195

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THIRTEENTH ANNUAL REPORT 219

TABLE 38.-Gases involving statutes administered by the Securities and ElCchange

Commisswn-July 1, 19# through June SO, 191{1

PART 1.-8ECURITIES ACT OF 1933

Title Citation Sections of statute Involved

AlchtT v. U.8- B4ur v. U. S

Bowen v, U.8-

BretDtT v. S. E. 0 .. _ BromO'll; U. S. v ..

OarruthtT'; U. S. v __.. _ Collins v. U. S ..

CrooUr v. S. E. 0 ..

Dan%iller v. U. Soo __ Hunt v. S. E. 0 __

McGarrl/; S. E. O. v

MampU v, U. Soo __

Minas de ArtemiBa S. E. O. v,

Monjar; U. S. v;

Penfield 00. of California and A. W. Younll, v. S. E. O.

S. E. O. v. W. J. Howel/ 00.,

and Howel/-1n-the-HdlB Sert»

ice, Inc. S.E. O. v; Trapp

Thomaslon Panhandle 00.; S.

E.O.v.

U. S. v. Earnhardt ..

S. E. O. v. Vacuum Oan 00., and Burton O. Smith. U. S. v, Weese

U. S. v, Wernes (U. S. v. Kinll).

143 F. (2<11592 (C. C. A. 6,1944)

156 F. (2<1)3866 (C. C. A. 5,1946); certi- orari denied, 329 U. S. 763.)

163 F. (2<1)747 (0. C. A. 8,1946); certi- orari demed, 328 U. S. 835. 145 E. (2<1)233 (C. C. A. 9, 1944) _ 145 F. (2<1)939 (C. C. A. 2,1944) __

152 F (2<1)512 (C. C. A. 7,1945) .. 157 F. (2<1)409 (C. C. A. 9,1946)

161 F. (2d) 944 (C. C. A.l,I947) ..

161 F. (2d) 299 (C. C. A. 9, 1947) __

158 F. (2<1)981 (C. C. A. 9, 1947) __

56 F. Supp. 791 (Colo. 1944); 147 F. (2<1)

389 (C. C. A. 10,1945). 155 F. (2(1) 952 (C. C. A. 5,1946)

100 F. (2d) 215 (C. C. A. 9, 1945) ..... __

47 F. Supp. 421 (Del. 1942); 147 F. (2<1) 916 (C C. A. 3, 1944).

157 F. (2d) 65 (C. C. A. 9, 1946); 330

U. S. 585. 60 F. Supp. 440 (Fla. 1945); 151 F. (2d)

714 (C. C. A. 5,1945); 328 U. S. 293.

Ci,,11 Action No. 1288 (D. N. Dak.

1947). Unreported. 145 F. (2d) 408 (C. C. A. 10, 1944) ..

163 F. (2<1)472 (C. C_ A. 7,1946); certiorari denied, 328 U. S. 858 157 F. (2d) 630 (C. C. A. 7,1946); eertiorarr denied, 330 U. S. 820. 145 F. (2<1) 135 (C. C. A. 2, 1944) . 157 F. (2<1)797 (C. C. A. 7, 1946) ..

17 (a) (1).

17 (a) (1).

5 (a), 17 (a).

22 (b)'; 20 (a)'; 19 (b)'.

17 (a) (1).

17 (a) (1).

17 (a) (1). S (a), 6, 7, 8 (a), 8 (b), 8 (d), 9 (a),

11, 12 (I), 12 (2), 17, 20 (a). 20 (b), 20 (c), 23, 24. 17 (a) (1).

3 (a) (11)'.- 5',18'.

5 (a); 17 (a); 19 (b); 20 (a).

2 (1),17 (a) (1).

19 (b); 22 (b).

2 (1); 2 (3); 5 (a) (1): 17 (a) (1):

20 (b); 23; 24. 19 (b), 20 (a), 22 (b).

2 (1), 3 (b), 5 (a).

17 (a) (2),17 (a) (3).

17 (a) (2); 17 (a) (3); 20 (b).

17 (a).

22 (b).

17 (a)'.

2,17 (a)'.

PART 2.-SECURITIES EXCHANGE ACT OF 1934

00. v.

See tenth annual report.

16 (b), 27.

9 (e), 10 (b).

16 (b): 27.

10 (b), 27*.

21.

19'.

9 (a) (4); 9 (e).

See tenth annual report. 9 (a) (2); 21 (e); 27.

14 (a)'.

See American Distilling

BrolCn. 9 (e), 16 (b), 18 (a).

14 (a).

10 (b); 23 (a).

10 (b)., 27*.

F. Supp -(So D. N. 1 . 1947)

148 MI,r. 431; 51 N. Y. S. (2d) 614 (S. Ct. 1944); 54 N. Y. S. (2<1)855 (App, Drv. 1945); 295 N. Y. 36 (1945). 55 N. Y. S. (2d) 215 (S. Ct N. Y. 1945)_

C. C. H. Fed Sec. L. S. Pars. 90, 328--9

(E. D. N. Y.I9451. Certiorari denied 323 U. S. 737

62 F. Supp. 609 (S. D. N. Y. 1945).....

Ct. C. P., Allegheny Co., Pa. (July

1944). 64 F. Supp. 168 (S. D. N. Y. 1945) __

F. Supp.-(E. D. N. Y. 1947)

73 F. Supp 281 (8. D. N. Y. 1947)

145 F. (2<1)316 (C. C. A. 3, 1944); eertlorari denied 325 U. S. 867.

Civil Action No. 1507 (S. D. Ohio, Dee. ll! 1946). Opinion took the form of a etter to counsel. Unreported. F. Supp.-(E. D. Pa. 1947) ..

146 F. (2<1) 596 (C. C. A. 5, 1944); certiorari denied, 324 U. 8. 865. Certiorari denied, 323 U. S. 737 ._ F. Supp.-(S. D. N. Y. 1947).

Frl/ v. SchumaktT

GenecOD v. Federal Petroleum Board. Gold&tein v. Grocsbeck .. __

Gratz v. OlaUl/hton and Mis- souri Kansas Texas Railroad

00.

GrO&,man and Temin v, Leon- 70 F. Supp.-970 (S. D. N. Y.1947) 16 (b), 27.

ard A. Young and L. A.

Young Srmng and WIre Oorp.

I This table brings up to date table 32 of the tenth annual report which Includes cases decided through

lune 30,1944. The only cases omitted from this table are those In which no opinion was rendered and which

In addition, did not Involve a novel legal problem sectlon not mentioned In case, but necessarily involved,

AcUr v, Schulte (Schmolka v. Schulte).

American Distillinll 00. v. Brown. Aoerl/ v. Moffatt

Bach v. Quillan .. __

Baird v. Franklin

Bennett; S. E. O. v , ......

Oommonwealth v. Green .. __

Craftsmen Finance k Morll/alle 00. v. Brown.

Dottenheim v, Emerson Elec- trie MIa. Co. DOl/ie v. Mllton .. __

Eilenlohr v. Kalodner .. __

Filtl/-Third Union TrUlt 00. v. Block,

'

_ _ _

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_

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• •
220 SECURITIES AND EXCHANGE COMMISSION

TABLE 38.-Cases involving statutes administerd by the Securities and &change

Commission-July 1,1944 through June eo, 1947-Continued

PART 2.-SECURITIES EXCHANGE ACT OF 19M-Continued

Title Citetation Sections of statute Involved

48 Atl. (2d) 501 (Ch. Del. 1946)________ 16 (b), TT.

69 F. Supp. 512 (E. D. Pa. 1946) 10 (b), TT, 29 (b).

61 F. Supp. 604 (S. D. N. Y. 1945) 3 (a) (13); 16 (b).

Certiorari denied, 323 U. S. 716________ See tenth annual report.

C. C. A. 2, March 9, 1946. No oplnlon, 15A.

12 (d); 25 (a).

10 (b) -,

10(b).

16 (b).

15 (b), lOA (e) (2), 25.

14 (a); 26. 10 (b).; 18 (e).; 29 (b) -,

3 (a) (13), 16 (b).

16 (b).

10 (b), 15 (c), (I), 21 (e).

21 (c).

15 (a), 15 (c) (1).

14 (a), 21 (e), 23 (a), TT.

146 F. (2d) 791 (C. C. A. I, 1945)

160 F. (2d) 15 (App. D. C. 1947)

68 F. Supp. 20 (S. D. N. Y.1944)

144 F. (2d) 387 (C. C. A. 2, 1944)

160 F. (2d) 984 (C. C. A. 2, 1947); rahearing denied, 160 F. (2d) 989. 71 F. Supp. 737 (S. D. N. Y. 1947)

Civil Action No. 5999 (D. M8SS.,

September 25, 1946). Unreported.

W. D. Wash., Dec. 1945. Unreported,

157 F. (2d) 530 (C. C. A. 7, 1946);

certiorari denied, 330 U. S. 820.

Olvil Action No. 1288 (D. N. Dalr. 1947). Unreported. 67 F. Supp.326 (D. Del. 1946).

Civil Action No 6564 (E. D. Pa., December 5. 1946). Unreported. Corp. 71 F. Supp. 457 (Del. 1947) .

FIlm F. Supp. (S. D. N. Y. 1947)

S. E. C. v. Tramamerica

Corp. and its Officers and

Direaors,

Shawmut Association v. S. E.

C.

SlaVIn v. Germantown Fire In- 8'Uranct Co.

Speed v. Transamerica

Twentieth Century Fox

Corp. v. Jenkins.

IntJutment AS80ciat.. , Inc. v, Standard Power Light Corp.

Kardon v. National Gupsum Co., WW,am SlaIJin and

Leon Slavin. Kogan v. &hulte.

Minuse; U. S. v ..

Natronal AssOCIationof Securities Dealers, In re. :Norris HIrshberg, Inc. v, S.E.C.

Okm; S. E. C. v_ .. .. ...

OppenheImer v, J. F. Young

Co. Park'" Tilford,Inc. v. &huUe

(U S. mteTl!enor).

Pottish v. Divak and Robert

Rns'" Co.

S. E. C. v. Raumond, Bliss,

Inc. S. E. C. v. Sharkeu.. . S. E. C. v. Vacuum Can Co

S. E. C. v. Trapp_.

PART 3.-PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

11 (b)., n(e), 18 (0.

n (b) (1), 11 (e), 12 (d), 24 (a).

2 (a) (3), 2 (a) (4), 2 (a) (29),

11 (b) (1).

11 (f)*

11 (b), 11 (e), 18 (t),24 (al. 11 (e), 24 (a).

11 (e).

11 (e). 2 (a) (7), 2 (a) (8), 11 (b), 11 (e)

18 (t) 2b.

2., 5 (ai, 11 (b), 11 (e), 24 (a) -,

7 (d) (6), 7 (e), 11 (e).

24 (a)

11 (b) (2), 12 (b), 12 (c), 12 (0, 15 (0, 19, 24 (a).

1 (a), 1 (b), 1 (c), 4 (a). 11 (b) (1),

11 (b) (2), 11 (e), 11 (e), 11 <0, 11 (g).

1 (b), 15 (a), 15 (t), 24 (a).

143 F. (2d) 945 (C. C. A. 2, 1944); 325 . U. S. 385

143 F. (2d) 250 (C. C. A. 1, 1944), 325

U. S. 385.

141 F. (2d) 606 (C. C. A. I, 1944); 329

U. S.90.

164 F. (2d) 597 (C. C A.5, 1946); cer- tiorari denied, 329 U. S. 738. . 71 F. Bupp. 538 (S. D. N. Y. 1947)

157 F. (2d) 894 \C. C. A.I,I946J

157 F. (2d) 898 (C. C. A. 1, 1946)

157 F. (2d) 900 (C. C. A. I, 1946) 157 F. (2d) 901 (C. C. A. 1,1946) 66 F. Supp. 690 (Del. 1946).

68 F. Supp. 877 (Del. 1944)

164 F. (2d) 6 (App. D. C. 1946),

U. S. (1947).

71 F. Supp, 1003 (Del. 1947)

151 F. (2d) 420 (C. C. A. 5, 1945)

AmerIcan Foreign Power

Co, In re (Okm v. SEC)

American Power Light Co.

v.S.E. C.

American Power if: Light Co v. S. E C. (Eledr'c Power

Light Co v. SEC). American Power'" Light Co. 168 F. (2d) 771 (C. C. A.l, 1946); cer- v S. E. C. (Florida Power tiorarl denied, 311 U. S.

and Light Co J.

Arkaiuas Natural Gas Corp.

v.S E. C.

Associated Gas Eledric c«; mre. Blatch/eu, Petsuo» of Blatchleu v. S. E. C. Do

Do . . ..

Central'" South West Utlllt,es

Co., In re Central States Power Light Corp., In reo Cheneru Corp. V. S. E. C. (Fed.

eral Water and Gas Corp. v. S.E. C.).

Cities Service Co.,In theMatter of.

Citu of North Miami Beach v. Federal Water Gas Corp. and S.E. C.

Till CommonweaUh South- 151 F. (2d) 217 (C. C. A. 3, 1945); eer- 11 (a)., 11 (b) (2)*, 11 (c)*, 11

ern Corp, In re (Lownsburu tiorari darned, 326 U. S. 782. (d).,l1 (e), 18 (0, 24 (a).

v. S. E. C. and The CommonfJJeaUh Sov.therfl Corp.). Cammuflltu Gas'" Power Co., 71 F. Supp. 171 (Del. 1947) 2 (a) (16),7 (c), 11 (b) (2),11 (d),

In re (American Gas afld 11 (e), 26 (c).

Power Co.)

Sectlon not mentioned In case, but necessarily Involved.

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THIRTEENTH ANNUAL REPORT 221

TABLE 38.-Cases involving statutes administered by the Securities and Exchange

Commission-July 1,1944 through June 30, 1947-Continued

PART3.-PUBLIC UTILITY HOLDING COMPANY ACT OF 193o-Contlnued

57 F. Bupp, 997 (E. D. Mo. 1944) 11 (c), 11 (b) (1),11 (b) (2),11 (e),

24 (a), 26 (a), 26 (c), 31.

168 F. (2d) 212 (C. C. A. 1, 1946); 11-

certiorari denied, 330 U. S. 819. 160 F. (2d) 845 (C. C. A. 1, 1947). 2 (a) (7),11 (b) (2),11 (e), 18 (f),

24 (a), 25.

147 F. (2d) 679 (C. C. A. 7, 1ll4.'i); eer- 11 (b)-, 11 (e), 24 (a)-.

tloran denied, 325 U. S. 863.

68 F. Snpp. 6 (Del. 1946); F. (2d) 1 (b), 1 (c), 4, 5, 11,25.

(C. C. A. 3, 1947). 162 F. (2d) 385 (C. C. A.l, 1947).• 11 (b) (1), 11 (b) (2), 15 (0, 20

(a),24 (a).

65 N. Y. Supp. (2d) 23, 187 Misc. 697 11. (Sup. Ct. 1946).

Unreported, Civil Action No. 33-343, 11. S. D. N. Y., Sept. 11, 1946, atlirmed

sub nomine, Okin v, S. E. C. and

Electric Bond and Share Co., 161 F. (2d) 978. F. Supp. (8. D. N. Y.1946)_ 11 (a), 11 (b) (1),11 (b) (2),11 (e), 18 (f), 19, 24 (a).

143 F. (2d) 960 (C. C. A. 2, 1944) 19,24 (a)", 24 (b).

145 F. (2d) 913 (C. C. A. 2, 1944) 11 (b) (1),11 (b) (2),24 (a)-.

Unreported (C. C. A. 2, Aug. 17, 1946, 11 (d), 11 (e).

and October 29, 1946).

Title

Dinnan y. S. E. C. ._

Downing v. Howard_

Eamrn Utaities Associates v,

S.E.C.

Electric Bond and Share Co.,

In re (Okin application).

Electric Bond and Share Co., In re (Okm monon for order

diseharging jurisdlction) (see

Okin v. S. E. C.).

Electric Bond and Share Co., In

reo Electric Bond Share Co., et al., In re (Okln V. S. E. C.).

Electric Power &: Light Corp.,

In re (Okin V. S. E. C).

Electric Power Light Corp., In the MaUer of (application

by Samuel OkJn for man.

damus).

Electric Power'" Light CO. V.

S. E. C. (American Power &:

Light CO.V. S. E. C.).

Engineers Public Servia: Oo.,

In reo Federal Water'" Gas Corp., In

re (CIty of North Miami

Beach, n«. v. Federal Water

&: Gas Corp. and S. E. C.). Federal Water and GaB Corp. v,

S. E. C. (Chenery Corp. V.

v.S.E. C.).

Florida Power'" Light Co., In

re (American Power &: Light

Co. v. S. E. C.; akin V.

S.E. C.).

Gilbert V. S. E. C.; Pike v,

S.E. C.).

GOld~~~ : ~._~._ Interstate Power Co. (In the Matter Of Ogden Corporation).

The Laclede Gas Light Oe., In re (See also Massachv,BeUs Mutual Life Ins. Co. v. S. E. C.). Ladd v. Brickley ._

Lahti v. New England Power Association (Godfrey B.

SimondB v. New England

Power ABBn.) (See also New

England Power ABBociation,

In re).

Lang IBland Lighting Oo.;

S.E.C.v.

LawnBburv V. S. E. C. and The

Commonwealth Southern Corp.

MaBBachusdtB Mutual Life Ins. Co. v. S. E. C. (The Lc.clede

GaB Light Co., In re). Midland United Co. In re (Gabert V. S. E. oJ. Midland United Co., In re (Harold Evans, appdlant). New England Power ABBocia.

tion, In re (Lahti v. New

England Power Association).

Citation

141 F. (2d) 606 (C. C. A. 1, 1944); 329

U.S.90.

71 F. Supp. 797 (Del. 1947) ._

151 F. (2d) 420 (C. C. A. 5,1945). ._

154 F. (2d) 6 (App. D. C. 1946);

U. S. (1947).

143 F. (2d) 250 (C. C. A. 1, 1944); 143

F. (2d) 943 (C. C. A. 2, 1944); 325

U. S. 385.

146 F. (2d) 513 (C. C. A. 7, 1944). Petl.

tion for rehearing denied, 2-10-45. 157 F. (2d) 899 (C. C. A. 1, 1946) 157 F. (2d) 900 (C. C. A. 1, 1946)•.• 71 F. Supp. 164 (Del. 1947) ._

59 F. Supp. 610 (E. D. N. Y.1944)

148 F. (2d) 252 (C. C. A. 2, 1945).

Cause became moot, remanded to

D. C. E. D. N. Y. for dismissal, 325

U. S.833. 151 F. (2d) 217 (C. C. A. 3, 1945);

certiorari denied, 326 U. S. 782.

151 F. (2d) 424 (C. C. A. 8, 1945);

certiorari denied, 327 U. S. 795.

68 F. Supp. 667 (Del. 1944); 146 F. (2d)

513 (C. C. A. 7, 1944). Petition for

rehearmg denied 2-10-45. 64 F. Supp. 399 (De1.1946); 159F. (2d)

340 (C. C. A. 3,1947).

66 F. Supp. 378 (Mass. 1946); 160 F.

(2d) 845 (C. C. A. 1, 1947).

Sections of statute involved

1 (a), 1 (b), 1 (c), 4 (a), 11 (b) (I),

11 (b) (2), 11 (c), 11 (e), 11 (f), 11 (g).

11(b)-,ll (e).

11 (b) (I), 11 (e), 12 (d), 24 (a).

7 (d) (6), 7 (e), 11 (e).

11 (b) (2), 12 (b), 12 (c), 12 (f),

15 (f), 19, 24 (a), 24 (a).

11 (e), 11 (f), 24 (a).

11 (e), 24 (a).

11 (e).

11 (b), 11 (e).

2 (a) (7) (b), 3 (a) (1), 4.

1 (c), 2 (a) (7),3 (a), 3 (c), 11 (d),

11 (e), 11 (0, 18 (a), 18 (d), 18

(f), 20 (a), 25.

11 (a), 11 (b) (2), 11 (c), 11 (d),

11 (e), 18 (f), 24 (a).

11 (b) (2), 11 (e), 24 (a), 26 (e).

11 (e), 11 (0,12 (a), 12 (b), 24 (a).

11 (f).-

2 (a) (3),2 (a) (4),2 (a) (7),2 (a)

(8), 11 (b) (2), 11 (e), 18 (f), 24

(a),25.

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222 SECURITIES AND EXCHANGE COMMISSION

TABLE 38.-Case8 involving statutes administered by the Securities and &change

Commission-July I, 19M through June 30, 1947-Continued

PART 3.-PUBLIC UTILITY HOLDING COMPANY ACT OF Ill36-Contlnued

Title

l\-orth American Co. v. 8.E. C_

North Continent Utll/tlu Corp., In re. Okln v. 8. E. C. Do

Do

Do

Do, no

Do

Okln v, S. E. C. and Electric

Bond and Share Co. 08borne v, U. G. 1. _

Ot .. &: Co. v. S. E. C. (8ecurltie» &: Exchange Commission,

In re),

Pacific Otu &: EUctric Co. v. 13.E. C.

Ph/Il.ps v. S. E. C. and The

Umted Corporation. PhiU'P8 V. S. E. C _

Portland Electric Power Co.,

In the Matter of the Petit/on

of (Wlllte v. Portland Electric Power Co.)

Southern Colorado Power Co., In re (D.sman v , S. E. C.)

Standard Ga& &: EUctrlc Co.,

In re, Standard Ga& &: Electric Co., In re (Guarantv Trust Co.

ofN. Y. v. S. E. C). Umted Ga8 Corp In the Matter

of (Samuel Okln, Appellant).

United Light &: Power Co , In re (Secur/flu & Exchange

Commissum, In re) (Otis &:

Co. v, S. E. C.).

Citation

133 F. (2d) 148 (C. C. A. 2, 1943); 327 U. 8. 686.

61 F. Supp. 419 (Del. 1945)

68 F. Supp.20 (8. D. N. Y.I944)

143 F. (2d) 943 (C. C. A. 2, 1944)

143 F. (2d) 945 (C. C. A. 2, 1944); 325

U. S. 385. 143 F. (2d) 960 (C. C. A. 2, 1944)

145 F. (2d) 206 (C. C. A. 2, 1944); certiorari denied, 325 U. S. 840. 145 F. (2d) 913 (C. C. A. 2, 1944)

154 F. (2d) 27 (C. C. A. 2, 1946); certiorari denied, 329 U. S. 755.

161 F. (2d) 978 (C. C. A. 2, 1947)

46 A. (2d) 208 (Pa.I946) _

142 F. (2d) 411 (C. C. A. 3, 1944); 323 U. S. 624 (Petition for rehearing de- nied, 324 U. S. 887.

324 U. S. 826 (affirmed without opm- ion by equally divided court).

153 F. (2d) 27 (C. C. A. 2, 1946); certiorari denied, 328 U. S. 860. 156 F. (2d) 606 (C. C. A. 2, 1946) _

162 F. (2d) 618 (C. C. A. 9, 1947)

2 S. E. C. JUd. Dec. (D. C. Colo. 1944); 147 F. (2d) 679 (C. C. A. 7,

1945); certiorari denied, 325 U. S. 863. 63 F. Supp. 876 (Del. 1946)

59 F. Supp.274 (D. Del. 1945); 151 F.

(2d) 326 (C. C. A. 3, 1945); certiorari

denied 327 U. S 796. 68 F. Supp 501 (Del. 1944); 162 F. (2d)

409 (C. C. A. 3, 1947).

51 F. Supp. 217 (Del. 1943) 142 F. (2d)

411 (C. C. A. 3, 1944); 323 U. S. f,24. Petition for rehearing denied, 324

U. S. 887.

8ections of statute Involved

1 (a), 1 (b), 1 (c), 2 (a) (7), 2-(a)

(28), 3 (a), 4 (a), 4 (b), 11.(a),

11 (b) (1),11 (d), 11 (e).

11 (e), 12 (d), 24 (a).

12 (e), 25.

24 (a).

24 (a).

19,24 (a)," 24 (b). 11 (b), 11 (e), 11 (0,18 (f), 24 (a).

11 (b) (1),11 (b) (2),24 (a) .•

2 (a) (5), 2 (a) (7), 2 (a) (8), 2 (a)

(16),3 (a) (5),3 (b), 6 (a), 7 (d),

7 COt 11, 12 (c), 12 (0, 18 (0, 26 (Ci, 29.

11 e), 25-.

11 (b) (I), 15.

1 (c), 2 (a) (8),2 (a) (10),5, 11 (a), 11 (b) (2), 11 (e), 24 (a)., 25.

See tenth annual report.

5,11 (b) (2)J 11 (c), 11 (d), 11 (e).

11 (f), 24 ~a),25. 10 (c) (2),11 (b) (2),11 (e), 24 (a).

11 (f)".

11 (b) (2).,11 (e) 24 (a) -,

11(e), 12 (c). 18 (I).

11 (b) (1),11 (b) (2),11 (e), 18 (f)

24 (a).

2 (a) (7),11 (b) (2),11 (e), 12 (b)

12 (c), 12 (I), 18 (a), 18 (b) 18 (I), 24 (a), 26 (e).

1 (c), 2 (a) (8),2 (a) (10),5, 11 (a) 11 (b) (2),11 (e), 24 (a)., 25.

Section not mentioned but necessarily involved,

PART 4.-TRUST INDENTURE ACT OF 1939 AND INVESTMENT COMPANY ACT

OF 1940

. Sections of statute Involved

Title Citation Trust Inden- Investment

ture Act of Company

L 939 Act of 1940

Aldred I1lDutmenl Trust v. 68 F. Supp. 724 (Mass. 1945); 151 F. (2d) -~----------_. 1,8,36.

S.E.C. 254 (C C. A. I, 1945); certiorari denied,

326 U S.795. AUen v. IllOestor8 Svndlcate ___ 24 So. 2d 909 (Ala. 1946) _____________________ -------------~ 11," 42 (e). Balleu v. :McLennan _________ 159 F. (2d) 1014 (C. C. A. I, 1947); certiorari -------------- 36.

... denied, U. S. Bailell v. Proctor ______________ 160 F. (2d) 78 (C. C. A. I, 1947); certiorari ~---------...--- 36.

denied, U. S.-. Beilev, In the Matter oj _______ 156 F. (2d) 980 (C. C. A.l, 1946) ____________ -------------- 36-, Ba.lev v. S. E. C 156 F. (2d~ 980 (C. C. A. I, 1946) -------------- 36-.

Banker, Secur/tlu Corp. V. 146 F. (2d 88 (C. C. A. 3,1944) 3 (a); 3 (b)

S.E.C. (2); 3 (c);

67 F. Supp. 859 (R. I. 1946) __________________ 316, 317, 318_

6 (c); 7; 42- Continental Bank &: Trmt Co. of N. Y. v. First NatlO1lul Petroleum Trust, DoVIe v. M.Uon 73 F. SuP). 281 (S. D. N. Y. 1947). _________ 1 (b) (4). Upson v. Oti& 155 F. (2d 606 (C. C. A. 2. 1946) ____________ 17 (a). 17 (b)

"

_

_ _ _ _ _

_ _ _

_ _ _

_

_

-

_

- - •

-

___•__________ ____________

_____________ --------------

_______________ -------------- _________________ --------------
THIRTEENTH ANNUAL REPORT 223

SPECIAL TABLES

The nine tables following were prepared for and submitted to the

Committee on Interstate and Foreign Commerce of the House of

Representatives. They include over-all data as to securities registered

under the Securities Act of 1933 (table 39), new securities offered for

cash sale in the United States (table 40), corporate bonds publicly, or

privately placed (table 41), divestments under the Public Utility

Holding Company Act of 1935 (table 42), and administrative,

criminal, and injunction proceedings instituted by the Commission

under the various acts which it administers (tables 43-47).

The tables are all condensed summaries, in statistical form, covering

12- to 14-year periods of Commission activity. They have been included in this report because the information which they contain is not

otherwise available in similar form and because some of the data has

never before been compiled.

TABLE 39.-A 13..year summary of data respecting securities registered under

the Becurities Act of 1933 and the amount of proceeds for new money purposes-Ju11l1933 through June 19Jp,by fiscal year

Amount of proNumber of Nnmberof Total amount Amoont or eeeds for new

registration registration of securities proceeds for money purFiscal year ended statements statements effectively new money poses as a per1lled e1fectlve registered purposes cent of total

amount reg.

istered

14 months ended Sept.

1,1934 (F. T. C.) .. 1,093 794 I$1, 245, 469, 000 (I) ---- ..-------:1'--- 10 months ended June

30:1935. 440 284 913,130,000 $210,285,000 2302 1936_______________ 781 669 4,835,049,000 763, 833, 000 1580 1937_______________ 967 880 4, 851, 463, 000 1,334,650,000 27.51 1938_______________ 459 412 2,101,186,000 811,706,000 38.63 1939_______________ 375 344 2, 579, 193, 000 708, 840, 000 Zl.48 1940 338 306 1,786, 537, 000 311,689,000 17,45 1941. 337 313 2, 610, 684, 000 533,060,000 20.41 1942_______________ 235 193 2,003,421,000 681, 852. 000 34.03 1943. ______________ 150 123 659, 480, 000 180, 401, 000 Zl35 1944_____________._ 245 221 1,759,780,000 476, 655, 000 Zl.Q9 1945 400 340 3,224,584,000 913,974,000 28.34 1946 _______________ 752 661 7,073,280,000 2,087,751,000 29.51 1947 567 493 6,732,447,000 3, 196,815,000 47.49

TotaL 7,139 6,033 42,375,703,000 12,211, 511,000 28. 91

I The admInistration of the Securities Act of 1933 was transferred from the Federal Trade Commlsslon ,to the SecurIties and Exchange Commission on Sept. I, 1934.

I Adjusted figure.

I!, ot compiled The amount of $1,245,469,000. efIective to Sept. I, 1934, was excluded in calculating this percentage figure.

' _

____• _________

___________ • ___

__________• ___

_________• _____

_______• _____••

______• ____

• •

•
224

'iR05S PROCLE05

OOLL .. RS BllllOhS

'0

'0

'0

'0

SECURITIES AND EXCHANGE COMMISSION

TABLE 40

A FOURTEEN-YEAR SUMMARY OF NEW SECURITIES

OFFERED FOR CASH IN THE UNITED STATES

AS TO TYPE Or ISSUER, TYPE or SECURITY. WHETHER PUBLICLY OFfEREO OR PRIYATEl" PLAct:D.

AJIID THE INTENDED USE OF THE PROCEEDS--183l1 THROU~ 19111. BY CALENDAR _EAR

ALL NEW SECURITIES CLASSIFIED BY TYPE OF ISSUER

=

CORPORATE "NO OT"U

STATE ..... 0 WVHICIf'AI.

U S GOVERNWENT

DIRECT AND GU .. RA"TUO

GROSS PflOCEEO$

DOll.ARS BILLION$.

.0

'0

4.

'0

20

'0

NEW CORPORATE SECURITIES CLASSIFIED BY TVP£ Of SECURITY

o no«. I. BONOS

NEW CORPORATE BONO ISSUES. PUBLICLY OFFERED AND PRIVATELY PLACED JJ

o PR'V'" .I.PUBLIC

'0

"I£T 'ROCHOS

OOLL"R~ BILLIONS

7

NEW CORPORAT£ ISSUES CLASSIFIED BY INTENDED USE OF Nfl PROCEEDS

i

R[fUIIlOING A,.O

"Ll. OTHER PURPOSES

WORKING CAPIUL

PLANT AND EQUI'MENT

1946

NET ,RoeHM DOLLARS BILLIONS.

7

Jl .... OUNT Of STOCK ISSUES PR,V .. TElY PlACED AR[ NEGUGIBL[

JJ PREl.IMINART fiGURES [ST'''ATEO ON SASIS Of OUA THROUGH A!JGUST ""1

,
THIRTEENTH ANNUAL REPORT 225

TABLE 4~-A 1~-yearsummary of corporate bonds1publicly offered and privately

placedin eachyear-193!, through 19~7-by calendar year

[Mlllions of dollars]

. Percent of

Year Total Publicly Placed total offerings offered privately placed

privately

1934 ____________________________________________________ 372 280 92 24.7 1935____________________________________________________ 2,225 1,840 385 17.3 1936____________________________________________________ 4,029 3,660 369 9.2 1937____________________________________________________ 1,618 1,291 327 20.2 1938____________________________________________________ 2,044 1,353 691 33.8 1939____________________________________________________ 1940____________________________________________________ 1,979 1,276 703 35.5

2, 386 1,628 758 31.8 194L ___________________________________________________ 2,389 1,578 811 33.9 1942____________________________________________________ 917 506 411 44.8 1943____________________________________________________ 990 621 369 37.3 1944____________________________________________________ 2,670 1,892 778 29.1 1945____________________________________________________ 4, 855 3,851 1,004 20.7 1946 ____________________________________________________ 4, 870 3,020 1,850 38 (). 1947____________________________________________________ 1,977 1,417 560 28.3

I Bonds, notes, and debentures.

TABLE 42.-..1 1~-year summary of dollar amounts of divestments in each year

under the Public Utility Holding OompanyAct of 1935-from 1936 to July 1,

19~7

The following table shows for the calendar years 1936 through 1940, the first 6 months of 1941, the fiscal years ended June 30, 1942, through 1946, and the period July I, 1946 to July 1, 1947, the total gross assets

divested, and the amounts of such divested assets whIch are no longer subject to Commission [unsdletlon;

Divested and no longer subYear Total divested ject to Commission

jurisdiction

1936_____________________________________________________________________ $89,201,652 $89,201,652 1937_____________________________________________________________________ 5,064,770 2,347,112 1938_____________________________________________________________________ 36,769,819 32,182,867 1939_____________________________________________________________________ 193, 420, 800 192, 462, 5J3 1940_____________________________________________________________________ 128, .J62,517 128,362,517

1941 (first 6 months) _____________________________________________________ 254,231,009 253,937,497 1941-42 __________________________________________________________________ 51,489,817 45,518,140 1942-43 __________________________________________________________________ I, 707, 764, 320 896, 664, 265 1943-44. _________________________________________________________________ 573,459,759 367, 288, 396 1944-45 __________________________________________________________________ 1,313,816,403 1,137,235,308 1945-46 __________________________________________________________________ 1,719,794,886 1, 434, 799, 286 1946-47 __________________________________________________________________ 1,978,000,000 870, 000, 000

Total-- ____________________________________________________________ 8,051,375,752 5,449,999,573
226 SECURITIES AND EXCHANGE COMMISSION

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THIRTEENTH ANNUAL REPORT 227

TABLE 44.-A 14-year summary of criminal cases developed by the Oommisswn1934 through 1947, by fiscal year

Number I Number

Number Number of such of these

of cases of persons cases in Number defendants Number

referred to as to whom which In- of defend- Number Number astowhom of these

Fiscal year Depart- prosecu- dictments ants In- of these of these proceed- defendants

ment of non was were ob- dieted in defendants, defendan ts ings were as to whom

Justice m recom- tained by such convicted acquitted dismissed cases are

each year mended in Umted cases I by Umted pending I

each year States States

attorneys attorneys

1 2 3 4 5 6 7 8 9

---- 1934_________ 7 36 3 32 17 0 15 0 1935_________ 29 177 14 149 84 5 60 0 1936_________ 43 379 34 368 164 46 158 0 1937_________ 42 128 30 144 78 32 32 2 1938_________ 40 113 33 134 75 13 43 3 1939_________ 1940_________ 52 245 47 292 199 33 68 2 59 174 51 200 96 38 65 1 194L ________ 54 150 47 145 94 15 32 4 1942_________ 50 144 46 194 105 21 44 24 1943_________ 31 91 28 108 60 10 16 22 1944_________ 27 6jl 24 79 47 6 18 8 1945_________ 1946_________ 19 47 18 61 34 10 11 6 16 44 14 40 11 5 0 24 1947_________ '20 50 10 26 1 2 0 23

TotaL 489 1,847 '399 1,972 1,065 236 , 5521 119

1The number of defendants in a case is sometimes increased by the Department of Justice over the

number against whom prosecution was recommended by the Oommission, , See Table 45 for break-down of pending cases. '10 of these references as to 27 proposed defendants are still being processed by the Department ofJustice.

'371 of these cases have been completed as to one or more defendants Convtctions have been obtained In333, or 89.6 percent of such cases. Only 37, or 10.1 percent of such cases have resulted in acquittals of all

defendants.

6 Includes 34 defendants who died after indictment.

TABLE 45.-An 11-year summary of criminaZ cases deveZoped by the Oommission

which are stin pending-1937 through 1947, by fiscal year

Number of Number of such defendants as t()

such whom cases are still pending and

Number of defendants reasons therefor

Cases defendan ts as to whom msuch cases have cases been Not yet Awaiting Awaiting

completed appre- trial' appeals hended !

Pending, referred to Department ofJustice in-J 1937 1 7 5 1 1 0 1938 2 5 2 3 0 o 1939 2 9 7 1 1 0 1940 I 12 11 1 1 0 1941. 2 9 5 1 3 0 1942 5 54 30 16 3 5 1943 5 33 11 20 2 0 1944 2 8 0 8 0 0 1945 4 7 1 1 4 1 1946 9 28 4 16 8 0 1947 9 25 2 5 15 3

Total. 42 197 78 73 37 9

Total cases pending .____________________________________ SUMMARY 52

Total defendants. 224

Total defendants as to whom cases are pending , .________ 146

1Almost without exception, these defendants are residents of Canada and cannot be extradited. t Includes one defendant awaiting retrial. , Fiscal year ended June 30 of the year indicated, , Except for 1947 indictments have been returned in all pending eases. Indictments have not yet been

returned as to 27 p~oposed defendants in 10 easesreferred to the Department ofJustice in 1947. Theae are reJlooted only in the recapitulation of totals at the bottom of the table.

___________________________

___________________________

____~______________________ ___________________________

__________________________

___________________________

___________________________

___________________________

___________________________

___________________________

___________________________

______________________

'

____ _________________ ____________ _________________
228 SECURITIES AND EXCHANGE COMMISSION

TABLE 46.-..4. 14-1/earsummary classifying all defendants in criminal casesdeveloped by the Oommission-1934 to JUly 1, 1947

Number as to whom Number as Number Number Number cases were to whom dismissed Indicted convicted acquitted by United cases are

States pending

attorneys

----- Registered broker-dealers I (Including principals of such firms) _________________ 316 199 21 90 6 Employees of such registered broker- dealers _________________________________ . 92 47 15 27 3 Persons in general securities business but not registered as broker-dealers (Includes prlncrpals and employees) __.. _._.. __. ___ 681 344 55 240 42 .All others , ___•. _.____________________ .... _ 883 475 145 195 68

TOtal__. __.•• __.. _.__. ___.. ________.. 1,972 1,065 236 552 119

I Includes persons registered at or prior to time of indictment. , The persons referred to in this column, while not engaged in a general business In securities, were almost

without exception prosecuted for violations of law Involving secunties transactions.

TABLE 47.-..4. 14-year summary of all injunction casesinstituted by the Oommi8-

sion-1934 to July 1, 1947, by calendar year

Calendar year

Numberofcaseslnstituted Number of cases in which

b) the Commission and Injunenons were granted the number of defend- and the number of de. ants Involved fendants enjoined I

1934.. _•. _ __. _. _.•. . _. _ _ _ _._ 1935 ._. _. _._ •.• •.• .. . _. _. _. _. 1936. _. . . ._ ._.

1937.. . ._._. 1938 . _. . . ._.

1939 _._ ._. . _. . . 1940. . .

1941. .. ._. .•.

1942. . . . •.• .

1943. ,_", _. _. _. ._. _. _._ 1944. .. ... ... _. _. •. .

1945 . .. . 1946 . . _. . _. •. _. 1947 (to June 30)

Total

Cases Defendants

7 24

36 242

42 116 96 240 70 152 67 1M 40 100 40 112 21 73 19 81 18 80

21 74

21 45

12 24

600 1,617

Cases Defendants

2 4 17 56 36 108 91 211

73 163

61 165 42 99 36 90 20 M 18 72 14 36

21 56

14 32 12 31

'457 1,166

SUMMARIZATION

Cases Defendants

Actions instituted liOO 1,617 Injunctions 0btalned _______________.__. ___. ___. __•... _._._. ___. ________ 450 1,166

~¥~~rn~~~W;ns -c::========== .: =:= .: .: .: =====:

10 '43 40 308

TotaL. ______________.__________. _._.___________. _... _._._... ___.• __. 600 1,517

I These columns show disposition of cases by year of disposition and do not necessarily retlect the disposition of the cases shown as having been instituted in the same years. Includes seven cases Which were counted twice In this column because injunctions against di1lerent

defendants in the same cases were granted in different years. , Includes 31 defendants in 6 cases in which injunctions have already been obtained as to 20 codefendants

Includes: (a) actions dismtssed (as to 248defendants); (b) actions discontinued, abated, vacated, abandoned, or settled (as to 50 defendants); (e) actions In which judgment was denied (as to 7 defendants): (d)

actions In which prosecution was stayed on stipulation to discontmne mi.....nduct charged (as to 3

defendants)

o

_ __ • _

• • • _ • _ •

'

• _

•

• __ _

__ • • _ • ••• _ _ __•

__• •• •• __ • __' • __ __• • _••

_

•• _• • •__•• •__

=== = = = = === = = = = = = = = = = = =

•

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•