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U I~' SECURITIES AND

EXCHANGE COMMISSION

1966

Fiscal Year Ended June 30

~-
II

SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

MANUEL F. COHEN, Ohai1'man

BYRON D. WOODSIDE

HUGH F. OWENS

HAMER H. BUDGE

FRANCIS M. WHEAT

ORVAL L. DuBoIs, Secretary

For sale by the Superintendent or Documents, U.8. Government Printing Office

Washington, D.C. 20402- Price lili cents (paper cover)
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., January 10,1967

SIR: On behalf of the Securities and Exchange Commission, I have

the honor to transmit to you the Thirty-Second Annual Report of the

Commission covering the fiscal year July 1, 1965 to June 30, 1966, in

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

Exchange Act of 1934, as amended; Section 23 of the Public Utility

Holding Company Act of 1935; Section 46 (a) of the Investment Company Act of 1940; Section 216 of the Investment Advisers Act of 1940;

Section 3 of the Act of June 29, 1949, amending the Bretton Woods

Agreement Act; Section l1(b) of the Inter-American Development

Bank Act; and Section 11(b) of the Asian Development Bank Act.

Respectfully,

Ohairman.

TUE PRESIDENT OF THE SENATE,

TI IE SPEAKER OF TIlE HOUSE OF REPRESENTATIVES,

Washington, D.C.

III

TABLE OF CONTENTS

Page

Commissioners and staff officers_____________________________________ XI

Regional and branch offices_________________________________________ XII

Biographies of Commissioners__ __________ ________________ _______ ____ XIII

INTRODUCTION

Changing conditions in the securities industry________________________ XVII

PART I

IMPORTANT RECENT DEVELOPMENTS_______________________ 1

Proposed broker-dealer financial reports; _________________________ 1

Level and structure of commission rate___________________________ 2

Odd-lot studlea.; , _ ___________________________________ 2

Review of exchange rules regarding off-board trading_______________ 3

Automation of market facilities__________________________________ 3

Over-the-counter markets_________ _____ __ ___ __ _____ 4

Coordination of regulatory efforts_____ ___________________________ 6

Conflicts of interest of investment advisers _ ______________________ 7

Newbuilding_________________________________________________ 8

Installation and use of electronic data-processing equipment_________ 8

PART II

OPERATION OF THE SECURITIES ACTS AMENDMENTS OF 1964__ 10

Extension of disclosure requirements to over-the-counter securities___ 10

Exemptions from registration; _ ____________ __________________ 12

Proposed definitions under the "market-maker" exemption from

insider trading provislons..; ________ ____ _________________ 14

Disciplinary action against broker-dealers and their associated persons_______________________________________________________ 15

Regulation of broker-dealers who are not members of registered

securities assoeietions , _ ___ ________ 16

Summary suspension of over-the-counter trading , _________________ 18

Changes in N ASD regulations, __________________________________ 18

PART III

LEGISLATIVE ACTIVITIES_ _ ____ _ 19

PART IV

ADMINISTRATION OF THE SECURITIES ACT OF 1933--________ 21

Description of the registration process____________________________ 21

Registration statement and prospectus, ___ _____ _ 21

Examination procedure_______ _____ ____________________ 22

Time required to complete registration _______________________ 23

Volume of securities registered; ___ _ __________________ ____ 24

Registration statements filed__ _______ __________ ____ 27

v
VI TABLE OF CONTENTS

Page

ADMINISTRATION OF THE SECURITIES ACT OF 1933-Con.

Stop order proceedings , ____ ______ ________________________ 28

Examinations and investigations_________________________________ 29

Exemption from registration of small Issues; ______________________ 30

Exempt offerings under Regulation A________________________ 31

Reports of sales., __ ___ __ 31

Suspension of exemption________________________________ 32

Exempt offerings under Regulation B________________________ 33

Reports of sales; _ __ ___ _________________ 33

Exempt offerings under Regulation E_ _______________________ 34

Exempt offerings under Regulation F________________________ 34

Revision of rules, regulations and forms; _________________________ 35

Amendments to Rule 416___ __ __ ___ __________ 35

Amendment of rules and forms relating to registration fees______ 35

Withdrawal of proposed amendments of Rule 485______________ 36

Adoption of Form S-13____________________________________ 36

PART V

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934_______________________________________________________ 37

Regulation of exchanges and exchange trading____________________ 37

Registration and exemption of exchanges_____________________ 37

Review of exchange rules and procedures_____________________ 38

Commission inspections of the exchanges_____________________ 38

Proceedings against San Francisco Mining Exchange___________ 39

Exchange disciplinary aettou.; _______ __________________ 39

Registration of securities on exchanges , __ ____________________ 40

Statistics relating to securities on exchanges_______________________ 40

Number of issuers and securities_____________________________ 40

Market value of securities available for trading________________ 41

Share and dollar volume of stocks traded_____________________ 42

Foreign stocks on exchanges________________________________ 43

Comparative exchange statistics_____________________________ 43

Delisting of securities from exehanges , , ___________________ 44

Unlisted trading privileges on exchanges__________________________ 45

Applications for unlisted trading privileges____________________ 46

Block distributions reported by exchanges________________________ 46

Over-the-counter trading in common stocks traded on national

securities exchangesc;., __ _________________________________ 47

Manipulation and stabilization____ ______________________________ 47

Manipulation; market surveillanccc., , _______ _________ __ 47

Stabilization__ __ __ ______________________________ 48

Registration of over-the-counter securities ________________________ 49

Periodic reports , _ ____ _______________ _________________ __ 49

Regulation of proxies; ________________________________ ___ 50

Scope of proxy regulation______ ____ ____ ______ _____ 50

Statistics relating to proxy and stockholder information statements__________________________________________________ 51

Stockholders' proposals.L; , _________________________________ 52

Ratio of soliciting to non-soliciting companies_________________ 52

Proxycontes~____________________________________________ 52
TABLE OF CONTENTS VII

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934-Continued Page

Insiders' security' holdings and transaetions., ______________________ 53

Ownership reporta, __ _____________________ 53

Recovery of short-swing trading profits by issuer _ _____________ 54

Investigations with respect to reporting provislons.,., _______________ 54

Regulation of broker-dealers and over-the-counter markets, __________ 55

RegistraMon______________________________________________ 55

Administrative proceedings., ________________________________ 55

Decisions of particular interest__________________________ 58

Suspension of registration pending final determination______ 60

Net capital rule; __ ___________________ 61

Financial statements; ______________________________________ 61

Broker-dealer Inspectiona, ________ _______ _________ 61

Supervision of activities of National Association of Securities Dealers,

Inc________________________________________________________ 62

NASD disciplinary actions____ _____________________ ____ _____ 63

Commission review of NASD disciplinary action_______________ 65

Commission review of NASD action on membership; _ _________ 68

Commission inspections of the NASD__ ________ ____ __________ 69

Revision of rules, regulations and forms__________________________ 70

Amendment of Rule 3aI2-3____ ____________ __________ 70

Amendments to the proxy rules_____________________________ 70

Amendment of Rule 15b6-1 and adoption of related Form BDW __ 71

Renumbering of rules under Sections 15(b) and 15A and amendment of Rules 15Al2-1, 17a-5 and 19a3-1 to conform________ 72

Amendment of Rule 16a-2__________________________________ 72

Proposed amendment of Rule 16a-6_________________________ 72

Amendment of Rule 16b-3__________________________________ 72

Amendment of Rule 16b-6__________________________________ 73

Amendment of Rules 16b-8 and 16b-9_______________________ 73

Proposed amendments to Forms 3 and 4______________________ 74

Proposed amendments to Form 8-K_ _ ________ _____ 74

Amendments to Forms 10,12, 1D-K and 12-K________________ 74

Amendments to Forms 16 and 16-K_________________________ 74

Proposed revision of Form X-17 A-5 and minimum audit requirements__________________________________________________ 75

PART VI

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935___________________________________________ 76

Composition of registered holding-company systems________________ 76

Section 11 matters in registered holding-company systems__________ 77

Proceedings with respect to acquisitions, sales and other matters_____ 79

Financing of active registered public-utility holding companies and

their subsidiariea, __ _____________________ _________ 81

Competitive bidding , ______________________________________ 82

Policy as to refundabiUty of bonds______________________________ 82
Vlli TABLE OF CONTENTS

PART VII

Page

PARTICIPATION OF THE COMMISSION IN CORPORATE REORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY

ACT __ _ __ 85

Summary of activities_______ ____ __ _ _ 86

JUrisdictional, procedural and administrative matters______________ 86

Trustee's Inveatigation; _ _________ ___________________________ 90

Reports on plans of reorganization_______________________________ 90

Activities with regard to allowances______________________________ 93

Intervention in Chapter XI proceedings__________________________ 94

PART VIII

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939___ 96

Revision of rules, regulations and forms__________________________ 97

Adoption of Rule 7a-9_____________________________________ 97

Amendments to Forms T-1 and T-2_________________________ 97

PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF

1940___________________________________________________________ 98

Companies registered under the Act______________________________ 99

Growth of investment company assets____________________________ 100

Inspection and investigation program; 100

Annual reporting by management investment companies__________ 102

Filings reviewed_______________________________________________ 102

Applications and proceedings_______ _________________ _________ 103

Revision of rules, regulations and forms__________________________ 107

Proposed Rule 17a-7_______________________________________ 107

PART X

ADMINISTRATION OF THE INVESTMENT ADVISERS ACT OF

1940___________________________________________________________ 109

Registration statistlca, ___________________________ ________ 110

Inspectionprogram____________________________________________ 110

Administrative proceedings; _______ ___ _____________ _ 110

Revision of rules, regulations and forms; 111

Amendment of Rule 204-2 (a) ___ ____ ________________ 111

PART XI

OTHER ACTIVITIES OF THE COMMISSION____________________ 112

~villitigation________________________________________________ 112

Criminal proceedings______ ___ __ _ _ ____ ___ 123

Complaints and investigations___________________________________ 126

Enforcement problems with respect to foreign securities__________ 127

Foreign restricted llst______________________________________ 129

Section of securities violations___________________________________ 130

Applications for nondisclosure of information______________________ 130

Activities of the Commission in accounting and auditing__________ 131

International Bank for Reconstruction and DevelopmenL__________ 136

Inter-American Development Bank______________________________ 138

Asian Development Bank_______________________________________ 139

_
TABLE OF CONTENTS IX

OTHER ACTIVITIES OF THE COMMISSION-Continued Page

Statistics and special studies_______ _ ____ _ ______ _____ __ 139

Issues registered under the Securities Act of 1933_ ___________ 139

New securities offeringa, __ ___ _ _______ 140

Individuals' savings_______ ___ _____________________ 140

Private pension funda., , _ _ _____________________ 140

Stock trading of financial Institutions; _ _ _____________________ 140

Financial position of corporations____________________________ 141

Plant and equipment expenditures___________________________ 141

Directory of registered companies_________ ___________________ 141

Stock market data_______ _ __ _ __________________ 141

Opinions of the Commission____________________________________ 142

Procedures for publishing hearing examiners' initial decisions., ___ 142

Dissemination of information___________________________________ 143

Information available for public inspection____________________ 144

PublicatioDS__________________________________________________ 145

Organization__________________________________________________ 146

Personnel and financial management_____ ________ _____________ 148

PARi,;XII

APPENDIX-STATISTICAL TABLES

Table 1. A 32-year record of registrations effective under the Securities

Act of 1933-fiscal years 1935-1966________________________ 155

Table 2. Registrations effective under the Securities Act of 1933, fiscal

year ended June 30, 1966_________________________________ 155

Part 1. Distribution by months_________________________________ 155

Part 2. Purpose of registration and type of security________________ 156

Part 3. Purpose of registration and industry of registrant___________ 157

Part 4. Use of proceeds and industry of registrant_________________ 158

Table 3. Brokers and dealers registered under the Securities Exchange

Act of 1934-effective registrations as of June 30, 1966, classified by type of organization and by location of principal office; 159

Table 4. Number of security issues and issuers on exchanges____________ 160

Part 1. Un duplicated count as of June 30, 1966 of number of stock

and bond issues admitted to trading on exchanges under

Section 12 of Securities Exchange Act of 1934, and number

of issuers involved__ ________________ __ ______ _____ 160

Part 2. Number of stock and bond issues on each exchange as of

June 30, 1966, classified by trading status, and number of

issuers Involved; _ ____ _____ __ ___ 160

Table 5. Value of stocks on exchanges, in billions of dollars_____________ 161

Table 6. Dollar volume and share volume of sales effected on securities

exchanges in the calendar year 1965 and the 6-month period

ended June 30, 1966_____________________________________ 162

Part 1. 12 months ended December 31, 1965______________________ 162

Part 2. 6 months ended June 30, 1966___________________________ 162

Table 7. Comparative share sales and dollar volumes on exchanges______ 163

Table 8. Block distributions of stocks reported by exchanges____________ 164

Table 9. Unlisted stocks on exchanges_______________________________ 164

Part 1. Number of stocks on the exchanges as of June 30, 1966_____ 164

Part 2. Unlisted share volume on the exchanges-calendar year 1965_ 165

_

_
x TABLE OF CONTENTS

APPENDIX-STATISTICAL TABLES-Continued Palr8

Table 10. Summary of cases instituted in the courts 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____________________________________ 165

Table 11. 33-year summary of all injunction cases instituted by the Commission-1934 to June 30, 1966, by calendar year__ 166

Table 12. Summary of cases instituted against the Commission, petitions

for review of Commission orders, cases in which the Commission participated as intervenor or amicus curiae, and reorganization cases under Chapter X in which the Commission

participated on appeal__________________________________ 167

Table 13. A 33-year summary of criminal cases developed by the Commission-1934 through 1966 by fiscal year________________ 168

Table 14. A 33-year summary classifying all defendants in criminal cases

developed by the Commission-1934 to June 30, 1966_______ 169

Table 15. Summary of criminal cases developed by the Commission which were pending at June 30, 1966_ 169

_
COMMISSIONERS AND STAFF OFFICERS

Term

Commissioners %~~e:

MANUEL F. COHEN or Maryland, Chairman___________ 1968

BYROND. WOODSIDEof Virginia______________ 1967

HUGH F. OWENS of Oklahoma______________________ __ 1970

HAMEB H. BUDGEof Idaho____________________________________________ 19G9

FRANCIS M. WHEAT of California______________________________________ 1971

Secretary: ORVALL. DuBOIS

Executive Assistant to the Chairman: DAVIDL. RATNEB

Staff Officers

EDMUNDH. WORTHY,Director, Division of Corporation Finance.

ROBEBTH. BAGLEY,Associate Director.

SOLOMONFREEDMAN,Director, Division of Corporate Regulation.

HAROLDV. LESE, Associate Director.

J. ARNOLDPINES, Associate Director.

LoUGHLIN F. McHUGH, Chief Economist, Office of Policy Research.

IRVING M. POLLACK,Director, Division of Trading and Markets.

THOMASW. RAE, Associate Director.

EUGENEH. Ro'rBERG,Associate Director.

PHILIP A. LoOMIS, JR., General Counsel.

DAVIDFERBER,Solicitor.

WALTERP. NORTH,Associate General Counsel.

ANDREWBARR,Chief Accountant.

LEONARDHELFENSTEIN,Director, Office of Opinions and Review.

W. VICTORRODIN,Associate Director.

ALFREDLETZLER,Associate Director.

WILLIAM E. BECKER,Chief Management Analyst.

FRANK J. DONATY,Comptroller.

ERNESTL. DESSECKER,Records and Service Officer.

HARRYPOLLACK,Director of Personnel.
REGIONAL AND BRANCH OFFICES

Regional Administrators

Region 1. New York, New Jersey.-Mahlon M. Frankhauser, 23rd Floor,

225 Broadway, New York, New York 10007

Region 2. Massachusetts, Connecticut, Rhode Island, Vermont, New Hampshire, Maine.-James E. Dowd, Suite 2203, John F. Kennedy Federal

Building, Government Center, Boston, Mass. 02203.

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

Carolina, Georgia, Alabama, Mississippi, Florida, that part of Louisiana

lying east of the Atchafalaya River.-William Green, Suite 138, 1371

Peachtree Street, N.E., Atlanta, Georgia 30309

Region 4. Illinois, Indiana, Iowa, Kansas City (Kansas), Kentucky, Michigan, Minnesota, Missouri, Ohio, Wisconsin.-Thomas B. Hart, Room 1708,

U.S. Courthouse and Federal Office Building, 219 South Dearborn Street,

Chicago, Illinois 60604

Region 5. Oklahoma, Arkansas, Texas, that part of Louisiana lying west of

the Atchafalaya River, and Kansas (except Kansas City).-Q. H. Allred,

503 U.S. Court House, 10th & Lamar Streets, Fort Worth, Texas 76102

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

Dakota, Utah.-Donald J. Stocking, 7224 Federal Building, 1961 Stout

Street, Denver, Colorado 80202

Region 7. California, Nevada, Arizona, Hawaii, Guam.-Arthur E. Pennekamp, 450 Golden Gate Avenue, Box 36042, San Francisco, California

94102

Region 8. Washington, Oregon, Idaho, Montana, Alaska.-James E. Newton,

900 Hoge Building, Seattle, Washington 98104

Region 9. Pennsylvania, Maryland, Virginia, West Virginia, Delaware, District of Columbia.-Alexander J. Brown, Jr., 500 North Capitol Street,

Washington, D.C. 20549

Branch Offices

Cleveland, Ohio, 44!l3.-Room 1628, Standard Building, 1370 Ontario Street.

Detroit, Michigan, 48226.-Room 1503, Washington Boulevard Building, 234

State Street.

Houston, Texas, 77002.-Room 2606, Federal Office Annex, Courts Building,

515Rusk Ave.

Los Angeles, California, 90028.-Room 309, Allstate Title Building, 6331

Hollywood Blvd.

Miami, Florida, 33130.-Room 1504, Federal Office Building, 51 S. W., First

Ave.

St. Louis, Missouri, 63102.-Room 916, Federal Building, 208 North

Broadway.

St. Paul, Minn., 55101.-1027 Post Office Building, 180 East Kellogg Blvd.

Salt Lake City, Utah, 84111.-Room 6004, Federal Building, 125 South State

Street.

~n
COMMISSIONERS

Manuel F. Cohen, Chairman

Chairman Cohen was born in Brooklyn, N.Y., on October 9, 1912.

He holds a B.S. degree in social science from Brooklyn College of the

College of the City of New York. He received an LL.B. degree,

cum laude, from Brooklyn Law School of St. Lawrence University in

1936, and was elected to the Philonomic Council. He is a member of

the District of Columbia and New York bars. In1933-1934 he served

as research associate in the Twentieth Century Fund studies of the

securities markets. Chairman Cohen joined the Commission's staff

as an attorney in 1942 after several years in private practice, serving

first in the Investment Company Division and later in the Division of

Corporation Finance, of which he was made Chief Counsel in 1953.

He was named Adviser to the Commission in 1959 and in 1960 became

Director of the Division of Corporation Finance. He was awarded

a Rockefeller Public Service Award by the trustees of Princeton University in 1956 and for a period of 1 year studied the capital markets

and the processes of capital formation and of government and other

controls in the principal financial centers of Western Europe. In

1961, he was appointed a member of the Council of the Administrative Conference of the United States and received a Career Service

Award of the National Civil Service League. From 1958 to 1962

he was lecturer in Securities Law and Regulation at the Law School

of George Washington University and he is the author of a number

of articles on securities regulation published in domestic and foreign

professional journals. In 1962, he received an honorary LL.D. degree from Brooklyn Law School. He took officeas a member of the

Commission on October 11, 1961, for the term expiring June 5, 1963,

and was reappointed for the term expiring June 5, 1968. He was

designated Chairman of the Commission on August 20, 1964.

Byron D. Woodside

Commissioner Woodside was born in Oxford, Pa., in 1908, and is a

resident of Haymarket, Va. He holds degrees of B.S. in economics

from the University of Pennsylvania, A.M. from George Washington

University, and LL.B. from Temple University. He is a member of

the bar of the District of Columbia. In 1929 he joined the staff of

the Federal Trade Commission, and in 1933, following the enactment

%III
XIV SECURITIES AND EXCHANGE COMMISSION

of the Securities Act of 1933, was assigned to the Securities Division

of that Commission which was charged with the administration of

the Securities Act. Commissioner Woodside transferred to the Securities and Exchange Commission upon its establishment by the Securities

Exchange Act of 1934. In 1940 he became Assistant Director and in

1952 Director of the Division (now Division of Corporation Finance)

responsible for administering the registration and reporting provisions of the Securities Act, Securities Exchange Act, the Trust Indenture Act of 1939, and, in part, the Investment Company Act of 1940.

For 14months commencing in May 1948,he was on loan to the Department of the Army and assigned to duty in Japan as a member of a

five-man board which reviewed reorganization plans of Japanese

companies under the Occupation's decartelization program; and beginning in December 1950, he served 17 months with the National

Security Resources Board and later with the Defense Production Administration as Assistant Deputy Administrator for Resources Expansion. He took office as a member of the Securities and Exchange

Commission on July 15, 1960, for the term of office expiring June 5,

1962,and was reappointed effective June 5, 1962,for the term expiring

June 5, 1967.

Hugh F. Owens

Commissioner Owens was born in Muskogee, Oklahoma on October 15, 1909, and moved to Oklahoma City in 1918. He graduated

from Georgetown Preparatory School, Washington, D.C., in 1927,

and received his A.B. degree from the University of Illinois in

1931. In 1934, he received his LL.B. degree from the University

of Oklahoma College of Law, and became associated with a Chicago

law firm specializing in securities law. He returned to Oklahoma

City in January 1936, to become associated with the firm. of Rainey,

Flynn, Green and Anderson. From 1940to 1941,he was vice-president

of the United States Junior Chamber of Commerce. During World

War II he attained the rank of Lieutenant Commander U.S.N.R.

and served as Executive Officer of a Pacific Fleet destroyer. In 1948,

he became a partner in the firm of Hervey, May and Owens. From

1951 to 1953, he served as counsel for the Superior Oil Company in

Midland, Texas, and thereafter returned to Oklahoma City, where

he engaged in the general practice of law under his own name. He

also served as a part-time faculty member of the School of Law

of Oklahoma City University. In October 1959, he was appointed

Administrator of the then newly enacted Oklahoma Securities Act

and was active in the work of the North American Securities Administrators, serving as vice-president and a member of the executive

committee of that Association. He took office as a member of the
COMMISSIONERS xv

Securities and Exchange Commission on March 23, 1964, for the term

expiring June 5, 1965, and was reappointed for the term expiring

June 5, 1970.

Hamer H. Budge

Commissioner Budge was born in Pocatello, Idaho, on November 21,

1910. He attended the College of Idaho, Caldwell, Idaho, received an

A.B. degree from Stanford University, Palo Alto, California, majoring in political science, and an LL.B. degree from the University of

Idaho in Moscow, Idaho. He is admitted to practice before the

Supreme Court of Idaho and the Supreme Court of the United States

and practiced law in the city of Boise, Idaho, from 1936 to 1951, except for 3% years in the United States Navy (1942-1945), with final

discharge as Lieutenant Commander. Elected to the Idaho State

Legislature, he served three sessions, two as assistant Republican floor

leader and one as majority floor leader. First elected to Congress in

November 1950, he represented Idaho's Second Congressional District

in the United States House of Representatives during the 82d, 83d,

84th, 85th, and 86th Congresses. In the House he was a member of

the Rules Committee, Appropriations Committee, and Interior Committee. During the period from 1961 until his appointment to the

Commission he was District Judge in Boise. He took office as a member of the Securities and Exchange Commission on July 8, 1964, for

the term of officeexpiring June 5, 1969.

Fraucis M. Wheal

Commissioner Wheat was born in Los Angeles, California, on February 4, 1921. He received an A.B. degree in 1942 from Pomona

College, in Claremont, California, and an LL.B. degree in 1948 from

the Harvard Law School. At the time of his appointment to the

Commission, Commissioner Wheat was a member of the Los Angeles

law firm of Gibson, Dunn & Crutcher, with which he became associated

upon his graduation from law school. His practice was primarily in

the field of corporation and business law, including the registration of

securities for public offering under the Securities Act of 1933. He has

been active in bar association work, including service as Chairman

of the Committee on Corporations of the Los Angeles County Bar

Association and Chairman of the Subcommittee on Investment Companies and Investment Advisers, Committee on Federal Regulation

of Securities, American Bar Association (Banking and Business Law

Section). He also has written or co-authored articles on various

aspects of the securities business and its regulation, both under Federal

and State law. He took office as a member of the Commission on

October 2, 1964, for the term expiring June 5, 1966, and was reappointed for the term expiring June 5, 1971.

INTRODUCTION

Changing Conditions in the Securities Indnstry

Changes are taking place in the nation's securities markets and the

securities industry. The dramatic growth of institutional investment

in equity securities and the advent of automation are but two examples

of the changes which raise basic questions about the structure of the

securities industry and its ways of doing business. The Commission

must continually study and assess the implications of these changes

and take appropriate action if it is to fulfill its statutory obligations

and help to maintain public confidence in the securities markets.

The Commission has recently completed and submitted to the Congress a Report on the Public Policy Implications of Investment

Company Growth. The Report was submitted pursuant to Section

14(b) of the Investment Company Act of 1940, which authorizes the

Commission, "if it deems that any substantial further increase in the

size of investment companies creates any problem involving the protection of investors or the public interest, to make a study and investigation" and "to report the results of its studies and investigations

and its recommendations to the Congress."

Both the securities industry and the Commission have taken important first steps in the use of electronic data-processing equipment,

but much remains to be done in that area. The Commission's computer is already serving an important role in the surveillance of the

securities markets and in developing a better understanding of the

operation of the securities markets. The Commission is also working

with the self-regulatory organizations, namely, the national securities

exchanges and the National Association of Securities Dealers, to develop automated procedures which will make possible more efficient

and effective procedures for the execution of securities transactions,

the publication of more timely and informative price and other information, and the establishment of improved surveillance programs.

The Commission staff has drafted improved financial reporting

forms for broker-dealers and investment advisers, and is discussing

these forms with industry groups. The information derived from

these forms, coupled with the use of computer simulation techniques,

should facilitate the evaluation of trends and problems within the industry and of the effects of alternative regulatory actions.

Changes in the securities markets and in the companies whose

securities are traded require a reassessment of the Commission's disXVII

238-643--67----2
XVIII INTRODUCTION

closure requirements. At the present time the Commission is working with the accounting profession and corporate executives to improve

financial reporting by "conglomerate" companies and to enhance the

comparability of financial statements of similar companies. In addition the Commission is reviewing its disclosure requirements under the

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

determine if the requirements can be coordinated and simplified so as

to provide more meaningful information to investors.

In sum, changes in the structure of the securities markets, in the

composition of the investor population, and in technology all require

knowledge and understanding on the Commission's part and imaginative regulation to deal with the problems raised. The Commission's

budget and staff have been strained in an effort to keep pace with

these problems. The Commission is attempting, through improved

coordination and cooperation with the states and the self-regulatory

bodies and other measures, to achieve the best utilization of its available resources.
PART I

IMPORTANT RECENT DEVELOPMENTS

As indicated in the Introduction to this Report, the Commission

and its staff devoted considerable attention during the 1966 fiscal

year to the study of changes taking place in the securities field and

consideration of the appropriate regulatory response. Some of the

problem areas had been touched on in the Report of the Special Study

of Securities Markets and various of the actions taken during the year

were to implement recommendations of that Study. Another important step forward was the acquisition of a computer, coincident

with the Commission's move into a new building. The computer will

contribute substantially to the Commission's efforts to discharge its

responsibilities more effectively. The sections that follow describe

in brief the principal matters under consideration during the year

(aside from developments with respect to the Securities Acts Amendments of 1964which are discussed in Part II of this Report), the longawaited move to satisfactory quarters, and the Commission's entry

into the computer age.

Proposed Broker-Dealer Financial Reporls

The Commission has submitted to industry leaders an informal

proposal to require broker-dealers to furnish increased financial

information on a periodic basis.

In making this proposal, the Commission considered several factors.

It noted that this is a period of rapid change in the securities markets

and the security industry. The resulting situation calls for actions

and decisions which require an informed analysis of the operations of

the markets and of persons and organizations in the markets. It is

necessary to evaluate the effects which various changes and proposals

by the Commission and others may have on the functioning of the

industry, its profitability and its ability to attract capital and people

with the imagination and energy so necessary to the continued growth

and development of our national economy. The Commission believes

that a full regulatory response to these conditions should be based on

informed analysis of the economic factors at work in the industry.

The Commission, the stock exchanges and the National Association of

Securities Dealers, Inc. now receive assorted financial information at

various times but often in a form which does not permit meaningful

1
2 SECURITIES AND EXCHANGE COMMISSION

evaluation and there is an almost complete absence of information

about the sources of income and expense for large segments of the

industry. Conferences with industry leaders are continuing.

Level and Structure of Commission Rate

During the fiscal year, the staff continued its research on the level

of the exchange commission rate. Considerable effort was devoted to

improving the quality and quantity of available data. As noted above

a proposed report form for broker-dealers has been drafted. Pending

resolution of the problems in developing such a report, the New York

Stock Exchange, following conferences with the Commission staff,

improved and made mandatory the filing of the Exchange's income

and expense report by all members doing a public commission business. It also adopted a form to provide supplementary balance sheet

information for the firms filing such reports.

The Commission staff has also continued its consultations on the

commission rate structure with the New York Stock Exchange staff

and others. These were directed towards gaining a fuller understanding of the various practices which now permit arrangements

qualifying the fixed minimum commission schedule established by the

Exchange. Based partly on these discussions, the Commission, with

a view to insuring a reasonable commission rate structure, has been

evaluating such current practices as "give-ups" and "give-aways",

reciprocal arrangements, and the provision of special services.

Odd-Lot Studies

The Special Study recommended that the New York Stock Exchange, with appropriate participation by the Commission, undertake It cost study of the odd-lot business. It also recommended that

the Commission, in conjunction with other exchanges, undertake

studies of the methods and costs of handling odd-lots on those exchanges. During the fiscal year the Commission reviewed the odd-lot

differential charged by New York Stock Exchange firms in the light

of the cost studies of the Exchange discussed in last year's annual

report,' the analysis made by the Commission's staff, and the numerous

conferences with the exchanges on the matter.

On June 16, 1966, effective July 1, 1966, the New York Stock

Exchange, at the request of the Commission, adjusted its odd-lot

differential. The new differential is 12% cents on each share of stock

selling for less than $55 and 25 cents on each share selling for $55

or over. The previous "break point" was $40. In requesting this

change the Commission indicated that it expected that a further review of the odd-lot differential charge of the New York Stock Ex1See p, 19.
TEITRTY-SECOND ANNUAL REPORT 3

change would be made promptly after the end of 1966. In addition,

the Commission determined to extend its inquiry into the mechanics

and principles under which odd-lot transactions are effected in all

securities markets. Ithas requested the comments of all the exchanges

and the NASD with regard to a number of significant issues and

problems pertinent to such a study.

Review of Exchange Rules Regarding Off-Board Trading

The Special Study Report recommended that the Commission and

its staff give continuing attention to "factors contributing to or detracting from the public's ready access to all markets," as well as

limitations on competition between markets and the effects of such

limitations on the fair and orderly functioning of the markets.

Until recently Rule 394 of the New York Stock Exchange prohibited all off-board transactions in listed securities, whether effected

on a principal or agency basis, unless the securities are specifically

exempted by the Exchange. The other national securities exchanges

have similar rules. Near the close of fiscal 1965 the Commission's

staff began a study to determine whether such prohibitions were consistent with the standards established under Section 19(b) of the

Securities Exchange Act for fair dealing in securities traded on exchanges. This inquiry was conducted during fiscal 1966. Following

the end of the year, the Exchange, at the request of the Commission,

amended Rule 394 to permit member broker-dealers to execute transactions with certain non-member broker-dealers who maintain markets in listed securities,- The rule is designed to promote competition

between the exchange specialist and the non-member market-maker

and to provide the public customer with the benefits of the best available market.

Automation of Market Facilities

During the past year the Commission appointed certain members

of its staff to an Electronic Data Processing Committee. The Committee's responsibilities include (1) the continuous examination of

industry practices and Commission rules to insure that the development and use of automation in the securities industry fulfills the needs

of both the industry and the Commission; and (2) the recommendation

of policies and procedures to implement its findings.

The Committee has met with representatives of the various exchanges, the National Association of Securities Dealers, suppliers of

stock market data and other interested parties to discuss various aspects

of automation in the securities industry. Discussions with the exchanges have dealt with such matters as the establishment of central

• See Securities Exchange Act Release No. 7981 (October 20,1966).
4 SECURITIES AND EXCHANGE COMMISSION

bookkeeping systems and central depositories for securities, the improvement of quotations, the aut.omation of surveillance procedures

and the clearing operation, and the automation of the execution of

odd-lot transactions. Automation in the over-the-counter market has

been discussed with the National Association of Securities Dealers,

with broker-dealers, and with vendors who hope to supply the equipment and related services for any such program.

In recent years the New York Stock Exchange has worked toward

the development of a centralized system for the handling and delivery

of securities through the use of automated procedures. To further

the development of such systems, the Commission during fiscal year

1966 amended Rules 8c-1 and 15c2-1 under the Exchange Act 3 to provide that the hypothecation of customers' securities held by a clearing

corporation or other subsidiary organization of a national securities

exchange or national securities association or by a custodian bank

pursuant to a central system in which customers' securities are commingled with securities of others will not of itself constitute a commingling prohibited by those rules. Generally speaking, the exemption is available only where the custodian agrees to deliver the securities

it holds as directed by the system and not to assert any claim against

them; the system has safeguards for the handling, transfer and delivery

of the securities; and the system provides for fidelity bond coverage

of employees and agents of the clearing corporation or other subsidiary

organization and for periodic examination by independent public

accountants. In addition, the Commission must find that the custody

agreement and the safeguards established are adequate for the protection of investors. At the time the Commission amended the rules

it found that the New York Stock Exchange's Central Certificate

Service met the specified standards.'

While the amendment makes clear that the presence within a system

of a stock certificate representing the interests of various customers and

other parties, including pledgees, does not constitute a prohibited

commingling, it does not make legal a hypothecation prohibited by

Ru1es 8c-l and 15c2-1. Thus, it would still constitute a violation of

these rules to hypothecate the securities of more than one customer

of a member, broker or dealer to secure a loan unless the consent of

each customer is obtained, or to hypothecate the securities of a

customer with those of any person other than a customer to secure

a loan.

Over-the-Counter Markets

The Special Study pointed out serious inadequacies in the supervisory controls utilized by broker-dealers in their surveillance of the

Securities Exchange Act Release No. 7896 (May 25,1966).

Ibid.

•

•
THIRTY-SECOND ANNUAL REPORT 5

selling activities of salesmen and other employees and recommended

the strengthening of such procedures and the adoption by the selfregulatory agencies of clearer standards and stronger enforcement

procedures to assure more effective supervision by their member firms.

The Commission's staff initiated discussion with the NASD to deal

with these problems and on July 1, 1965, the NASD adopted rules

dealing with supervision procedures and selling practices of Association members. Among other things, these rules require the establishment and enforcement of written supervisory procedures and

designation of a partner or officer to be responsible for their execution.

The internal procedures must include periodic review of customer

accounts and at least an annual inspection of each branch office. The

NASD rule governing discretionary accounts has also been amended

to require written customer authorization, supervisory review, and

approval of activity in such accounts. A revised statement summarizing many of the selling practices which violate a member's

responsibility for fair dealing also was adopted. To aid in the implementation of these new rules, the Association has prepared and

distributed to its members a separate comprehensive manual which

contains detailed guidelines and suggestions for effective supervisory

procedures. All of these areas were subjects of Special Study

recommendations.

During the year a number of further conferences were held between

the NASD and the Commission staff concerning the NASD markup

policy. The NASD has had a special committee reviewing the Association's markup policy, which also was the subject of a number of

significant recommendations by the Special Study. The Association

hopes to present a revised markup policy to its Board of Governors

for adoption in the near future.

As noted in last year's annual report, the NASD engaged an outside

management consulting firm to study the effects of its revised newspaper quotations system which was adopted in response to the provisions of Section 15A(b) (12) of the Securities Exchange Act as

amended in 1964 and the recommendations of the Special Study. The

study was also designed to assist in evaluating the possible effects and

appropriateness of the Special Study's recommendations regarding

the prohibition of so-called "riskless" principal transactions in the

over-the-counter markets and the disclosure of prevailing inter-dealer

markets to investors. In October 1966, the findings and conclusions

of the study were announced by the NASD. The study found that

the quotations revisions made in 1965 had had no substantial impact

on the markets for the securities affected, and that the issuers of these

securities as well as well as those quoted in local lists sponsored by the

NASD favored publication of inter-dealer (i.e. wholesale) quotations.
6 SECURITIES AND EXCHANGE COMMISSION

The NASD has revised its rules to provide that all over-the-counter

quotations in national news media reflect inter-dealer markets including those in securities traded only on a local basis. With respect to the

possible impact of adoption of the other Special Study proposals,

the consulting firm concluded that certain types of NASD members

would be adversely affected. These conclusions are now being reviewed

by the Commission's staff.

Coordination of Regulatory Efforts

During the past year, the Commission gave increased emphasis to

the coordination of its regulatory activities with those of the various

states and the self-regulatory institutions to improve the effectiveness

of regulation and at the same time to reduce the burdens of compliance. The regional officestook steps to improve the coordination

of inspection and other activities with state securities administrators

and with the NASD in those areas where the respective jurisdictions

overlap. Staff members of the Commission and of certain of the state

authorities have conducted joint inspections which have strengthened

and made more effective the entire inspection program.

The Commission has also developed procedures for informing state

administrators about important investigations the Commission is

conducting in their respective states and for advising them of injunctive or public administrative proceedings which are to be instituted

there.

To make information filed with the Commission more readily available to the states, the Commission now furnishes to the interested

state administrators a copy of the prospectus in the first registration

statement filed by a company under the Securities Act of 1933. The

Commission will also send a copy of any broker-dealer withdrawal

form to the state administrator in the state in which the firm's principal officeis located. This form may help the state administrator determine whether any regulatory action under state law is appropriate.

To reduce the burden on persons filing broker-dealer application

forms, the North American Securities Administrators recently approved the adoption of a uniform form, which will be available to

all administrators. A common core of information would be provided

by the Commission's broker-dealer registration form, and that information would be supplemented by information, if any, required by

a particular jurisdiction. This new form will reduce the burden on

firms who must now furnish the same or similar information to various

regulatory bodies.

Significant progress has also been made to coordinate the administration of examinations given to securities salesmen, to relieve them

of the need to take essentially duplicative examinations. In its exami-
THIRTY-SECOND ANNUAL REPORT 7

nation program for persons associated with broker-dealers that are

not members of the NASD, the Commission grants reciprocity to

securities examinations meeting established standards," Since the

initiation of the Commission examination program in January 1966,

a majority of the 31 states which require salesmen to pass a general

securities examination, and the NASD, have granted reciprocity to

the Commission's own examination.

Conflicts of Interest of Investment Advisers

The Special Study Report discussed various situations where the

nature of the advice given by investment advisers could be affected

by consideration of their own interests. It particularly questioned

the purchase of securities by an investment adviser for his own account

shortly before recommending such securities, followed by a sale after

the market price reflects the impact of the recommendation. This

practice is known as "scalping."

With a view to identifying and possibly regulating conflicts-ofinterest situations involving investment advisers, the Commission

amended Rule 204-2 (a) of the Investment Advisers Act of 1940 to

require investment advisers to maintain records concerning transactions in which they or their "advisory representatives" (as that term

is defined in the rule) have a beneficial interest,"

In announcing the amendment, the Commission pointed out that an

investment adviser is a :fiduciary, and as such owes his clients undivided loyalty, should not engage in any activity in conflict with the

interest of clients, and should take the steps reasonably necessary to

fulfill his :fiduciary obligations. It referred to the holding by the

United States Supreme Court in SEO v, Oapital Gains Research

Bureau, 375 U.S.1S0 (1963), that "scalping" by an investment adviser

violates the anti-fraud provisions of Sections 206(1) and (2) of the

Advisers Act unless appropriately disclosed. The Commission has considered whether it should adopt a rule designed to prevent "scalping"

by prohibiting specified transactions by investment advisers and their

associates in securities recommended by them. Itis expected that the

new record-keeping requirement will assist the Commission in determining whether such a rule is necessary and if so, what its nature and

scope should be. In addition, the reports furnished to investment

advisers by their "advisory representatives" should provide the investment advisers with valuable information on the basis of which

See pp.16-17, infra.

The amendment was proposed during the fiscal year. Its adoption was

announced in Investment Advisers Act Release No. 203 (August 11, 19(6). To

allow investment advisers adequate time to establish the internal procedures

necessary for compliance with its provision, the Commission made the amendment

effective on October 1, 1966.

•

•
8 SECURITIES AND EXCHANGE COMMISSION

they may establish appropriate internal controls over representatives'

trading.

New Building

The Commission completed its move into new quarters in June 1966

The building is conveniently located at. 500 North Capitol Street, facing Union Station Plaza.

For the first time in its 32-year history, the Commission's Headquarters Officeis housed in a single modern officebuilding with suitable

facilities and accommodations. This consolidation of the Washington

staff (including the Washington Regional Office) into one building

will contribute to a more orderly and efficient conduct of the Commission's business. Coincident with the move, the Commission undertook

to improve its service to the public. For example, better facilities are

now available for the public's examination of corporate and other reports on file with the Commission. In addition, new and improved

telephone facilities have been installed which will permit direct transfers of incoming telephone calls without rerouting through the master

switchboard. The Commission will continue to press forward in

every possible way to make improvements in its service to the public.

In a message sent to the dedication ceremonies, President Johnson

said:

"It gives me great pleasure to congratulate you on the attainment

of a much-needed goal-the efficient and attractive quarters being

dedicated today.

For many years the Securities and Exchange Commission has

labored under the handicap of a series of so-called "temporary"

buildings. I am glad that we could finally obtain this new and

more pleasant working environment for your dedicated public

servants.

The modern facilities now at your disposal will undoubtedly result in even better service to the public and the securities industry.

A valuable by-product of the new SEC building deserves mention.

The important Washington gateway at Union Station, adjacent

to the Capitol, should add to an impressive first view for our

visitors arriving by rail. The SEC building significantly improves the vista on this spacious plaza. It makes a notable contribution to our efforts to create a more beautiful Washington.

I share the pride of the Commission and its staff in your new

home and you have my best wishes for the future."

Installation and Use of Electronic Data-Processing Equipment

In May 1966, following extensive studies and preparatory work,

a computer was delivered to the Commission in its new building. The
TEITRTY-SECOND ANNUAL REPORT 9

equipment is being used for a variety of regulatory, enforcement,

statistical and house-keeping uses.

In one important application of EDP, the Commission has begun

operation of an integrated regulatory and enforcement information

system which combines information as to names, numbers and descriptions previously contained only in a number of separate indexes. The

new system will permit a speedier, more accurate and more comprehensive verification of information in incoming documents against

information already on file. It will also be used to provide supervisory personnel with meaningful information about the large number

of documents which are under examination at any given time. A

second important application of automation is in the area of surveillance of the over-the-counter securities markets on a comprehensive

basis which was not feasible under the former manual methods. The

computer is programmed to identify unusual price movements or dealer

interest, securities which are quoted in the inter-dealer market after

lengthy absence, and those in which there are "special arrangements"

among broker-dealers. If a security is identified for any of these

reasons, the system will print out the security and the dealers involved,

permitting the rapid detection of potentially troublesome areas.

The computer is also being used to analyze various data relating

to the securities industry. These analyses will materially assist the

Commission in carrying out its regulatory functions. EDP applications planned for the future include the development and programming

of a system for legal and accounting research and the expansion of

the integrated regulatory and enforcement system to provide for EDP

surveillance of security holdings and transactions required to be

reported by corporate insiders.
PARTn

OPERATION OF THE SECURITIES ACTS AMENDMENTS OF 1964

Extension of Disclosure Requirements to Over-the-Counter Secnrities

Section 12(g) of the 1964 amendments extended to many securities

traded in the over-the-counter markets the registration, periodic reporting, proxy solicitation and insider reporting and trading provisions of the Exchange Act previously applicable to securities listed on

a national securities exchange. This Section requires a company with

total assets exceeding 1 million dollars and a class of non-exempt equity

securities not previously registered under Section 12 which is held of

record by 500 or more persons 1 to register those securities by filing a

registration statement.

During the fiscal year, 676 registration statements were filed under

Section 12(g). From the enactment of the 1964 amendments through

June 30, 1966, 2,184 registration statements were filed under this Section. Six of these statements were withdrawn before they had become

effective upon the determination that they were not required to be filed

under the Act. Sixteen registrations were terminated pursuant to

Section 12(g) (4) because the number of shareholders fell under 300.

Of the 2,184 registration statements filed under Section 12 (g), 1,310

were filed by issuers already subject to the reporting requirements of

Sections 13 or 15 (d) of the Act. Of this latter figure 106 registration

statements (78 in fiscal 1965 and 28 in fiscal 1966) were filed by issuers

with another security registered on a national securities exchange

under Section 12 of the Act, and 1,204 were filed by issuers subject to

the reporting requirements of Section 15(d) (851 during fiscal 1965

and 353 during fiscal 1966) . These latter companies had not been subject to the proxy solicitation and insider reporting and trading provisions of Sections 14 and 16 of the Exchange Act. The remaining

868 issuers which filed registration statements had not been subject to

any of the disclosure or insider trading provisions and became subject

to them through registration.

During the fiscal year, the Commission granted 250 extensions of

time for filing, including more than one request by some issuers. A

majority of these requests was based on the difficulties encountered

by independent accountants in preparing certified financial statements

1Until JUly 1, 1966, the number was 750.

10
TEITRTY-SECOND ~lJAL REPORT 11

within the prescribed time when prior financial statements had not

been certified.

During the fiscal year, 1,304 definitive proxy statements were filed

pursuant to Regulation 14A by issuers with securities registered under

Section 12(g). In addition, 19 out of 37 proxy contests occurring

during the year which were subject to Regulation 14A involved securities registered under Section 12(g) .

As a further consequence of Section 12(g), there was a great increase

in the number of ownership reports filed this year pursuant to

Section 16(a).

Section 14(c) of the Exchange Act, added by the 1964 amendments,

requires issuers of securities registered under Section 12 to file with

the Commission and transmit to security holders from whom proxies

are not solicited for a meeting of stockholders an information statement containing information comparable to that which would be

furnished in proxy material if proxies were solicited. During the

fiscal year, the Commission adopted Regulation 14C, setting forth the

requirements for this information statement. In the case of an annual meeting the issuer is also required to transmit to security holders an annual report including financial statements certified by independent public or certified public accountants, similar to the annual

report required of issuers which solicit proxies,"

Rule 14c-7 of the new regulation provides that if the issuer knows

that securities of any class entitled to vote at a meeting are held of

record by a broker, dealer, bank or voting trustee, or their nominees,

the issuer must inquire whether other persons are beneficial owners of

such securities and must furnish the record holder with enough copies

of the information statement and annual report to enable the record

holder to send copies to the beneficial owners. The issuer must pay

the reasonable expenses of the record holders in transmitting this

material. This latter provision is similar to Rule 14a-2(b) of the

proxy rules.

Regulation 14C applied to any meeting of security holders held on or

after March 15, 1966. During the fiscal year, 53 information statements in definitive form were filed with the Commission pursuant to

the regulation.

Section 12(i) provides, in effect, that for securities issued by banks,

the responsibility for administering and enforcing Sections 12, 13,

14(a), 14(c) and 16 of the Exchange Act is vested in the Comptroller

of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, depending on

which agency has primary supervisory jurisdiction over a particular

• Securities Exchange Act Release No. 7774 (December 30.1965).
12 SECURITIES AND EXCHANGE COMMISSION

bank. The Commission understands that information regarding the

operation of the Securities Acts Amendments of 1964 with respect to

banks under the supervision of these agencies is discussed in their

respective annual reports or is otherwise available from them,"

Exemptions From Registration

Section 12(h) of the Act authorizes the Commission, either by rules

and regulations or by order upon application of an interested person,

to grant a complete or partial exemption from the provisions of Sections 12(g), 13,14, 15(d), or 16 if the Commission finds that because

of the number of public investors, the amount of trading interest in

the securities, the nature and extent of the activities of the issuer, the

income or assets of the issuer, or otherwise, the exemption is not inconsistent with the public interest or the protection of investors.

During the fiscal year, 22 applications for complete or partial exemptions were filed; 21 applications filed during the prior year were

pending. Of these 43 applications, 22 were granted,' 2 were denied,

7 were withdrawn, and 12 were pending at the end of the year. Exemptions were granted for a wide variety of reasons. Several mutual

or cooperative organizations which did not meet all of the technical

criteria of Section 12(g) (2) (F) for exclusion :fromregistration under

Section 12(g) were granted complete exemptions. Several issuers

which were in the process of liquidation or of taking steps which would

shortly terminate the public ownership of their securities, and whose

registrations would therefore be shortly terminated were also exempted

completely. Exemptions from Section 14(c) only were granted to

several other issuers, only a small percentage of whose securities were

held by the public and whose operations consisted solely of the receipt

of rentals for property leased to affiliates.

Section 12(g) (2) exempts various types of securities from the registration requirements of Section 12(g) including the securities of an

insurance company if (1) the company is required to and does file an

annual statement conforming to that prescribed by the National Association of Insurance Commissioners ("NATC") with the insurance

regulatory authority of its domiciliary state; (2) the company is regulated in the solicitation of proxies as prescribed by the NATC; and

(3) after July 1, 1966, the purchase and sale of securities issued by the

company are subject to reporting and trading regulations by its

8 See 52nd Annual Report of Board of Governors of Federal Reserve System,

pp. 225-226; Annual Report of Federal Deposit Insurance Corporation (1965)

pp. 18-20.

As required by the Act, exemptions were granted only after notice and opportunity for hearing. No hearings were requested as to any applications which

were granted.

•
THIRTY-SECOND ANNUAL REPORT 13

domiciliary state in substantially the same manner as provided by

Section 16 of the Act.

The NAlC has prescribed a uniform annual reporting form which

has been adopted in every State and the District of Columbia as the

required form for insurance companies. As part of that form, the

NAIC has developed a "stockholders' information supplement" to determine whether the company has furnished its stockholders with information substantially equivalent to that which the Commission

would require under its periodic reporting requirements and proxy

rules. The Commission has been informed that, as of the close of

the fiscal year, the insurance regulatory agencies of every State and

the District of Columbia had adopted rules and regulations requiring companies within their jurisdiction to file the supplement and

any future revisions, and to comply with the proxy solicitation practices referred to therein. Many states also had enacted legislation specifically authorizing the adoption of such rules and regulations.

The NAlC also supported enactment of a model insider trading

statute affording investor protections comparable to those of Section

16 of the Exchange Act. As of August 15, 1966, all of the States

and the District of Columbia had passed such legislation.

Section 12(g) (3) authorizes the Commission to exempt foreign securities and certificates of deposit for such securities from the registration requirements of Section 12(g) if it :finds that such action is

in the public interest and is consistent with the protection of investors.

Rule 12g3-1, adopted on September 15, 1964, exempted all foreign

securities from registration until November 30, 1965.G This exemption afforded the Commission time to study the problems of the registration of foreign securities traded in the over-the-counter market.

On November 16, 1965, the Commission published for public comment

proposed rules and forms for the registration of foreign securities

under Section 12 (g) .6

The Commission received many comments on the proposed rules,

including many from persons and companies who would be directly

affected by them and from representatives of foreign governments.

Most of those who submitted comments suggested that the application

of the requirements of the Exchange Act to foreign issuers which were

neither listing shares on a United States securities exchange nor offering new shares in this country would be improper under international

law. A number of comments indicated that in particular areas there

would be technical difficulties in superimposing the requirements of

the proposed rules on existing law to which issuers were subject in

their country of incorporation.

Securities Exchange Act Release No. 7427.

Securities Exchange Act Release Nos. 7746, 7747, 7748, 7749.

•

•
14 SECURITIES AND EXCHANGE COMMISSION

After considering the comments, the Commission further postponed

the application of Section 12 (g) to foreign issuers, by amending Rule

12g3-1 to extend the exemption from registration to November 30,

1966.7 During the further period of exemption, the Commission continued its study of the adequacy of information now furnished by

foreign issuers, the development and effects of the changing foreign

law in this field, and the need for technical changes in the proposed

rules because of foreign laws and practices. As of November 30,1966,

the exemption had not been extended further. The earliest date by

which a foreign issuer would be required to register, if the Commission did not. grant a further exemption, is 120 days after its first fiscal

year ending after November 30, 1966.

To assist the Commission during the further exemption, and to

provide information as promptly as possible to American investors,

the Commission asked foreign issuers to furnish the Commission with

certain information if they had in excess of $1 million of total assets

and a class of equity securities with 500 or more holders (at least 300

of which are residents of the United States) at the end of a :fiscalyear

ending after November 30, .1965. The information requested was that

which issuers were required to publish under foreign law or to furnish

to foreign stock exchanges, or which they distributed to their own

security holders. The information so furnished would be available

for public inspection.

On August 10, 1966, the Commission published a list of 80 foreign

issuers which had furnished information voluntarily and 32 issuers

which had not done SO.8 The Commission will publish additional

lists as additional companies furnish information. The Commission

believes that these lists will be useful to brokers and dealers in making

recommendations to their customers concerning the securities of foreign companies.

Proposed Definitions Under the "Market.Maker" Exemption From Insider

Trading Provisions

Section 16 (d) of the Exchange Act, added by the 1964 amendments,

exempts market-making transactions by broker-dealers from the profit

recovery provisions of Section 16 (b) and the "short sale" and "sale

against the box" provisions of Section 16(c). On June 16, 1966, the

Commission proposed for public comment a new Rule 16d-1 defining

certain terms in Section 16( d) and specifying conditions for the availability of the exemption,"

The proposed rule would define the term "securities held in an investment account" as used in Section 16(d) to mean securities which

a dealer has identified on his records as being held in an investment

7 Securities Excbange Act Release No. 7867 (April 21, 1966).

Securities Exchange Act Release No. 7984.

Securities Excbange Act Release No. 7905.

•

•
TEURTY-SECOND ~AL REPORT 15

account, securities acquired in other than market-making transactions

and securities held by the dealer more than 5 business days after the

dealer ceases to maintain a market in the securities. The acquisition

of these securities would not be exempt from Section 16(b) even

though made in a market-making transaction. The term "transactions made in the ordinary course of business and incident to the

establishment or maintenance of a primary or secondary market"

(referred to in the rule as "market-making transactions") would be

defined to mean both retail and inter-dealer transactions in securities

which are sold, or acquired and held for sale, in the ordinary course of

business and incident to the establishment or maintenance of a market.

The rule would require as a basis for exemption that the dealer maintain a continuous inter-dealer market in the securities on each business

day for a period of at least 45 consecutive calendar days, including

the day of the transaction for which exemption is claimed. At the

close of the fiscal year, the Commission was considering the comments

and suggestions which it had received.

Disciplinary Action Against Broker-Dealers and Their Associated Persons

The 1964 amendments added several important provisions to Section

15 of the Exchange Act concerning disciplinary action against brokers

and dealers and persons associated with them. For the first time,

the Commission was authorized to proceed directly against and impose sanctions on individuals associated with broker-dealer firms.

These sanctions include a suspension or a bar from being associated

with a broker-dealer. The sanctions which the Commission may impose against broker-dealers were expanded to permit censure and suspension of registration for up to 12 months. The statutory disqualifications from being registered as or associated with a broker-dealer were

expanded to include additional types of injunctions, convictions and

violations.

During fiscal 1966, the Commission applied the new provisions in

many instances. It instituted four proceedings solely against individuals associated with broker-dealers. Another such proceeding was

pending at the start of the fiscal year. During the year, a respondent

in one of the above proceedings was barred from further association

with a broker-dealer. In proceedings in which broker-dealers as well

as certain of their associated persons were named as respondents, 67

individuals were barred from further association with a broker or

dealer, and 9 others were suspended from such association for varying periods of time. The Commission also suspended the registrations of six broker-dealer firms.

238-643--67----3
16 SECURITIES AND EXCHANGE COMMISSION

Regulation of Broker-Dealers Who Are Not Members of Registered Secnrities

Associations

Prior to the 1964 amendments, broker-dealers registered with the

Commission who were not members of the National Association of

Securities Dealers, Inc. (NASD), or one of the principal exchanges,

were not subject to any comprehensive regulation concerning qualifications, experience in the securities business, or fair business practices.

A major objective of the amendments was "to insure that the Commission has the necessary authority to provide regulation of non-member

brokers and dealers comparable to that imposed by (self-regulatory)

associations on their membership, including the requirement that these

non-member brokers and dealers pay fees which will compensate the

Commission for this additional regulation." 1(1

New subsections (8), (9), and (10) of Section 15(b) of the Exchange Act authorize the Commission to adopt rules and regulations

prescribing standards of training, experience and other qualifications

for such brokers and dealers and persons associated with them, as well

as to adopt rules and regulations for non-member broker-dealers

designed to promote just and equitable principles of trade, to provide

safeguards against unreasonable profits or unreasonable rates of

commissions or other charges, and in general to protect investors and

the public interest and to remove impediments to and perfect the

mechanism of a free and open market.

During the past fiscal year, the Commission continued to implement

these provisions. In September 1965, the Commission adopted Rule

15b8-1 which, among other things, established qualification requirements for registered broker-dealers who do an over-the-counter business and who are not members of a registered securities association,

and for their principals, salesmen and other associated persons."

Subject to certain exemptions, every associated person engaged directly

or indirectly in securities activities must now successfully complete a.

qualifications examination, and broker-dealers subject to the rule must

file a personnel form for every such associated person with the

Commission.

In January 1966, the Commission's general securities examination,

administered by the NASD, was given for the first time. The examination covers a broad range of securities subjects, including corporate

structure, financial statements and accounting theory, investment companies, the securities laws, details of underwriting, trading and distributions, and other Federal rules and regulations such as Regulations

"T" and "U" of the Federal Reserve Board. By the end of the fiscal

year, 8,315 examinations had been given in over 70 testing centers in

l'House Report No.HI8, 88th Congo2d Sess., p.12.

11 Securities Exchange Act Release No. 7697 (September 7,1965).
TEITRTY-SECOND ~ruAL REPORT 17

the United States and Puerto Rico. The examination was first given

in United States consulates abroad in .August 1966.

.An associated person may also satisfy the examination requirement

by passing an examination which the Commission deems a satisfactory

alternative to its own. Such examinations include, thus far, those

given by the N.ASD, certain of the national securities exchanges, many

States, and the NAIC (in connection with variable annuities).

The Commission reviewed and processed more than 22,000 personnel

forms received from approximately 450 non-member broker-dealers

during the year. The Commission will use the information in these

forms to formulate further qualification standards for non-member

broker-dealers and associated persons. The data is also being coded

and tabulated for a statistical study of non-member broker-dealers.

In June 1966, the Commission adopted Rule 15b8-2, which among

other things established assessments for fiscal 1966.12 The assessments

apply to broker-dealers who had been registered with the Commission

for at least 45 days as of June 30, 1966, and who were not members of a

registered securities association on that date, as well as to broker-dealers who, although members of a registered securities association on

August 1, 1966 (the effective date of the rule), were for at least 45

days during fiscal 1966 both registered with the Commission and not

members of such association. The rule requires the filing of an assessment form and payment of a base fee for each such broker-dealer, and

imposes an additional levy for each associated person and each office

of the broker-dealer.

The rule also requires broker-dealers registering with the Commission after the effective date of the rule, who do not become members of

a registered securities association within 45 days after their registration with the Commission, to pay a fee of $150. In addition, there is a

$25 fee for each personnel form filed after .August 1, 1966, except those

forms filed for persons for whom such a form had previously been

filed by the firm and for persons who conduct all their securities activities outside the United States and do not deal with any United States

residents or nationals.

The rule exempts broker-dealers who are members of a national securities exchange if they do not carry customers' accounts and if their

annual gross income derived from over-the-counter business is no more

than $1,000. This exemption applies mainly to exchange specialists

and other floor members who occasionally introduce accounts to other

members .

.A program for the inspection of non-member broker-dealers has

been formulated, and the first inspections were conducted in August

1966. In addition, the Commission's staff has drafted rules under

11 Securities Exchange Act Release No. 7906.
18 SECURITIES AND EXCHANGE COMMISSION

Section 15(b) (10) concerning the business conduct and selling practices of broker-dealers, and additional rules concerning advertising

and salesliterature are being prepared.

Summary Suspension of Over-the-Counter Trading

Section 15(c) (5) of the 1964 amendments authorizes the Commission to suspend over-the-counter trading in any security (except an

exempted security) summarily for 10 days if the Commission believes

the public interest and protection of investors so require. Brokerdealers are prohibited from trading in any such security during the

period of suspension. This provision is a counterpart to Section

19(a) (4) which provides for summary suspension of trading in securities listed on a national securities exchange.

During the 1966 fiscal year, the Commission temporarily banned

trading in five over-the-counter securities. In three of these cases,

the Commission suspended trading when it learned of information not

generally known to the securities community and investors which indicated that there were substantial questions concerning the financial

condition or business operations of the companies involved. The suspensions were ordered pending clarification and adequate public dissemination of information concerning these matters."

The Commission suspended trading in the securities of two other

issuers concurrently with the institution of court action to enjoin violations of the Federal securities laws in the offer and sale of such

securities. These suspensions were imposed to permit public disclosure of the information developed and the steps taken by the Commission in the course of its investigations of the violations.>

The Commission also acted under Section 15(c) (5) in several instances where it ordered suspensions at the same time under Section

19(a) (4) for securities traded on national securities exchanges. In

these cases, the Commission found it necessary to suspend over-thecounter trading to prevent circumvention of the exchange suspension.

Changes in NASD Regulations

Pursuant to additional powers granted the NASD under the 1964

amendments, the Association amended its By-Laws and Rules of Fair

Practice in September 1965 to establish further qualification requirements and standards for members and persons associated with members, as well as to expand the Association's bars to eligibility for

membership. These new regulations also permit the Association in

disciplinary actions to proceed directly against associated persons

without necessarily joining the member firm.

18 Securities Exchange Act Release Nos. 7812 (February 2, 1966), 7822 (February 11,1966), and 7881 (April 29, 1966).

It Securities Exchange Act Release Nos. 7735 (November 1, 1965) and 7866

(April 18, 1966). Rpe Release No. 7913 (July 1,1966).
PART HI

LEGISLATIVE ACfIVITIES

On October 22, 1965 the President signed Public Law 89-289,

amending the Securities Act of 1933. This legislation, proposed by the

Commission, increased the fees payable for the registration of

securities under the Securities Act from YJ.oo of 1 percent of the

maximum aggregate offering price of the securities to be offered, or

10 cents per $1000, with a minimum fee of $25, to %0 of 1 percent, or

20 cents per $1000, with a minimum of $100. As a result, the Commission will be able to recover more of the costs of administration of

the Federal securities laws.

Chairman Cohen testified on behalf of the legislation on September

14, 1965, before the Committee on Interstate and Foreign Commerce,

House of Representatives, and on September 22, 1965, before the Subcommittee on Securities of the Committee on Banking and Currency,

United States Senate.

On March 11, 1966, Chairman Cohen appeared before the Subcommittee on Financial Institutions of the Committee on Banking

and Currency, United States Senate, and submitted a written statement in opposition to S. 2704, a bill to provide for the regulation of

collective investment funds maintained by banks. Under the bill,

interests in such funds would be excluded from the definition of

"security" in the Securities Act and the Securities Exchange Act, and

the funds would be excluded from the definition of "investment company" in the Investment Company Act. The Chairman stated that

the Commission objected to the bill principally because it was special

legislation which would permit banks to offer to the public collective

investment management similar to that offered by mutual funds but

without the proven safeguards which the Securities Act and the Investment Company Act afford t:o investors.

Chairman Cohen also testified on June 22, 1966, before the Subcommittee on Securities of the Committee on Banking and Currency,

United States Senate, concerning S. 2672, a bill to regulate the interstate sale of undeveloped subdivision lots. Among other things, the

bill, which follows the pattern of the Securities Act, would require a

real estate developer to file with the Commission a registration statement making specified disclosures if he subdivided land into 25 or more

units or interests for the purpose of sale or lease as part of a common

19
20 SECURITIES AND EXCHANGE COMMISSION

promotional plan, and to furnish a prospectus to a prospective purchaser or lessee at least 48 hours before a contract was entered into.

The bill also contains provisions designed to prevent and punish fraud.

The Chairman pointed out that administration of the bill by the

Commission would to some extent divert its attention from its primary

function, the regulation of the securities markets. He stated, however,

that if the bill were enacted into law, the Commission would do its best

to carry out the legislative purpose effectively and economically. The

Chairman also submitted for the record an analysis of the bill and

certain suggestions for amendment.

The Commission's General Counsel, Philip A. Loomis, Jr., testified

on April 4, 1966, before the Subcommittee on Domestic Marketing and

Consumer Relations of the Committee on Agriculture, House of Representatives, with respect to H.R. 11788, a bill to amend the Commodity

Exchange Act.

During the fiscal year the Commission and its staff analyzed or

commented on 43 bills and other legislative matters referred by various

committees of the Senate and House of Representatives, individual

memb~rs of Congress, the Bureau of the Budget and other Federal

agencies,
PART W

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is designed to provide disclosure to

investors of material facts concerning securities publicly offered for

sale by the use of the mails or instrumentalities of interstate commerce,

either by an issuing company or by any person in a control relationship to such company, and to prevent misrepresentation, deceit, or

other fraudulent practices in the sale of securities generally. Disclosure is obtained by requiring the issuer of such securities to file

a. registration statement with the Commission which includes a prospectus containing significant financial and other information about

the issuer and the offering. The registration statement is available

for public inspection as soon as it is filed. Although the securities

may be offered for sale as soon as the registration statement has been

filed, actual sales may not be made until the registration statement

has become effective. A copy of the prospectus must be furnished

to each purchaser at or before the sale or delivery of securities in order

to provide him with an opportunity to evaluate such securities and

make an informed investment decision. The issuer and the underwriter are responsible for the contents of the registration statement.

The Commission has no authority to control the nature or quality of a

security to be offered for public sale or to pass upon its merits or the

terms of its distribution. Its action in permitting a registration

statement to become effective does not constitute approval of the

securities, and any representation to the contrary to a prospective

purchaser violates Section 23 of the Act.

DESCRIPTION OF THE REGISTRATION PROCESS

Registration Statement and Prespeems

Registration of any security proposed to be publicly offered may

be effected by filing with the Commission a registration statement on

the applicable form containing the prescribed disclosure. Generally

speaking, a registration statement relating to securities issued by a

corporation or other private issuer must contain the information

specified in Schedule A of the Act, while a statement relating to

securities issued by a foreign government must include the information specified in Schedule B. Securities issued by the United States,

by a state, or by any political subdivision of a state are exempt from

21
22 SECURITIES AND EXCHANGE COMMISSION

the registration provisions of the Act. The Act empowers the Commission to classify issues, issuers and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or

diminish, the particular items of information required to be disclosed

as the Commission deems appropriate in the public interest or for the

protection of investors. To facilitate the registration of securities by

different types of issuing companies, the Commission has prepared

special registration forms which vary in their disclosure requirements

so as to provide maximum disclosure of the essential facts pertinent

in a given type of case while a,t the same time reducing the burden

and expense of compliance with the law.

In general, the registration statement of an issuer other than a foreign government must disclose such matters as the names of persons

who participate in the management or control of the issuer's business;

the security holdings and remuneration of such persons; the general

character of the business, its capital structure, past history and earnings; underwriters' commissions; payments to promoters made within

2 years or intended to be made; the interest of directors, officers and

principal stockholders in material transactions with the issuer; pending' legal proceedings; and the purposes to which the proceeds of the

offering are to be applied, and must include financial statements certified by independent accountants. The registration statement of a

foreign government contains information concerning the purposes for

which the proceeds of the offering are to be used, the natural and industrial resources of the issuer, its revenues, obligations and expenses,

the underwriting and distribution of the securities being registered,

and other material matters. The prospectus constitutes a part of the

registration statement and contains the more important of the required

disclosures.

Examination Procedure

Registration statements are examined by the Commission's staff for

compliance with the standards of adequate and accurate disclosure.

This examination is primarily the responsibility of the Division

of Corporation Finance. Statements filed by investment companies

registered under the Investment Company Act of 1940 are examined

by the Division of Corporate Regulation. If it appears that a statement does not conform in material respects with the applicable requirements, the registrant is usually notified by a letter of comment and

is afforded an opportunity to file correcting or clarifying amendments.

The Commission also has the power, after notice and opportunity for

hearing, to issue an order suspending the effectiveness of a registration statement if it finds that material representations are misleading,
THIRTY-SECOND ANNUAL REPORT 23

inaccurate or incomplete. Incertain instances, such as where the deficiencies in a registration statement appear to stem from careless disregard of applicable requirements or from a deliberate attempt to

conceal or mislead, a letter of comment is not sent and the Commission

either institutes an investigation to determine whether "stop-order"

proceedings should be instituted or immediately institutes such proceedings. Information regarding the exercise of the "stop-order"

power during fiscal year 196Gappears below under the heading "StopOrder Proceedings."

Time Required to Complete Registration

The Commission's staff endeavors to complete its examination of

registration statements in as short a time as possible. The Act provides that a registration statement shall become effective on the 20th

day after it is filed (or on the 20th day after the filing of any amendment thereto) . Since most registration statements require one or more

amendments, they usually do not become effective until some time

after the original 20-day period. The period between filing and

effective date is intended to afford investors an opportunity to become

familiar with the proposed offering through the dissemination of the

preliminary form of prospectus. The Commission can accelerate the

effective date so as to shorten the 20-day waiting period, taking into

account the adequacy of the information respecting the issuer theretofore available to the public, the facility with which the facts about the

offering can be understood, the public interest and the protection of

investors. The note to Rule 460 under the Act lists some of the more

common situations in which the Commission considers that the statute

generally requires it to deny acceleration.

The median number of calendar days from the date of the original

filing to the effective date for the 1,280 registration statements that

became effective during the 1966fiscal year 1was 38, compared with 36

days for 1,097 registration statements in fiscal year 1965 and 36 days

for 960 registration statements in fiscal year 1964.

The following table shows by months during the 1966 fiscal year the

number of calendar days elapsed during each of the three principal

stages of the registration process for the median registration statement, the total elapsed time and the number of registration statements

which became effective.

I This figure excludes 247amendments filed by investment companies pursuant

to Section 24{e) of the Investment Company Act of 1940,which provides for the

registration of additional securities through amendment to an effective registration statement rather than the filing of a new registration statement.
24 SECURITIES AND EXCHANGE COMMISSION

Monthly statistics on time elapsed in registration process

NUMBER OF CALENDAR DA YB

From date of From date From

orlglnal fillng oUetter of amendment Total Number of

Months to date of comment to after letter nnmberof registration staff's letter date of fillng to effective dayS In stetements of comment amendment date of registration effective.

thereafter registration

Jnly 1965____________________________ 18 14 7 39 101 August ______________________________ 20 12 6 38 ss september ___________________________ 16 16 7 39 97 October _____________________________ 18 18 6 85 November ___________________________ 18 11 6 35 89 December ___________________________ 21 11 7 39 97 January 1966 22 12 6 40 78 February ____________________________ March 22 13 7 42 67 _______________________________ 20 11 6 36 108

.; .: : :

21 8 5 34 176

23 10 5 38 144 June 23 10 5 38 153

Fiscal 1966 for median effective reglstratlon statement._ 21 11 6 38 1,280

See footnote 1 to tert, mpra.

VOLUME OF SECURITIES REGISTERED

During the fiscal year 1966, 1,523 registrations of securities in the

amount of $30.1 billion became effective under the Securities Act of

1933.2 The number of statements was the highest since the year ended

June 1962, and the dollar amount of registrations was the largest on

record. The large volume of issues reflected the general expansion in

the economy during the period and the sharply increased need for

funds by business. The chart on page 25 shows the number and

dollar amounts of registrations from 1935 to 1966.

The figures for 1966 include all registrations which became effective

including secondary distributions and securities registered for other

than cash sale, such as issues exchanged for other securities, and

securities reserved for conversion. Of the dollar amount of securities

registered in 1966, 85 percent was for account of issuer for cash sale,

8 percent for account of issuer for other than cash sale, and nearly

7 percent for account of others, as shown below.

Account for which securities were registered under the Securities Act of 1933 during

the fiscal year 1966 compared with the fiscal years 1965 and 1964.

1966 In Percent 1965 In Percent 1964 In Pereent

millions of total millions of total mll1lons of total

--- --- --- --- --- Registered for account of Issuer for cash

$25,723 $14, 656 $14, 784 87.7 sale _____________________________________ 854 76.4

R=~:\/~~~~~_~:~~~_~~~~_~_ 2,422 8 1 1,990 10. 2 612 36 Registered for account of others than Issuer 1,964 6.6 2, 791 14. 4 1,464 8.7

Total _______________________________ --- 30, 109 100. 0 111,437 100.0 16,860 100. 0

The figure of 1,523 does not include 4 registrations which became e1fectlve

before competitive bids were received, as to 2 of which amendments disclosing

the accepted terms were not filed In fiscal 1966, and 2 of which were withdrawn

after the end of the fiscal year.

~

____ - ___________________

~~====_________________________________ ===== ========= ======

•

• __________________________________

•
THIRTY-SECOND ANNUAL REPORT

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

Dollars Billions 1935 1966

32

28

24

20

16

12

8

4

15

10

5

o

25

1935 40 45 50

(Fiscal Years)

55 60 65

05-4737

The amount of securities offered for cash for account of issuer, $25.7

billion, represented an increase of $11 billion, or 75 percent, over the

previous year. Registration of new common stock issues aggregated

$18.2 billion, $7.6 billion more than in the 1965 fiscal period, reflecting

the continuing increase of registrations of investment company issues

which aggregated a record $12.4 billion. The amount of investment

company issues was almost double that of the preceding year. Registration of new bonds, notes and debentures increased 90 percent from

the previous year and accounted for $7.1 billion of the 1966 volume.

Preferred stock issues amounted to $445 million. Appendix Table 1

shows the number of statements which became effective and total

amounts registered for each of the fiscal years 1935 through 1966,

and contains a classification by type of security of issues to be offered

-
26 SECURITIES AND EXCHANGE COMMISSION

for cash sale on behalf of the issuer during those years. More

detailed information for 1966 is given in Appendix Table 2.

Corporate issues scheduled for immediate cash sale totaled almost

$8.8 billion, an increase of $3.4 billion over the previous year. Electric, gas and water companies registered $3.0 billion of new issues,

the largest amount for this group since 1958. Manufacturing company issues were next highest in volume, totaling $2.8 billion, the

largest amount since 1961. Issues of communication companies

amounted to $1.3 billion, almost double the amount registered in the

previous year. Among the other industry groups, registration of

financial and real estate issues totaled $1.0 billion, while trade, service,

mining and other miscellaneous issues amounted to over $500 million.

Registration of foreign government issues scheduled for immediate

sale increased to $482 million from $303 million in the preceding year.

In addition, one foreign government issue of $100million was planned

for offering on a continuous basis over a number of years.

The following table gives the distribution by industry of issues

registered for account of issuer to be offered for cash sale during the

last 3 fiscal years:

1966 In Percental 1965 In Percentol 1964 In Percental

millions total millions total millions total

--- --- --- Issues offered for Immediate sale:

CW~~}~g_ .. _.__________________ $2,787 10. 8 $1.451 99 $923 6.2 Extractive ._ . 130 5 141 1.0 113 .8 Electric. gasand water . 3,028 11.1l 1.719 11.7 2, 103 14. 2 Tr811SPortation.other than raIlroad . 174 .7 145 1 0 121 .8 Commnnication . 1.301 51 719 49 2, 156 146 Financial and real estate, . 1.009 39 922 63 1.010 6.8 Trade _. 253 1.0 162 1 1 33 .2 Service . 72 .3 66 .4 41 3 Constrnction and mlsc 25 .1 22 .2 14 .1

--- --- --- Total_ 8,779 34.1 5.347 365 6.515 44.1 Foreign Government 482 1.9 303 21 118 8 --- --- --- Total for Immediate sale. 9,262 360 5,650 38.6 6.633 44.9 Issues offered over an extended period .. 16.462 64.0 9,006 61.4 8.151 55.1

Total for cash sale for account of Issuer . . 25,723 100. 0 14.656 100 0 784 100.0

Of the $8.8 billion expected from the immediate cash sale of corporate securities for the account of issuers in 1966, over 90 percent was

designated for plant and equipment expenditures ($6.4 billion) and

working capital ($1.5 billion). The total figure of $7.9 billion represented an increase of more than '50 percent over the corresponding

figure for fiscal 1965. The balance was to be used for retirement of

securities and for other purposes including purchase of securities and

repayment of bank loans. Appendix Table 2, Part 4 contains a classification of uses of proceeds by principal industry groups.

Registration of issues to be offered over an extended period amounted

to $16.5 billion compared with $9.0 billion in 1965, the largest amount

in any previous fiscal year. These issues are classified below:

--- ---

______ •• _________________

____•• _________

__ ___•_________________

••••• _______ __••••••• ______________________ ____•____________•• ___•___•___ •••_____________

--- --- --- •• _•• _••• _•••••••• ___•__________ ____•________________

--- --- --- ___________

__

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

_____ ______________________
THIRTY -SECOND ANNUAL REPORT 27

Investment company Issues' Management open-end Management closed-end

Unit investment trust .. . . .. Faee-amount certlficates .

Total investment compames_. .

Employee saving plan certificates •. ._. Securities for employees stock option plans . Other, including stock for warrants an-I options

1966in 1965in 11164in

millions millions millions

--- ---

$9,254 $4, 958 $3,822

105 16 183

2,835 1,131 Slil

241 250 170 --- --- --- 12,434 6,355 5,0"-5 --- --- 1,015 797 687

2,326 1,584 1,470 686 270 968

REGISTRATION STATEMENTS FILED

During the 1966 fiscal year, 1,697 registration statements were filed

for offerings of securities aggregating $31.1 billion, as compared with

1,376 registration statements filed during the 1965 fiscal year for

offerings amounting to $19.1 billion. This represents an increase of

23.2 percent in the number of statements filed and 62.5 percent in the

dollar amount involved.

Of the 1,697 registration statements filed in the 1966 fiscal year,

422, or 25 percent, were filed by companies that had not previously

filed registration statements under the Securities Act of 1933. Comparable figures for the 1965 and 1964 fiscal years were 458, or 33 percent, and 322, or 27 percent, respectively.

From the effective date of the Securities Act through June 30, 1966,

a cumulative total of 27, 119 registration statements has been filed by

12,065 different issuers covering proposed offerings of securit.ies aggregating over $308 billion.

The disposition of all registration statements filed under the Act

to J una 30, 1966is summarized inthe following table:

Number and disposition of registration statements filed

Prior to July I, 1965 Total

July I, 1965 to June 30, June 30. 1966

1966

Registration statements: Flied . ___________________ 2,'i,422 1,697 27,119

Disposition: Effective (net) .22,056 -t.sio .23,541 Under stop or refusnl order ___________________________ Wlthdrawn.. 229 1 228

2, 820 148 2,968 Pending at June 30,1965______________________________ 318 -------------- Pending at June 30,1966. _____________________________ --.-.--------. -------------- 382

TotaL . 25,423 -------------- 27,119

Aggregate dollar amount: $277 $.>1.1 As filed (In b\lllons) ______________________________ .____ 8 $308.9 As effective (in billlons) __________________________________ 267.0 30.1 297.1

Includes 247 registration statements covering proposed offerings totalling $11,303,681,419filed by In- vestment companies under Section 24(e) ofthe Investment Company Act or 1940which permits registration by amendment to a previously effective registration statement . Includes one reg1stratlon statement which had been removed from the effective category in 1964when a stop order was Issued and which became effective again in 1lsca11968when the stop order was lifted . Excludes 17registration statements that became effective during the year but were subsequently withdrawn. These statements are counted in the 148statements withdrawn during the year Excludes 25registration statements effective prior to July 1, 1965,which were withdrawn during the year. These statements are reflected under withdrawn

Excludes 1 registration statement that became effective during the year by lUting or stop order and 1

ffectlve registration statement on which a stop order was placed in 1964and lifted during the fiscal year.

•

•

_____________________________ •___

___••• ________________________ •_________

______•_________•_____________________ •___

__________•_____•_________•__________________

•

•

•

• • •

_

_

_

_

_

_

_

_

•

•

--------~-----

•
28 SECURITIES AND EXCHANGE COMMISSION

The reasons given by registrants for requesting withdra wal of the

148 registration statements that were withdrawn during the 1966 fiscal

year are shown in the following table:

Number of Percent

Reason for witbdrawal request statements of total withdrawn withdrawn

1. Withdrawal requested alter receipt of staff's letter of comment ________________ 20 13.5

2. Registrant was advised that tnsntunon of stop order proceedings would be recommended ifstatement not wlthdrawn __________________________________ 1 .7

3. Change In 1Illanclng plans ____________________________________________________ 86 58.2

4. Other change In plans or In registrant's ctrcumstances _________________________ 9 6.1

5. Change In market condltions _____________________________________________ ... 25 168

6. Registrant unable to negotiate agreement with underwriter .... ______.. __.. __ 7 4.7

TotaL ___________________________. ________________. __.. __. ___... ___.. ______ 148 100

STOP ORDER PROCEEDINGS

Section 8 (d) of the Act provides that, if it appears to the Commission at any time that a registration statement contains an untrue statement of a material fact or omits to state any material fact required to

be stated therein or necessary to make the statements therein not misleading, the Commission may institute proceedings to determine

whether a stop order suspending the effectiveness of the registration

statement should be issued. Where such an order is issued, the offering

cannot lawfully be made, or continued if it has already begun, until

the registration statement has been amended to cure the deficiencies

and the Commission has lifted the stop order.

At the beginning of the 1966 fiscal year, one stop order proceeding

was pending. Four additional proceedings were instituted during the

year, two were terminated (one through issuance of a stop order," and

one through withdrawal of the registration statement pursuant to an

offer of settlement 4), and three were pending at the end of the year.

The Wolf Corporation 5-The registration statement of a cash flow

real estate company was found materially false and misleading because

it substantially overstated registrant's cash flow, net income and assets,

and failed to disclose adequately registrant's relationship with affiliated persons. The Commission's opinion pointed out that the registrant's ability to maintain cash disbursements at the existing level was

of paramount importance to prospective purchasers of its securities,

and therefore a clear, uncomplicated statement of the basic facts reGreat Southwest Drilling Programs, Inc., Securities Act Release No. 4834

(June 20, 1966). ThIs stop order to which th'e registrant consented was Issued

by the Director of the Office of Opinions and Review pursuant to delegated

authority.

The Wolf Oorporation, Securities Act Release No. 4830 (May 4, 1966).

Securities Act Release No. 4830 (May 4, 1966}.

•

•

•
THIRTY-SECOND ANNUAL REPORT 29

lating to this issue was essential. Instead, registrant's presentation of

its cash distribution policy and practices was highly deceptive. Registrant not only included in the term "cash available for distribution"

amounts which represented anticipated income rather than cash, but

included in such anticipated income substantial amounts of rent

arrearages without disclosing any of the facts indicating that such

arrearages were uncollectible. In view of registrant's affirmative representation that it believed such amounts would be paid in the :future,

the Commission found that a sophisticated investor-and certainly an

unsophisticated one---could reasonably believe that the qualifying

statement that "there is no assurance" that the rent arrearages would

be paid was attributable to an excess of caution in the interest of :full

disclosure, and conclude that the uncollected (and uncollectible) rents

were for all practical purposes equivalent to cash in hand. In fact,

registrant had distributed to stockholders a sum which was more than

twice as much as the cash actually derived from operations; the remainder apparently had come from :funds borrowed for the purpose of

making cash distributions to stockholders and thus maintaining a false

appearance of a high level of cash available from operations.

A.lthough the deficiencies were considered serious and extensive,

the Commission did not issue a stop order but permitted the withdrawal of the registration statement pursuant to an offer of settlement. Registrant's offer provided that a stipulation correcting the

principal deficiencies of the registration statement be included in the

public record of the proceeding and that a written communication advising of the stop order proceeding be distributed to its stockholders

and other persons to whom copies of the preliminary prospectus had

been sent. Inthe Commission's view, this communication, which was

to be reviewed by the Commission's staff prior to release, was sufficient

to give adequate public notice of the dismal record of the abortive

financial program and the deceptive disclosures in the prospectus.

The factors that led to this conclusion were: (1) the registration statement had never become effective; (2) none of the securities had been

sold; (3) the proposed financing had been abandoned; and (4) the

stipulation correcting the deficiencies was to become part of the publie record.

EXAMINATIONS AND INVESTIGATIONS

The Commission is authorized by Section 8 (e) of the A.ct to make

an examination in order to determine whether a stop order proceeding

should be instituted under Section 8(d), and in connection therewith

is empowered to examine witnesses and require the production of pertinent documents. The Commission is also authorized by Section 20(a)

of the Act to make an investigation to determine whether any provi-
30 SECURITIES AND EXCHANGE COMMISSION

sion of the Act or any rule or regulation prescribed thereunder has

been or is about to be violated. In appropriate cases, investigations

are instituted under this Section as an expeditious means of determining whether a registration statement is false or misleading or

omits to state any material fad. The following tabulation indicates

the number of such examinations and investigations with which the

Commission was concerned during the year:

Pending at beginning of fiscal year__________________________________ 37

Initiated during fiscal year 7

44

Closed during fiscal year 15

Pending at close of fiscal year_______________________________________ 29

EXEMPTION FROM REGISTRATION OF SMAIL ISSUES

The Commission is authorized under Section 3 (b) of the Securities

Act to exempt, by its rules and regulations and subject to such terms

and conditions as it may prescribe therein, any class of securities from

registration under the Act, if it finds that enforcement of the

registration provisions of the Act with respect to such securities is

not necessary in the public interest and for the protection of investors

because of the small amount involved or the limited character of the

public offering. Only offerings not exceeding $300,000 may thus be

exempted.

Acting under this authority, the Commission has adopted the following exemptive rules and regulations:

Rule 234: Exemption of first lien notes.

Rule 235 : Exemption of securities of cooperative bousing corporations.

Rule 236 : Exemption of shares offered in connection with certain transactions.

Regulation A: General exemption for United States and Canadian issues up to

$300,000.

Regulation B: Exemption for fractional undivided interests in oil or gas rights

up to $100,000.

Regulation F: Exemption for assessments on assessable stock and for assessable

stock offered or sold to realize the amount of assessment thereon.

Under Section 3(c) of the Securities Act, which was added by Section 307(a) of the Small Business Investment Act of 1958,the Commission is authorized to adopt rules and regulations exempting securities

issued by a company which is operating or proposes to operate as a

small business investment company under the Small Business Investment Act. Acting pursuant to this authority, the Commission adopted

Regulation E which exempts, subject to terms and conditions substantially similar to those contained in Regulation A, securities offerings not exceeding $300,000 by any small business investment company which is registered under the Investment Company Act of 1940.
THIRTY-SECOND ANNUAL REPORT 31

Exemption from registration under Section 3 (b) or 3 (c) of the Act

does not carry with it any exemption from the provisions of the Act

prohibiting fraudulent conduct in the offer or sale of securities and

imposing civil liability or criminal responsibility for such conduct.

Exempt Offerings Under Regulation A

Regulation A permits a company to obtain needed capital not in excess of $300,000 (including underwriting commissions) in anyone year

from a public offering of its securities without registration, provided

specified conditions are met. These include the filing of a notification

supplying basic information about the company with the Regional

Office of the Commission in the region in which the company has its

principal place of business, and the filing and use in the offering of an

offering circular. However, an offering circular need not be filed or

used in connection with an offering not in excess of $50,000 by a company with earnings in one of the last 2 years.

During the 1966 fiscal year, 410 notifications were filed under Regulation A, covering proposed offerings of $'75,218,434, compared with

39'7notifications covering proposed offerings of $'7'7,36'7,235in the 1965

fiscal year. Included in the 1966 total were 9 notifications covering

stock offerings of $2,242,800 by companies engaged in the exploratory

oil and gas business, 12 notifications with respect to offerings of

$2,190,224 by mining companies and 23 notifications covering offerings of $5,823,23'7 by companies featuring new inventions, products or

processes.

The following table sets forth various features of the Regulation A

offerings during the past 3 fiscal years:

Offerings under Regulation A

Fiscal year

1966 1965 1964

--- --- Size:$100,000 or less ________________________________________________________ 128 98 126 Over $100,000 but not over $200,000 ____________________________________ 94 101 96 Over $200,000 but not over $300,000 ____________________________________ 188 198 240

--- --- --- 410 397 462 --- --- Underwriters: U sed

Not used _____________________________________________________________ 58 68 72

352 329 3110

--- --- --- Offerors: Issuing oompanies ____________________________________________________ 386 371 418 Stockholders __________________________________________________________ 13 19 311 Issuers and stockholders Jointly _______________________________________ 11 7 s

Reports of Sales

The Commission requires, within 30 days after the end of each 6-

month period following the date of the original offering circular re238-643--67----4

= _____• ____________________________________________________________
32 SECURITIES AND EXCHANGE COMMISSION

quired by Rule 256, or the statement required by Rule 257, that the

issuer or other person for whose account the securities are offered shall

file a report containing specified information and that a final report

shall be made upon completion or termination of the offering.

During the fiscal year 1966, 864 Reports of Sales were filed reporting

aggregate sales of $48,632,121.

Suspension or Exemption

Regulation A provides for the suspension of an exemption thereunder where, in general, the exemption is sought for securities for

which the regulation provides no exemption or where the offering

is not made in accordance with the terms and conditions of the regulation or with prescribed disclosure standards. Following the issuance

of a temporary suspension order by the Commission, the respondent

may request a hearing to determine whether the temporary suspension

should be vacated or made permanent. If no hearing is requested

within 30 days after the entry of the temporary suspension order and

none is ordered by the Commission on its own motion, the temporary

suspension order becomes permanent.

During the 1966 fiscal year, temporary suspension orders were issued

in 6 cases, which, added to the 7 cases pending at the beginning of the

fiscal year, resulted in a total of 13 cases for disposition. In 11 of

these cases, the temporary suspension became permanent during the

fiscal year: in 5 cases after hearing, in 5 by withdrawal of the request

for hearing, and in 1 by lapse of time. Thus, there were 2 cases pending at the end of the fiscal year.

A decision of particular interest rendered by the Commission during

the year in a Regulation A suspension proceeding was Del Oonsolidated Industries, hw.6 In that case the Commission found that the

offering circular filed by the issuer, which had been organized to engage in oil, gas and mining operations, contained materially misleading statements.

The introductory statement of the circular represented that the

issuer had an option to acquire certain properties, including "working

interests in four proven oil leases" in New Mexico, "consisting of four

wells which produced approximately 15,000 barrels of oil in 1961,"

and that the properties were more fully described in the section "Business and Property." The introductory statement did not disclose

that the options covered substantially less than the entire working interests in the leases. That fact was disclosed only in the "Business

and Property" section, six pages later in the circular, following statistics regarding the production applicable to the entire working

interests.

• Securities Act Release NQ. 4795 (July 26,1965).
THIRTY-SECOND ANNUAL REPORT 33

The Commission found that the misleading implication in the introductory statement that the option covered the entire working interests was not cured by the subsequent description. The Commission

pointed out that even though an offering circular contains all of the

essential facts, it still may not satisfy the disclosure requirements if

the facts are not presented so clearly that they will be plainly evident

to the ordinary investor. The Commission stated that the burden

should not be placed on the investor to examine the offering circular

for qualifying language to counteract the misleading nature of a statement in the introductory material which does its damage in its initial

effect on the prospective investor.

The issuer requested that the temporary suspension order be vacated,

asserting that it had abandoned plans for the proposed offering and

that it had not been guilty of bad faith. However, the Commission,

affirming the recommendation of the hearing examiner, concluded

that the suspension should be made permanent, since it was satisfied

that the issuer did not make "a diligent and careful effort" to make

an accurate and adequate filing.

Exempt Offerings Under Regulation B

During the fiscal year ended June 30, 1966, 235 offering sheets and

302 amendments thereto were filed pursuant to Regulation B and were

examined by the Oil and Gas Section of the Commission's Division

of Corporation Finance. During the 1965 and 1964 fiscal years, 173

and 242 offering sheets, respectively, were filed. The following table

indicates the nature and number of Commission orders issued in connection with such filings during the fiscal years 1964-66. The balance

of the offering sheets filed became effective without order.

Action taken on offering sheets filed under Regulation B

Fiscal years

1966 1965 1964

--- --- Tempornry suspension orders (under Rule 34O(a)) 14 13 18 Orders terminating proceeding after amendment_. ________________________ 10 7 8 Orders consenting to withdrawal of offering sheet and terminating proceeding. -.--. -_.-.--- _-_.--._.-. -_ -. ._- -_ -.- 0 2 3 Orders fulng effective date 01 amendment (no proceeding pending) 203 128 187

Orders consenting to withdrawal of offering sheet (no proeeedmg pending) __ 12 5 15

--- --- Total number 01 orders _. ._. 239 165 231

.Reports of sales.-The Commission requires persons offering securities under Regulation B to file reports of the actual sales made

pursuant to that regulation. These reports aid the Commission in

determining whether violations of law have occurred in the marketing

of such securities. The following table shows the number of sales

_____ •• _________________

•• •••• - _•••--••- - ••• --~•• --- ____• __

~-- ___••• __• _______••• ___• ___•• ___•••• __• __
34 SECURITIES AND EXCHANGE COMMISSION

reports filed under Regulation B during the past 3 :fiscalyears and the

aggregate dollar amount of sales during each of such fiscal years.

Reports of sales under Regulation B

1966 1965 1964

Number of sales reports fIled __________________________________ 3,301 2,016 2,668

Aggregate dollar amount of sales reported _____________________$2,998,683 $1,603,144 $2,247,259

Exempt Offerings Under Regulation E

Regulation E provides a conditional exemption from registration

under the Securities Act for securities of small business investment

companies which are licensed under the Small Business Investment

Act of 1958 or which have received the preliminary approval of the

Small Business Administration and have been notified by the Administration that they may submit an application for such a license. As

has been noted, the terms and conditions of the exemption are substantially similiar to those provided by Regulation A. One notification was filed under Regulation E during the 1966 fiscal year for an

offering of securities aggregating $100,000, which was pending at the

end of the year.

Exempt Offerings Under Regulation F

Regulation F provides an exemption for assessments levied upon

assessable stock and for delinquent assessment sales in amounts not

exceeding $300,000 in anyone year. It requires the filing of a simple

notification giving brief information with respect to the issuer, its

management, principal security holders, recent and proposed assessments and other security issues. The regulation requires a company

to send to its stockholders, or otherwise publish, a statement of the

purposes for which the proceeds of the assessment are proposed to be

used. Copies of any other sales literature used in connection with the

assessment must be filed. Like Regulation A, Regulation F provides

for the suspension of an exemption thereunder where the regulation

provides no exemption or where the offering is not made in accordance

with the terms and conditions of the regulation or in accordance with

prescribed disclosure standards.

During the 1966 fiscal year, 21 notifications were filed under Regulation F, covering assessments of $486,231. These notifications were

filed in three of the nine regional officesof the Commission: Denver,

San Francisco and Seattle. Underwriters were not employed in any

of the Regulation F assessments. No Regulation F exemptions were

suspended during the fiscal year.
TEITRTY-SECOND ~AL REPORT 35

REVISION OF RULES, REGULATIONS AND FORMS

Amendments to Rule 416

During the fiscal year, the Commission published for comment a

proposal to amend Rule 416 relating to the coverage by a registration

statement of certain securities issued to prevent dilution as a result of

stock splits and stock dividends." After consideration of the comments received, the Commission adopted the proposed amendments

with certain changes." The former Rule 416 has been designated

Rule 416(a), and concerns the coverage of securities offered or issued

pursuant to anti-dilution provisions to holders of warrants, options,

convertible securities, or similar rights to purchase securities, upon

exercise of their rights. Rule 416(b) broadens the scope of the former

rule by extending the coverage of a registration statement to additional securities issued pursuant to a split of a class of securities which

includes undistributed securities covered by the statement or pursuant

to a dividend declared on and payable in securities of such class, where

there are no applicable anti-dilution provisions. The rule also provides that when all the securities of a class which includes undistributed registered securities are combined by a reverse split into a

lesser number of shares, the amount of undistributed securities of such

class covered by the registration statement shall be proportionately

reduced.

Amendment of Rules and Forms Relating to Registration Fees

Part III of this Report discusses the statutory increase in the fees

payable for the registration of securities. During the fiscal year the

Commission amended Rules 45'7 and 458 and Forms D-1, D-1A and

s-6, all of which refer to the required filing fee, to conform to the

statutory changes," At the same time the Commission adopted additional amendments to Rule 45'7to clarify the rule and to incorporate

certain recurring administrative interpretations concerning the computation of filing fees. The rule sets forth the method of calculating

fees in various situations in which the maximum aggregate offering

price is based on fluctuating factors, such as market price or underlying asset values, or is otherwise uncertain at the time of filing.

In order to incorporate all provisions relating to the calculation of

filing fees into one rule, the calculation provisions contained in Forms

8-8 and 8-12 were transferred to Rule 45'7,calculation provisions in

Forms D-1, D-1A and 8-6 which were duplicated in Rule 45'7were

7 Securities Act Release No. 4793 (JUly 19, 1965).

Securities Act Release No. 4806 (October 26,1965).

Securities Act Release No. 4815 (January 11, 1966) ; Securities Act Release

No. 4833 (May 24, 1966).

•

•
36 SECURITIES AND EXCHANGE COMMISSION

deleted from those Forms, and additional amendments of Rule 457 relating to the calculation of filing fees in connection with the registration of stock pursuant to certain employee stock options were adopted.

Withdrawal of Proposed Amendments of Rnle 485

During the fiscal year, the Commission, after consideration of the

comments received, withdrew proposed amendments of Rule 485.10

That rule prescribes the procedure for obtaining confidential treatment of material contracts.

Adoption of Form 8-13

The Commission adopted a new Form 8-13 for the registration of

voting trust certifioates," replacing Form F -1. The disclosure requirements correspond to those in the recently revised Form 16, the

form for the registration of voting trust certificates pursuant to Section 12 of the Securities Exchange A.ct of 1934.12

,. See 31st Annual Report, p, 39; Securities Act Release No. 4801 (September 13,

1965).

n Securities Act Release No. 4821 (March 4, 1966)

.. See pp, 74--75, infra.

•
PART V

ADMINISTRATION OF THE SECURITIES EXCHANGE ACT

OF 1934

The Securities Exchange Act of 1934, as amended by the Securities

Acts Amendments of 1964, provides for the registration and regulation

of securities exchanges, the registration of securities listed on such

exchanges and, under new Section 12 (g) , the registration of securities

traded over the counter where the issuers of such securities have total

assets in excess of $1 million and the securities constitute a class of

equity securities held of record by at least 500 persons (until July 1,

1966, the minimum number was 750). It establishes, for issuers of

securities registered under the Act, financial and other reporting

requirements and regulation of proxy solicitations and, for directors,

officers and principal security holders of such issuers, reporting requirements and restrictions on trading in the securities of their companies. The Act also provides for the registration and regulation of

national securities associations and of brokers and dealers doing business in the over-the-counter markets, contains provisions designed to

prevent fraudulent, deceptive and manipulative acts and practices on

the exchanges and in the over-the-counter markets and authorizes the

Board of Governors of the Federal Reserve System to regulate the use

of credit in securities transactions. The principal purpose of the various statutory provisions is to ensure the maintenance of fair and

honest markets in securities transactions on the organized exchanges

and in the over-the-counter markets.

REGULATION OF EXCHANGES AND EXCHANGE TRADING

Registration and Exemption of Exchanges

As of June 30, 1966, 14 stock exchanges were registered under the Exchange Act as national securities exchanges:

American Stock Exchange Pacific Coast Stock Exchange

Boston Stock Exchange Philadelphia-Baltimore-Washington

Chicago Board of Trade Stock Exchange

Cincinnati Stock Exchange Pittsburgh Stock Exchange

Detroit Stock Exchange Salt Lake Stock Exchange

Midwest Stock Exchange San Francisco Mining Exchange

National Stock Exchange Spokane Stock Exchange

New York Stock Exchange

37
38 SECURITIES AND EXCHANGE COMMISSION

Richmond Stock Exchange

Three exchanges have been exempted from registration by the Commission pursuant to Section 5 of the Act:

Colorado Springs Stock Exchange

Honolulu Stock Exchange

Review or Exchange Rules and Procedures

Rule 17a-8 of the Exchange Act provides that each national securities exchange must file with the Commission three copies of any

proposed change in its rules not less than 3 weeks (or such shorter

period as the Commission may authorize) before final action is taken

by the exchange. These proposals are submitted for review to the

Commission's Division of Trading and Markets. That Division also

reviews, on a continuing basis, the existing rules, regulations, procedures, forms and practices of the national securities exchanges. The

purposes of this review are to permit the Division to (a) ascertain the

effectiveness of the application and enforcement by the exchanges of

their own rules; (b) determine the adequacy of the rules of the exchanges, and of related statutory provisions and rules administered

by the Commission, in light of changing market conditions, and (c)

anticipate and define problem areas so that preventive or remedial steps

can be taken. Most significant aspects or the rules and procedures of

the national securities exchanges are subject to review by the staff in

the course of a year.

When problems occur, conferences are held to permit the exchange

and the Division to reach satisfactory solutions. These conferences

sometimes lead to studies or current rules and practices, or proposed

exchange's performance, the staff communicated its views to the particular exchange and discussions were held between the staff of the

Commission and the exchange to arrive at appropriate solutions.

Commission Inspections or the Exchanges

Pursuant to the regulatory scheme of the Act, the Commission

actively oversees the performance by the national securities exchanges

of their self-regulatory activities. As part of this program, the Office

or Regulation in the Division of Trading and Markets conducts regular

inspections of various phases of exchange activity. During the past

year, it conducted two such inspections of the New York Stock Exchange and three inspections of the American Stock Exchange. These

inspections covered such areas as specialist and registered trader surveillance, exchange procedures for investigation and inquiry into

unusual market situations, and exchange inspections of member firms'

office procedures. In addition, the Office of Regulation carried out

general inspections of the Philadelphia-Baltimore-Washington, Boston and Pittsburgh Stock Exchanges. The inspection program enables
THIRTY-SECOND ANNUAL REPORT 39

the Commission to insure that the exchanges are complying with their

self-regulatory responsibilities and to recommend improvements and

refinements designed to increase the effectiveness of self-regulation.

Where it appeared to the Commission's staff that revisions in internal procedures or policies were desirable in order to improve an

exchange's performance, the staff communicated its views to the particular exchange and discussions were held between the staff of the

Commission and the exchange to arrive at appropriate solutions.

Proceedings Against San Francisco Mining Exchange

During the fiscal year, the Commission issued a decision pursuant

to Section 19(a) (1) of the Exchange Act in which it held that it was

necessary and appropriate for the protection of investors to withdraw

the registration of the San Francisco Mining Exchange as a national

securities exchange,"

The Commission found that over a period of years the Exchange

had repeatedly neglected to enforce compliance by its mem:bers and

by issuers of securities listed thereon with the reporting, insider trading and anti-fraud provisions of the Exchange Act and had lent its

facilities to securities distributions made in violation of the registration requirements of the Securities Act of 1933. The Commission

also found that officials of the Exchange had been personally involved

in repeated violations of the securities acts. In rejecting the Exchange's request that it be given an opportunity to rehabilitate itself,

the Commission pointed out that the Exchange had failed to avail

itself of prior opportunities to take corrective measures, that it did

not perform any signficant function as a trading market, and that an

effective rehabilitation would in effect require the organization of an

entirely new exchange. On June 20, 1966, the Exchange filed a petition for review of the Commission's order with the Court of Appeals

for the Ninth Circuit. The Court has issued a stay of the Commission's order pending final determination of the Exchange's

petition.

Exchange Disciplinary Action

Each national securities exchange reports to the Commission disciplinary actions taken against its members, member firms, and their

associated persons for violation of any rule of the exchange or of the

Securities Exchange Act or any rule or regulation thereunder. During the fiscal year, eight exchanges reported 133such actions, including

impositions of fines in 44 cases ranging from $25 to $10,000,with total

fines aggregating $68,575, and the suspension from membership of 14

1Securities Exchange Act Release No. 7870 (April 22, 1966).
40 SECURITIES AND EXCHANGE COMMISSION

individuals and 9 member organizations. These exchanges also reported the imposition of various sanctions against 65 registered representatives and employees of member firms. In addition, a number of

informal staff actions of a cautionary nature were reported by several

exchanges.

REGISTRATION OF SECURITIES ON EXCHANGES

Unless a security is registered on a national securities exchange under the Securities Exchange Act or is exempt from such registration it

is unlawful for a member of such exchange or any broker or dealer to

effect any transaction in the security on the exchange. In general, the

.Act exempts from registration obligations issued or guaranteed by a

state or the Federal Government or by certain subdivisions or agencies

thereof and authorizes the Commission to adopt rules and regulations

exempting such other securities as the Commission may find necessary

or appropriate to exempt in the public interest or for the protection of

investors. Under this authority the Commission has exempted securities of certain banks, certain securities secured by property or

leasehold interests, certain warrants and, on a temporary basis, certain

securities issued in substitution for or in addition to listed securities.

Pursuant to Section 12 of the Exchange .Act, an issuer may register

a class of securities on an exchange by filing with the Commission and

the exchange an application which discloses pertinent information

concerning the issuer and its affairs. Information must be furnished

regarding the issuer's business, its capital structure, the terms of its

securities, the persons who manage or control its affairs, the remuneration paid to its officers and directors, and the allotment of options,

bonuses and profit-sharing plans, and financial statements certified by

independent accountants must be filed as part of the application.

Form 10 is the form used for registration by most commercial and

industrial companies. There are specialized forms for certain types

of securities, such as voting trust certificates, certificates of deposit

and securities of foreign governments.

STATISTICS RELATING TO SECURITIES ON EXCHANGES

Number of Tssuers and Securities

As of June 30, 1966, a total of 2,578 issuers had 4,220 classes of securities listed and registered on national securities exchanges, of which

2,958 were classified as stocks and 1,262 as bonds. Of these totals

1,445 issuers had 1,648 stock issues and 1,161 bond issues listed and

registered on the New York Stock Exchange. Thus, 56.1 percent of

the issuers, 55.7 percent of the stock issues and 92 percent of the bond

issues were on the New York Stock Exchange. Table 4 in the appendix to this report contains comprehensive statistics as to the number of
THIRTY-SECOND ANNUAL REPORT 41

securities issues admitted to exchange trading and the number of

issuers involved, as of June 30, 1966.

During the 1966 fiscal year, 161 issuers listed and registered securities on a national securities exchange for the first time, while the registration of all securities of 105 issuers was terminated. A total of 326

applications for registration of securities on exchanges was filed during

the year.

Market Value of Securities Available for Trading

The market value on December 31, 1965, of stocks and bonds, both

listed and unlisted, admitted to trading on one or more stock exchanges

in the United States was approximately $707 billion.

There is no duplication of issues between the New York and American Stock Exchanges. The figures for all other exchanges are for the

net number of issues appearing only on such exchanges, excluding the

many issues on them which were also traded on one or the other of the

New York exchanges. The number and market value of issues as

shown below exclude those suspended from trading and a few others

for which quotations were not available.

Number of Market value

issues Dec. 31, 1965

(millions)

Stocks: New York Stock Exchange ______________________________________________ 1,627 $537,481

=~I~~li.~e~l~-nges================= =====:============:====: 1,028 30,990

412 4,730

Total stocks ___________________________________________________________3,067 673, 201

Bonds: New York Stock Exchange ______________________________________________ 1,210 182, 373

=~~~tg~~li.~~~~es=========== =========:::=:.: .: .. :======= 98 1,320 23 144

Total bonds ___________________________________________________________1,331 133,837

Total stocks and bonds ________________________________________________ 4,398 707,038

The number and market value as of December 31, 1965, of preferred

and common stocks separately were as follows :

Preferred stocks Common stocks

Number Market value Number Market value

(millions) (millions)

Listed on registered exchanges __________________________ li26 $10,890 2, 374 $648,894 All other stocks G _______________________________________ 41 446 126 12, 971

TOtal____________________________________________667 11,336 2,mll 661,865

G Stocks admitted to nnllsted trading privileges only or listed only on exempted exchanges.

The 3,067 preferred. and common stock issues represented over 12.2

billion shares, of which 11.7 billion were included ill the 2,900 issues

listed on registered exchanges.

=

= =
42 SECURITIES AND EXCHANGE COMMISSION

The New York Stock Exchange has reported aggregate market

values of all stocks listed thereon monthly since December 31, 1924,

when the figure was $27.1 billion. The American Stock Exchange has

reported totals as of December 31 annually since 1936. Aggregates

for stocks exclusively on the remaining exchanges have been compiled

as of December 31 annually by the Commission since 1948. The

available data since 1936 appear in Table 5 in the appendix of this

Annual Report. Itshould be noted that changes in aggregate market

values over the years reflect not only changes in prices of stocks but

also such factors as new listings, mergers into listed companies,

removals from listing and issuance of additional shares of a listed

security.

Share and Dollar Volume of Stocks Traded

The figures below show the annual volume of shares traded on all

exchanges during the years 1955 through 1965,and the first 6 months

of 1966. These volume figures include stocks, warrants and rights.

Tables 6 and 7 in the appendix of this Annual Report contain comprehensive statistics on volume, by exchanges.

Share and dollar volume on exchanges

New York American All other Calendar year Stock Stock exchanges Total Exchange Exchange

Share volume (thousands): 1955________________________________________ 909,785 253,531 158,084 1,321,401 1956__________________________. _____________ 784,066 248,458 149,962 1,182,487 1957______________. _________________________ 914,163 234,494 144,365 1,293,022 1958 _____. __________________________________ 998,762 268,097 133,719 1, 400, m9 1959________________________________________ 1,114,758 416,451 168,487 1,699,697 1960______________. _________________________ 986,878 320,906 133,263 1,441,048 1961. ___________________. ___________________ 1,392,573 548,161 201,790 2,142,523 1962________________________________. _______ 1,220,854 344,347 146, 744 1,711,945 1963________________________________________ 1,371,808 354,305 154,686 1,880,798 1964 ________________________________________ 1,542,373 411,450 172,551 2,126,374 1965________________________________________ 1,867,223 601,844 201,944 2,671,012 1966 (1st 6 months) _________________________ 1,267,237 493,014 135,483 1,895,735 Dollar volume (thousands): 1955 ________________________________________ 32,830,838 2,657,016 2,551,253 38,039,107 1956________________________________________ 29,854,717 2,731,360 2,557,038 35,143,115 1957__________. _____________________________ 27,546, 762 2,361,940 2,306, 144 32,214, 846

1958 32,818,440 2,864,486 2,736,634 38,419,560 1959 ________________________________________ 43,503,502 4,954,568 3,543,185 52,001,255 1960________________________________________ 37,972,433 4,235,686 3,098,484 45,306,603 1961________________________________________ 52,820,306 6,863,110 4,388,207 64,071,623 1962________________________________________ 47,353,334 3,736,619 3,765,941 54,855,894 1963________________________________________ 54,897,096 4,844,912 4,696,065 64,438,073 1964________________________________________ 60,501,229 6,127,236 5,833,285 72,461,750 1965 ________________________________________ 73,234,393 8,874,875 7,439,825 89,549,093 1966 (1st 6months) _________________________ 55,319,472 9,417,563 5,566,251 70,303,286

In 1965 share and dollar volume on exchanges increased 25.6 percent and 23.6 percent, respectively, over 1964. Volume continued to

increase in the first 6 months of 1966. On the American Stock Exchange the dollar volume in these 6 months exceeded the dollar volume

for the entire year 1965.

------------------~--------------------
THIRTY-SECOND ANNUAL REPORT 
 43 

Foreign St& on Exchanges 

The market value on December 31,1965, df all shares and certificates 

replgsenting foreign stocks on U.S. stock exchanges mas $18.8 billion, 

of which $15.3 billion represented Canadian and $3.5 billion represented other foreign stocks. The market values of the entire Canadian 

stock issues were included in these aggregates. Most of the other foreign stocks were represented by American Depository Receipts or 

American shares, only the outstanding amounts of which were used 

in determining market values. 

Foreign stocks on elehanges 

Canadian Other foreim Totd 

Dec. 31,1965 - -- Lsues Value Issues Vdue Issues Valae 

Exchange: New Yod................ 14 L6.849.183,WU 12 $2 154610 MO 26 $9, W3.719.WO 


American................. a 8,393,351.W 36 1:2&4(*1:W 98 9,651.759,WO 


Others only............... 2 33.420.000 3 4&WS,MO 5 78.49S.WO 


Total................... 79 15,275,874. W 51 3.452 W,WO I30 18,133,973, 000 


The number of foreign stocks on the exchanges has declined in 

recent years, from 173 as of the end of 1960 to 130 in 1965. During 

this period, the American Stock Exchange had a net decline from 

145 to 99 issues, while the New York Stock Exchange had an i,ncrease 

of 1and the remaining exchanges an increase of 2. 

Trading in foreign stocks on the American Stock Exchange has 

fallen from 17.9 percent of the reported share volume in 1960 to 15.1 

percent in 1965. On the New York Stock Exchange trading in foreign stocks has declined from 2.7 percent of its reported share volume 

in 1960 to 2 percent in 1965. 

Comparative Exchange Statistics 

During fiscal year 1966, there was a moderate increase in the number of stocks listed on the New York Stock Exchange, consistent 

with the trend of recent years. The number listed on the American 

Stock Exchange increased slightly, representing the second eonsecutive year in which a gain occurred. The number of stocks available for trading exclusively on the other exchanges continued to 

decline. 

Net number of sloeks on ~xchanoes 

New Ymk American Erdusively Totd stah June 30 / 8UL 1 8tak 1 mothe 1 on Exohmga Exchange erohanges erohsnges 
44 SECURITIES AND EXCHANGE COMMISSION 

In 1965, the aggregste value of shares listed on the New York 

Stock Exchange represented an increasing proportion of total share 

values on all exchanges as it has in most years since the late 1940's. 

Share values on ezchanges, in percentages 

New York Amerlcsn Exolualvely / 8U Ibck on other

Exohmge 

I 

Exohawe 

1 

ertbanees 

The ratio of share volume on the regional exchanges to the total on 

all exchanges has continued to decline over the years. However, in 

1965 the regional exchange percentage of dollar volume increased 

slightly. The American Stock Exchange percentages of share and 

dollar volume have increased steadily since 1963 while the percentages of the New York Stock Exchange have decreased. In the following presentation stocks, mnnnnts and rights are included Annual data since 1935 are shown in Appendix 'lbble 7 in this Annual 

~e~drt. 

Annual sales of stock on erehamges, in percentages 

Pertant of share oh me P-t of dollar volume 

Cdendl~ye= -

1940........................... 75.44 13.20 1l.m 85.17 7.88 7.16 

1M6........................... 05.87 21.31 12.E 82.76 10.81 6.44 

1950........................... 70.82 18.64 10.14 65.91 6.85 7.24 

1%........................... 180........................... €8.85 

68.48 

18.19 

22.27 

11.96 

9.26 

88.81 

a81 

b98 

9.36 

6.71 

6.84 

1981 ......................... 84.89 26.68 9.4 m.~ la71 6.85 

1902.......................... 

1% .......................... 71.32 

72.M 

20.U 

18.84 

8.55 8.n 88.M 

a.19 

6.81 

7.61 

6.87 

7.m 1061........................... 72.64 18.86 8.11 81.49 8.46 8.05 

1G35........................... 8.91 22.53 755 81.78 0.91 8.31 

IOBB(1st 6 months)............ 55. 81 26. m 7.15 78.W 13.40 7.82 

DELISTING OF SECURITIES FROM EXCEANGES 

Application may be made to the Commission by exchanges to strike 

securities or by issuers to withdraw their securities from listing and 

registration on exchanges pursuant to Rule 12d2-2 under &don 12(d) 

of the Securities Exchange Ad. During the fiseal year ended 

June 30,1966, the Commission granted applications by exchanges and 

issuers to remove 63 stock issues and 2 bond issues, representing 60 

issuers, from listing and registration. Since 5 stocks were each 

delisted by two exchanges, there was a total of 68 stock removals, 

as follows: 
THIRTY-SECOND ANNUAL REPORT

Application filed by:

American Stock Exchange

Cincinnati Stock Exchange

Chicago Board of Trade

Detroit Stock Exchange

Midwest Stock Exchange

New York Stock Exchange

Pacific Coast Stock Exchange

Philadelphia-Baltimore- Washington Stock Exchange

Pittsburgh Stock Exchange

San Francisco Mining Exchange

Salt Lake Stock Exchange

Issuer

8tockl

15

1

1

5

4

22

6

4

2

2

3

3

45

1

Total_______________________________________________ 68 2

The three applications by issuers which were granted during the

year removed one security each from the American, Pacific Coast and

Philadelphia-Baltimore-Washington Stock Exchanges.

UNLISTED TRADING PRIVILEGES ON EXCHANGES

Stocks with unlisted trading privileges which are not also listed

and registered on other exchanges continued to decline in number,

from 132 on June 30, 1965, to 114 on June 30, 1966. The American

Stock Exchange accounted for the entire decline except for 1 issue

removed from the Philadelphia-Baltimore-Washington Stock Exchange. During the calendar year 1965, the reported volume of

trading on the exchanges in stocks with only unlisted trading

privileges similarly declined to about 23,775,000 shares, or about

.92 percent of the total share volume on all exchanges, from about

24,521,000 shares and about 1.2 percent of share volume during

calendar year 1964.

About 97 percent of the 1965 volume was on the American Stock

Exchange while four other exchanges contributed the remaining

3 percent. The share volume in these stocks on the American Stock

Exchange represented 4 percent of the total share volume on that

exchange.

Unlisted trading privileges on exchanges in stocks listed and

registered on other exchanges numbered 1,735 as of June 30, 1966.

The volume of trading in these stocks for the calendar year 1965

was reported at about 87,761,000shares. About 17.4 percent of this

volume was on the American Stock Exchange in stocks listed on

regional exchanges and 82.6 percent was on regional exchanges in

stocks listed on the New York or American Stock Exchange. While

the 87,761,000shares amounted to only 3.4 percent of the total share

volume on all exchanges, they constituted substantial portions of the

share volume of most regional exchanges, as reflected in the following

approximate percentages: Cincinnati, 84 percent; Boston, 78 percent;

_

_

_

_

_

_

_

_

_

_

_

_
46 SECURITIES AND EXCHANGE COMMISSION

Detroit, 75 percent; Philadelphia-Baltimore-Washington, 71 percent;

Pittsburgh, 50 percent; Midwest, 31 percent; and Pacific Coast,

30 percent,"

Applications for Unlisted Trading Privileges

Applications by exchanges for unlisted trading privileges in stocks

listed on other exchanges, filed pursuant to RuIe 12f-1 under Section

12(f) (1) (B) of the Securities Exchange Act, were granted by the

Commission during the fiscal year ended June 30, 1966, as follows:

Stock exchanges: Number 01 stocks Boston 50

Cincinnati 19

])etroit 7

Alidvvest 13

Pacific Coast 1

Philadelphia-Baltimore- Washington 32

Pittsburgh 3

125

BWCK DISTRIBUTIONS REPORTED BY EXCHANGES

The usual method of distributing blocks of listed securities

considered too large for the auction market on the floor of an exchange

is to resort to "secondary distributions" over the counter after the

close of exchange trading. Secondary distributions, as reported since

1942, reached a new high of $1,603,107,000during the calendar year

1965, surpassing the previous peak of $926,514,000 in 1961. During

the first 6 months of 1966, there were 72 secondary distributions

aggregating $1,126,091,000. Unusually large secondary distributions

have caused these record high figures. Secondary distributions of

the common stocks of Ford Motor Co. and General Motors Corp.

accounted for 38 percent of the 1965 total value, and a distribution of

Trans WorId Airlines common stock comprised more than half the

total for the .first 6 months of 1966.

Block distrzbutlOn8 of stocks reported by exchanges

Number j Sh~:re;in I Shares sold I 12 months ended Dec. 31,1965

Value

Special Offerings

Exchange Dlstrlbutlons Secondary Dlstrlbutlons 01 01 01 $0 57 2, 638, 802 2, 334, 'Jl7 86, 478, 829

142 29,749,605 31,153,319 1,603,106, 564

6 months ended lune 30, 1966

Special Offerlngs___________________________________ 0 I 0 I 0 I $0

Exchange Dlstrlhutlons____________________________ 25 1,359,582 1,261,282 52,201,526 Secondary Dlstr1butions .___ 72 18,368,461 19,00,004 1,126,lJ9O, 765

Detalls of these dlstrlbntlons appear in the Commission's monthly StatistIcal Bulletins. Data for

prior years are shown in Appendix Table 8in this Annual Report.

The distribution of unlisted stocks among the exchanges and share volume

therein are shown in Appendix Table 9.

•

_

_

_

•

•
THIRTY-SECOND ANNUAL REPORT 47

Special Offering Plans were adopted by many of the exchanges in

1942, and Exchange Distribution Plans in 1953, in an effort to keep

as much trading as possible on their floors. Since 1962 there have

been no special offerings. Exchange distributions increased to reach

a record of 72 in 1963 but have since declined. In 1965 there were

57 with a value of $86,479,000.

OVER.THE.COUNTER TRADING IN COMMON STOCKS TRADED ON

NATIONAL SECURITIES EXCHANGES

Pursuant to the recommendations of the Special Study of Securities

Markets, the Commission in December 1964 adopted Rule 17a-9 providing a system for the identification of broker-dealers making offboard markets in common stocks traded on national securities exchanges and for the reporting of summaries of over-the-counter

trading in common stocks traded on national securities exchanges

(sometimes referred to as the "third market") .

In accordance with this rule, since January 1965 brokers and dealers

who make markets in common stocks traded on national securities exchanges have been reporting their trading over the counter and on

exchanges in the common stocks in which they make markets. They

also report certain off-board trading in other common stocks traded on

exchanges. Broker-dealers who are not market makers report certain

large third market transactions. The reporting system is designed to

reflect all sales to persons other than broker-dealers, i.e., to individuals

and institutions.

During the calendar year 1965, total third market sales of common

stock amounted to 50,362,000 shares valued at $2,563,000,000. This

latter figure was the equivalent of 2.9 percent of the value of shares of

common and preferred stocks traded on all national securities exchanges. Almost 98 percent of the third market dollar volume was in

common stocks listed on the New York Stock Exchange. Over-thecounter sales of these stocks during 1965 amounted to the equivalent of

3.4 percent of the New York Stock EXChange's value of trading in

common and preferred issues.

Inthe first half of 1966, third market volume was larger than in the

corresponding period of 1965 but did not keep pace with the sharply

increased volume on exchanges. In this period, third market sales of

common stocks amounted to 31,009,000 shares valued at $1,596,000,000,

or 2.3 percent of the dollar volume on all national securities exchanges.

MANIPULATION AND STABILIZATION

Manipulation; Market Surveillance

The Exchange Act and Commission rules under the Act prohibit

various kinds of manipulative activities. In order to enable the

238-643-67-5
48 SECURITIES AND EXCHANGE COMMISSION

Commission to meet its responsibilities for the surveillance of the

securities markets, the market surveillance staff has devised a number

of procedures to identify possible manipulative activities. A program

has been adopted with respect to surveillance over listed securities,

in which the staff's activities are closely coordinated with the stock

watching operations of the New York and American Stock Exchanges.

Within this framework, the staff reviews the daily and periodic stock

watch reports prepared by these exchanges and on the basis of its

analysis of the information developed by the exchanges and other

sources, determines matters of interest, possible violations of applicable law, and the appropriate action to be taken.

In addition, the market surveillance staff maintains a continuous

ticker tape watch of transactions on the New York and American

Stock Exchanges and the sales and quotations sheets of regional exchanges to observe any unusual or unexplained price variations or

market activity. The financial news ticker, leading newspapers and

various financial publications and statistical services are also closely

followed. Matters raised by private investors in letters to the Commission may also be used in determining whether possible violations

have occurred.

If any of these sources reveal possible violations, the market surveillance staff conducts a preliminary inquiry into the matter. These

inquiries, some of which are conducted with the cooperation of the

exchange concerned, generally begin with the identification of the

brokerage firms which were active in the security. Contact may be

made with partners, officers or registered representatives of the firms,

with customers, or with offlcials of the company in question to determine the reasons for the activity or price change in the securities

involved and whether violations may have occurred.

The Commission, recognizing the utility of electronic data-processing equipment, has developed an automated over-the-counter surveillance program to provide more efficient and comprehensive

surveillance. The automated equipment is programmed to identify,

among other things, unlisted securities whose price movement or

dealer interest varies beyond specified limits in a pre-established time

period. When a security is so identified, the automated system prints

out current and historic market information concerning it. This data,

combined with other available information, is collated and analyzed to

select those securities whose activity indicates the need for further

inquiry or referral to the Commission's enforcement staff.

Stabilization

Stabilization involves open-market purchases of securities to prevent or retard a decline in the market price in order to facilitate a
THIRTY-SECOND ANNUAL REPORT 49

distribution. It is permitted by the Exchange Act subject to the

restrictions provided by the Commission's Rules 10b-6, 7, and 8. These

rules are designed to confine stabilizing activity to that necessary for

the above purpose, to require proper disclosure and to prevent unlawful manipulation.

During fiscal year 1966, stabilizing was effected in connection with

stock offerings totaling 57,793,000 shares having an aggregate public

offering price of $2,158,883,000 and bond offerings having a total

offering price of $247,974,000. In these offerings, stabilizing transactions resulted in the purchase of 1,992,000 shares at a cost of $85,-

974,000 and bonds at a cost of $2,078,000. In connection with these

stabilizing transactions, 9,761 stabilizing reports, showing purchases

and sales of securities effected by persons conducting the distribution,

were received and examined during the fiscal year.

REGISTRATION OF OVER-THE-COUNTER SECURITIES

As previously noted, Section 12 (g) of the Exchange Act requires the

registration of securities traded over the counter, when certain standards as to assets of the issuer and number of shareholders are met. The

same forms used for the registration of securities on an exchange are

used for the registration of over-the-counter securities. Part II of

this report includes statistics regarding the number of registration

statements filed during the fiscal year pursuant to Section 12(g) and

related matters.

PERIODIC REPORTS

Section 13 of the Exchange Act requires issuers of securities registered pursuant to Section 12 to file periodic reports keeping current

the information contained in the application for registration or registration statement. These periodic reports include annual, semi-annual,

and current reports. The principal annual report form is Form lQ-K,

which is designed to give current information regarding the matters

covered in the original filing. Semi-annual reports required to be filed

on Form 9-K are devoted chiefly to furnishing mid-year financial

data. Current reports on Form 8-K are required to be filed for each

month inwhich any of certain specified events of immediate interest to

investors have occurred. A report on this form deals with matters

such as changes in control of the registrant, important acquisitions

or dispositions of assets, the institution or termination of important

legal proceedings and important changes in the issuer's capital securities or in the amount thereof outstanding. Section 15(d) of the

Exchange Act, generally speaking, requires issuers who have filed

registration statements under the Securities Act of 1933 that have

become effective to file the same reports as the issuers described above.
50 SECURITIES AND EXCHANGE COMMISSION

The following table shows the number of reports filed during the

fiscal year pursuant to Sections 13 and 15(d) of the Exchange Act.

As of June 30, 1966,there were 2,578 issuers having securities listed on

a national securities exchange and registered under Section 12(b) of

the Act, 2,061 issuers having securities registered under Section 12(g),

and 2,233 additional issuers (including 358 that were also registered

as investment companies under the Investment Company Act of 1940)

which were subject to the reporting requirements of Section 15(d) of

the Act.

Number of annual and other periodic reports filed by issuers under the Securities

Exchange Act of 1934 and the Investment Company Act of 1940 during the fiscal

year ended June 30, 1966

Number of reports filed by

Listed Over-the-counter Issuers

Issuers Issuers filing filing Total

Type of reports filing reports under reports reports

reports under Sec- filed

under tlon 30 of

SectIon Section SectIon Investment

13 15(d) 13 Company Act

--- Annual reports on Forms IG-K, N-IR, N-30A-l,

2,540 1,124 1,599 601 5,864 etc ______________________________________________

Semi-annual reports on Form lI--K.. 2, 110 663 1,441 --.....------- 4,214 Current reports on Form 8-K _____________________ 4, 957 1,326 2,255 ---------- ..... 8,538 Quarterly reports on Form 7-K ____________________ 31 97 119 ----..------- 247 Quarterly reports on Form N-30B-L ______________ 283 283

Reports to stockholders:

1,565 1,565 (Section 30(d»)________________________________

--- --- 2,4491 Total reports filed_________________ ._ 9,638 3,210 5,414 20,711

REGULATION OF PROXIES

Scope of Proxy Regulation

Regulation 14A, adopted pursuant to Sections 14(a) of the Securities Exchange Act, 12(e) of the Public Utility Holding Company

Act of 1935, and 20(a) of the Investment Company Act of 1940,

requires the disclosure in a proxy statement of pertinent information in connection with the solicitation of proxies, consents and

authorizations in respect of securities subject to those provisions, in

order to enable holders of such securities to act intelligently on the

matters involved. The regulation also provides, among other things,

that when the management is soliciting proxies, any security holder

desiring to communicate with other security holders for a proper

purpose may require the management to furnish him with a list of

all security holders or to mail his communication to security holders

for him. A security holder may also, subject to reasonable prescribed

limitations, require the management to include in its proxy material

any appropriate proposal which such security holder desires to submit

to a vote of security holders. Any security holder or group of security

holders may at any time make an independent proxy solicitation upon

compliance with the proxy rules, whether or not the management is

______• _________

•_______
THIRTY-SECOND ANNUAL REPORT 51

making a solicitation. Certain additional provisions of the regulation

are applicable where a contest for control of the management of an

issuer or representation on the board is involved.

Copies of proposed proxy material must be filed with the Commission in preliminary form prior to the date of the proposed solicitation.

Where preliminary material fails to meet the prescribed disclosure

standards, the management or other group responsible for its preparation is notified informally and given an opportunity to correct the

deficiencies in the preparation of the definitive proxy material to be

furnished to security holders.

The Securities Acts Amendments of 1964 extended the proxy solicitation requirements to those over-the-counter securities which are

registered under Section 12(g) of the Act. In addition, new Section

14(c) of the Act provides that issuers of securities registered under

Section 12 shall, in accordance with rules and regulations prescribed

by the Commission, transmit information comparable to proxy material to security holders from whom proxies are not solicited. During

the fiscal year the Commission adopted Regulation 14C implementing

this statutory provision. a

Statistics Relating to Proxy and Stockholder Information Statements

During the 1966 fiscal year, 4,109 proxy statements in definitive

form were filed under the Commission's Regulation 14A for the solicitation of proxies of security holders; 4,084 of these were filed by management and 25 by non-management groups or individual stockholders. These 4,109 solicitations related to 3,773 companies, some

336 of which had 2 solicitations during the year, the second generally

for a special meeting not involving the election of directors.

There were 3,632 solicitations of proxies for the election of directors,

446 for special meetings not involving the election of directors, and 31

for assents and authorizations.

During fiscal year 1966, the votes of security holders were solicited

with respect to the following types of matters, other than the election

of directors:

Mergers, consolidations, acquisitions of businesses, purchases and sales

of property, and dissolutions of companies________________________ 397

Authorizations of new or additional securities, modifications of existing securities, and recapitalization plans (other than mergers, con- solidations, ete.) 793

Employee pension and retirement plans (including amendments to

existingplans)_________________________________________________ 74

Bonus or profit-sharing plans and deferred compensation arangements

(including amendments to existing plans and arrangements)______ 151

Stock option plans (including amendments to existing plans)________ 479

Stockholder approval of the selection by management of Independent auditors 1,395

Miscellaneous amendments to charter and by-laws and miscellaneous

other matters (excluding those listed above) 1, 391

• Securities Exchange Act Release No. 7774 (December 30, 1965).
52 SECURITIES AND EXCHANGE COMMISSION

During fiscal year 1966, 53 information statements under new Regulation 14C were filed by 52 companies, 1 company filing 2 such

statements. The 53 statements related to 48 annual meetings and 5

special meetings.

Stockholders' Proposals

During the 1966 fiscal year, 156 proposals submitted by 35 stockholders were included in the proxy statements of 103 companies under

Rule 14a-8 of Regulation 14A.

Typical of such stockholder proposals submitted to a vote of security holders were resolutions relating to amendments of charters or bylaws to provide for cumulative voting for the election of directors,

limitations on the grant of stock options to, and their exercise by,

key employees and management groups, the sending of a post-meeting

report to all stockholders, and a change of the place of the annual

stockholders' meeting.

A total of 58 additional proposals submitted by 39 stockholders

was omitted from the proxy statements of 30 companies in accordance

with Rule 14a-8. The principal reasons for such omissions and the

number of times each such reason was involved (counting only one

reason for omission for each proposal even though it may have been

omitted under more than one provision of Rule 14a-8) were as follows:

Reasfm for omi88Wn of proposals Number

Not a proper subject matter under state law________________________ 14

Not timely submittecL___________________________________________ 11

Related to the ordinary conduct of the company's business__________ 8

Reason for proposal deemed misleading____________________________ 8

VVithdrawn by ~ponent----_------------------------------------ 8

Concerned a personal grievance against the company 5

Proponent did not advise management of his intention to present the

proposal for action at the meeting______________________________ 2

Converse of management's proposaL_______________________________ 1

Involved SUbstantially the same matter as one previously proposed..___ 1

Ratio of Soliciting to Non-Soliciting Companies

Of the 2,578 issuers that had securities listed and registered on national securities exchanges as of June 30, 1966, 2,357 had voting securities so listed and registered. Of these 2,357 issuers, one listed and

registered voting securities for the first time after its annual stockholders' meeting in fiscal 1966; of the remaining 2,356 issuers with

voting securities, 2,141 or 90.9 percent, solicited proxies under the

Commission's proxy rules during the 1966 fiscal year for the election

of directors.

Proxy Contests

During the 1966 fiscal year, 37 companies were involved in proxy

contests for the election of directors. A total of 923 persons, both
THIRTY-SECOND ANNUAL REPORT 53

management and non-management, filed detailed statements as participants under the requirements of Rule 14a-ll. Proxy statements

in 24 cases involved contests for control of the board of directors and

those in 13 cases involved contests for representation on the board.

Management retained control in 10 of the 24 contests for control of

the board of directors, 2 were settled by negotiation, non-management

persons won 6 and 6 were pending as of June 30, 1966. Of the 13

cases where representation on the board of directors was involved,

management retained all places on the board in 6 contests, opposition

candidates won places on the board in 6 cases and 1 was settled by

negotiation.

INSIDERS' SECURITY HOLDINGS AND TRANSACTIONS

Corporate insiders, by virtue of their position, may have knowledge

of a company's condition and prospects which is unavailable to the

general public and may be able to use such information to their personal advantage in trading in the company's securities. Section 16 of

the Securities Exchange Act and corresponding provisions in Sections

17 of the Public Utility Holding Company Act of 1935 and Section

30(f) of the Investment Company Act of 1940 are designed to provide

other stockholders and investors with information as to insiders'

security transactions and holdings, and to prevent the unfair use of

confidential information by insiders to profit from short-term trading

in a company's securities.

Ownership Reports

Section 16(a) of the Securities Exchange Act, as amended, requires

every person who beneficially owns, directly or indirectly, more than

10 percent of any class of equity security which is registered under

Section 12 (b) for exchange listing or under Section 12 (g) for over-thecounter trading, or who is a director or an officer of the issuer of any

such security, to file statements with the Commission disclosing his

ownership of the issuer's equity securities and changes in ownership.

Copies of such statements must also be filed with exchanges on which

securities are listed. Similar provisions applicable to insiders of

registered public-utility holding companies and registered closedend investment companies are contained in Section 17 (a) of the Public

Utility Holding Company Act and Section 30 (f) of the Investment

Company Act. The administration of the insider reporting provisions

of the three Acts is combined in one section in the Division of Corporation Finance.

During the fiscal year, 96,232 ownership reports (23,989 initial statements of ownership on Form 3 and 72,243 statements of changes in

ownership on Form 4) were filed with the Commission. This repre-
54 SECURITIES AND EXCHANGE COMMISSION

sents an increase of 51,601over the 44,631 reports filed during the 1964

fiscal year and an increase of 39,678 over the 56,554reports filed during

the 1965 fiscal year. The bulk of the increase is attributable to the

extension of the reporting requirements to insiders of issuers of overthe-counter securities registered under Section 12(g) .

All ownership reports are made available for public inspection as

soon as they are filed at the Commission's office in Washington and

at the exchanges where copies are filed. In addition, the information contained in reports filed with the Commission is summarized

and published in the monthly "Official Summary of Security Transactions and Holdings," which is distributed by the Government Printing Officeon a subscription basis to more than 25,000persons.

Recovery of Short-Swing Trading Profits by Issuer

In order to prevent insiders from making unfair use of information which they may have obtained by reason of their relationship

with a company, Section 16(b) of the Exchange Act, Section 17(b)

of the Holding Company Act, and Section 30(f) of the Investment

Company Act provide for the recovery by or on behalf of the issuer

of any profit realized by insiders (in the categories listed above) from

certain purchases and sales, or sales and purchases, of securities of

the company within any period of less than 6 months. The Commission has certain exemptive powers with respect to transactions not

comprehended within the purpose of these provisions, but is not

charged with the enforcement of the civil remedies created by them.

INVESTIGATIONS WITH RESPECT TO REPORTING PROVISIONS

Section 21(a) of the Act authorizes the Commission to make such

investigations as it deems necessary to determine whether any person

has violated or is about to violate any provision of the Act or any rule

or regulation thereunder. The Commission is authorized, for this

purpose, to administer oaths, subpoena witnesses, compel their attendance, take evidence and require the production of records. In

addition to the investigations undertaken in enforcing the anti-fraud,

broker-dealer registration, and other regulatory provisions of the Act,

which are discussed in Part XI of this report under ''Complaints and

Investigations," the following investigations were undertaken in

connection with the enforcement of the reporting provisions of Sections 12, 13, 14 and 15(d) of the Act and the rules thereunder, particularly those provisions relating to the filing of annual and other

periodic reports and proxy material:

Investigations pending at beginning of fiscal year________________ 31

Investigations Inltlated during fiscal year________________________ 20

51

Investigations closed during fiscal year_____________________________ 14

Investigations pending at close of 1I.sca1 year______________________ 37
THIRTY-SECOND ANNUAL REPORT

REGULATION OF BROKER-DEALERS AND OVER-THE.COUNTER

MARKETS

55

Registration

Subject to limited exemptions, Section 15(a) of the Securities Exchange .Act requires the registration of all brokers and dealers who

use the mails or instrumentalities of interstate commerce to effect or

induce transactions in securities in the over-the-counter market.

Brokers and dealers conducting an exclusively intrastate business or

dealing only in exempted securities, commercial paper, commercial

bills or bankers' acceptances are exempt from registration.

The following tabulation reflects certain data with respect to regis.

trations of brokers and dealers during the fiscal year ended June 30,

1966.

Effective registrations at close of preceding fiscal year 4,543

Applications pending at close of preceding fiscal year______________ 39

Applications filed during fiscal year______________________________ 4S2

~dta1 6,034

Applications denied____________________________________________ __ 2

Applications withdra wn__________________________________________ 6

Applications cancelled____________________________________________ 0

Registrations withdrawn____________________________ 556

Registrations cancelle<L__________________________________________ 35

Registrations revoked____________________________________________ 44

Registrations suspended pending final determination________________ 1

Registrations effective at end of fiscal year 4,363

Applications pending at end of fiscal year_________________________ 30

~otal 5,037

Less: 3 registrations which, prior to the fiscal year, had been suspended pending final determination and removed from "effective

registrations": 2 of these were revoked, and 1 was withdrawn,

during the fiscal year__________________________________________ --3

Total 5,034

Administrative Proceedings

The scope of the administrative sanctions which the Commission

may impose against brokers and dealers and persons associated with

a broker or dealer, pursuant to Sections 15(b) and 15.Aof the Exchange .Act,was enlarged in significant respects by the Securities .Acts

.Amendments of 1964. Thus, in addition to the previously available

sanctions against a broker-dealer of denial or revocation of registration and expulsion or suspension from a registered securities association or national securities exchange, the Commission may now

suspend a broker-dealer's registration for a period not to exceed 12

months and may impose censure. Under prior law the Commission

_
56 SECURITIES AND EXCHANGE COMMISSION

could not proceed directly against individuals associated with a

broker-dealer :firm, although incidental to a proceeding against the

firm it could make findings with respect to such individuals which had

the effect of disqualifying them from employment in the securities

mdustry. The Act, as amended, permits direct action against

associated persons, with or without joining the firm. The Commission

may censure an associated person, may suspend or bar him from being

associated with a broker or dealer, and may suspend or bar him from

being associated with a member of a registered securities association.

Under Section 15(b), a sanction of revocation, denial or suspension

of registration, or censure may be imposed upon a broker-dealer if,

after notice and opportunity for hearing, the Commission finds that

such sanction is in the public interest and that the broker-dealer, or

any person associated with such broker-dealer, is subject to one or

more of the specified statutory disqualifications. The Commission

may censure, or bar or suspend from association with a brokerdealer, an associated person where it finds that such action is in the

public interest and that such person has committed or omitted any act

or omission which would be a basis for the imposition of a sanction if

such person were a broker-dealer. The statutory disqualifications,

which have been enlarged by the 1964 amendments, include the

following:

(1) wilfully false or misleading statements in an application for

registration or other report required to be filed under the Exchange

Act;

(2) conviction within the previous 10 years of a felony or misdemeanor which involved the purchase or sale of securities; arose out of

the conduct of business as a broker-dealer or investment adviser; involved embezzlement, fraudulent conversion, or misappropriation of

funds or securities; or involved violation of the provisions of the

United States Code dealing with various frauds and swindles committed by use of the mails, telephone, telegraph, radio or television;

(3) injunction by a court of competent jurisdiction against engaging in certain practices related to the securities business;

(4) wilful violation of any provision of the Securities Act of 1933,

the Exchange Act, the Investment Advisers Act of 1940 or the Investment Company Act of 1940or any of the Commission's rules or regulations thereunder;

(5) wilfully aiding or abetting another person in a violation of the

Federal securities laws or rules and regulations thereunder or failing

reasonably to supervise other persons who commit such violations; and

(6) employing a person barred or suspended from being associated

with a broker-dealer.

Section 15A of the Exchange Act as amended empowers the Commission to suspend or expel a broker-dealer from membership in a
THIRTY-SECOND ANNUAL REPORT 57

registered securities association or to suspend or bar any person from

being associated with a member, upon a finding of violation of the

Federal securities laws or any rule or regulation thereunder. The

National Association of Securities Dealers, Inc. (NASD) is the

only such association. Section 19(a) (3) of the Act gives the Commission power to take similar action against members of national

securities exchanges.

Set forth below are statistics with respect to administrative proceedings instituted by the Commission pursuant to Sections 15(b), 15A and

19(a) (3) of the Securities Exchange Act which were pending during

fiscal year 1966.

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants__________________________________ 98

Against broker-dealer applicants__________________________________ 6

Against individuals only__________________________________________ 1

Total__________________________________________________________ 105

Proceedings instituted during fiscal year:

Against broker-dealer registrants__________________________________ 37

Against broker-dealer applicants___________________________________ 2

Against individuals only__________________________________________ 4

Total ------- 43

Total proceedings current during fiscal year______________________ 148

Disposition of proceedings:

Itegistration revoked_____________________________________________ 31

Beglstration revoked and firm expelled from NASD__________________ 7

Begistratlon and NASD membership suspended for period of time____ 4

Registration and exchange membership suspended for period of time; 1

Regtstration suspended for period of time_________________________ 1

Suspended for period of time from NASD___________________________ 3

:Members of firm required to dissociate themselves from firm for period of tlme ---- 1

Individual respondent barred from association with brokers or dealers; 1 Itegistrationdenied- -- 2

Dismissed on wi'thdrawal of registratioIL .---- 10

Dismissed and registration continued in effect..________________ 1

Total- ------ 62

Proceedings pending at end of fiscal year:

Against broker-dealer registrants-------------------- -------------- Against broker-dealer applicants

Against individuals only

76

6

4

Total proceedings pending at end of year 86

Total proceedings accounted for_------------------------------:..-- .. H8 ..

_ ~ _

'

~
58 SECURITIES AND EXCHANGE COMMISSION

Action taken against individuals associated with the firms included above:

Named as cause__________________________________________________ 81

Barred__________________________________________________________ 67

Suspended 9

Total._________________________________________________________ 157

Deci8iol1ll of Particular Interest

It is not feasible to discuss within the confines of this report each

of the many decisions rendered by the Commission during the 1966

fiscal year in administrative proceedings with respect to broker-dealers

and their personnel. However, a few cases of unusual interest or

significance are summarized in the following paragraphs:

The Commission's decision in Shearson, Hammill & 00.,4 involving

one of the major Wall Street brokerage houses, was of particular

interest to the financial community, The Commission found that

certain activities which had taken place in three California branch

offices of the firm, primarily in Los Angeles, resulted in violations

of both the registration provisions of the Securities Act and the

anti-fraud provisions of that Act, the Exchange Act, and the Investment Advisers Act. A significant aspect of the case is that the

Commission held responsible not only the firm and certain branch

officepersonnel directly involved in the misconduct, but also the firm's

five principal partners who comprised its executive committee charged

with supervision of the firm's nationwide operations. The Commission found that their failure "diligently to enforce (the firm's) system

of internal controls resulted in the perpetration of fraud upon many

customers," and that these principals bore "a heavy responsibility"

for the violations.

The Commission stated that the willful violations established "were

so grave and extensive as to warrant the imposition of substantial

sanctions." However, the firm had terminated the employment of

most of the branch officepersonnel involved in the violations and by

the adoption of enlarged internal controls had reduced the risk of any

recurrence of injury to investors of the type found, and the Commission recognized that further sanctions against the firm would affect

many innocent people. Inview of these factors, the Commission concluded that it would be inclined to withhold imposition of a sanction

against the firm if the members of the executive committee were dissociated from the firm for an appropriate period. Accordingly, it

withheld issuance of an order to permit the firm to submit a proposal

providing for the separation of those persons from the firm for 60 days

each and for their surrender of any share in firm profits during that

period. A proposal was thereafter submitted, and approved by the

4 securities lDxcbange Act Release No. 7743 (November 12, 1965).
THIRTY-SECOND ANNUAL REPORT 59

Commission, which provided that during the period of dissociation

the executive committee members would not receive, directly or indirectly, any salary or share of the profits, and that all salaries and

profits attributable to that period would be distributed as a stock

dividend to the stockholders of the firm's successor corporation other

than the executive committee members. A compliance report submitted in August 1966 disclosed that the profits allocable to the period

of dissociation were $573,168, that salaries and consulting fees which

would have been payable but were not paid to the executive committee

members amounted to $24,790, and that the total of these amounts had

been distributed in the form of a stock dividend.

The case of Russell L. I risk 5 involved a broker-dealer specializing in

the retail sale of mutual fund shares. The Commission found that

Irish, contrary to the best interests of his customers and for his own

gain, induced purchases and redemptions of such shares in the accounts

of customers which were excessive in size and frequency in view of

the "non-trading" character of those accounts. Among other things,

he followed a policy of recommending to customers that they redeem

the shares of one fund and use the proceeds to buy those of another

fund, requiring the payment of a new sales commission. Many of

these switches were effected within a relatively short time after shares

in the first fund had been acquired. This policy, the Commission

found, was highly profitable to Irish and detrimental to his customers.

In addition, Irish sold mutual fund shares to customers in amounts

slightly below the "break-point" at which a reduced sales load would

have been available, without adequately disclosing the savings which

could have been obtained through slightly larger investments. The

Commission concluded that Irish's conduct violated the anti-fraud

provisions of the securities acts and that it was appropriate in the

public interest to revoke his registration.

In Lile & 00., lna.,6 the Commission found, among other things,

that the firm's president and sole stockholder obtained loans from a

customer of the firm, for the purpose of financing the firm, and in

doing so made misrepresentations to the customer. The president represented that the firm's business was good and would be expanded and

failed to disclose the firm's actual precarious financial condition. In

finding that this conduct was fraudulent, the Commission stated that

"The propriety of inducing a customer to make substantial loans for

the purpose of financing an unprofitable broker-dealer would seem to

be particularly questionable in any case where, as here, the brokerdealer had established a relationship of trust and confidence with the

S Securities Exchange Act Release No. 7687 (August 27,1965).

8 Securities Exchange Act Release No. 7644 (July 9, 1965).
60 SECURITIES AND EXCHANGE COMMISSION

customer. At the least, where such loans are solicited, the anti-fraud

provisions require candid disclosure to the customer of all the material

facts."

A significant aspect of the decision in Olarenoe Earl Thornton 7 was

the holding that a state-licensed broker-dealer, who with knowledge

of Thornton's purchase of securities from a customer at a price far

below the market price loaned the purchase price to Thornton in anticipation of purchasing the securities from him at a discount, had aided

and abetted Thornton's fraudulent conduct. The Commission revoked

Thornton's registration and found the other broker-dealer a cause of

the revocation.

As in the past, a number of cases decided during the year involved

so-called "boiler-rooms." Among these cases were Hamilton Waters

&: 00., bw.8 and M. J. Merritt &: 00., Inc.,9 in both of which the Commission found that the respondents had engaged in the sale of securities by means of high pressure selling techniques including the use of

false and misleading statements concerning the securities being sold

and their issuers. As is typical of "boiler-room" activities, the securities involved were unseasoned and speculative and were generally

sold to persons with whom the respondents were not acquainted and

in disregard of the financial needs and objectives of such persons.

The Commission revoked the broker-dealer registrations of both firms

and found various individuals associated with the firms, who either

participated directly in the misconduct or by virtue of their position

or interest in the firms were responsible for it, to be "causes" of the

revocation.

Suspension of Registration Pending Final Determination

Section 15(b) of the Securities Exchange Act authorizes the Commission to suspend a broker-dealer's registration pending final determination as to whether registration should be revoked. In order to

suspend registration, the Commission must find, after notice and opportunity for hearing, that suspension is necessary or appropriate

inthe public interest or for the protection of investors. The registration of one broker-dealer was suspended during the past fiscal year

on the basis of such findings.10 The entry of a suspension order is of

course not determinative of the ultimate issue whether registration

should be revoked.

Securities Exchange Act Release No. 7693 (August 31,1965).

Securities ExChange Act Release No. 7725 (October 18,1965).

Securities Exchange Act Release No. 7878 (May 2, 1966).

10 Waldman et; Oo., Securities Exchange Act Release No. 7828 (February 25,

1966).

•

•

•
THIRTY-SECOND ANNUAL REPORT 61

Net Capital Rule

Rule 15c3-1 under the Exchange Act, commonly known as the net

capital rule, was amended during fiscal year 1965 to impose minimum

net capital requirements on brokers and dealers (effective December 1,

1965) and in certain other respects. As before, the rule limits the

amount of indebtedness which may be incurred by a broker-dealer in

relation to its capital, by providing that the "aggregate indebtedness"

of a broker-dealer may not exceed 20 times the amount of its "net

capital" as computed under the rule. During the past fiscal year,

violations of the net capital rule were charged in eight administrative

proceedings instituted against broker-dealers.

Registered broker-dealers who participate in "firm commitment"

underwritings must have sufficient capital to permit the participation

provided by the underwriting contract without impairing the capitaldebt ratio or minimum net capital prescribed by the rule. If a brokerdealer is unable to meet such requirements, he must decrease his "firm

commitment" to the extent necessary to achieve compliance with the

rule. If necessary, he may have to withdraw from the underwriting

or participate on a "best efforts" basis only.

Financial Statements

Rule 17a-5 under Section 17(a) of the Exchange Act requires registered broker-dealers to file annual reports of financial condition with

the Commission. Such reports must be certified by a certified public

accountant or public accountant who is in fact independent, with certain limited exemptions applicable to situations where certification

does not appear necessary for customer protection. A broker-dealer's

first report must reflect his financial condition as of a date between the

end of the 1st and 5th months after the effective date of registration.

All reports must be filed within 45 days after the date as of which the

report speaks.

Through these reports the Commission and the public may evaluate the financial position and responsibility of broker-dealers. The

financial report is one means by which the staff of the Commission determines whether the registrant is in compliance with the net capital

rule. Failure to file the required reports may result in the institution

of administrative proceedings.

During the fiscal year 4,134 reports of financial condition were filed

with the Commission, compared to the 1965 total of 4,317.

Broker-Dealer Inspections

Section 17(a) of the Exchange Act provides for regular and periodic inspections of registered broker-dealers. During the fiscal year

a total of 1,272 such inspections was conducted. Inspections provide
62 SECURITIES AND EXCHANGE COMMISSION

one of the most useful means available to the Commission for the protection of investors. Among other things, the staff members conducting the inspection determine a broker-dealer's financial condition,

review his pricing practices, evaluate the safeguards employed in

handling customers' funds and securities, and determine whether

adequate and accurate disclosures are made to customers.

The Commission's inspectors also determine whether brokers and

dealers are maintaining books and records as required by the Exchange

Act and the Commission's rules thereunder and are conforming to the

margin and other requirements of Regulation T of the Board of Governors of the Federal Reserve System. Inspectors also look for excessive trading or switching in customers' accounts. They frequently

find evidence of the sale of unregistered securities or of fraudulent

practices such as use of improper sales literature or sales techniques.

When an inspection reveals that a broker-dealer is in violation of applicable statutory provisions or rules, the action taken depends on the

type of violation and its effect on the public. The Commission does

not take formal action as a result of every infraction discovered. However, if the violation appears to be wilful and the public interest is

best served by formal action against the broker-dealer, the Commission promptly institutes appropriate proceedings.

The table below shows the types of infractions uncovered by the

inspection program during the fiscal year:

Number oj

Type: broker-dealers

Financial dtificulties______________________________________________ 93

IInproperhypothecation___________________________________________ 33

Unreasonable prices in securities purchases and sales_______________ 58

Non-compltance with Regulation T_________________________________ 82

"Secret profits" 10

Non-compltance with eonflrmatlon and bookkeeping rules____________ 766 Other 483

Total indicated violations 1, 525

SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF

SECURITIES DEALERS, INC.

Section 15A of the Exchange Act provides for registration with the

Commission of national securities associations and establishes standards and requirements for such associations. The National Association

of Securities Dealers, Inc. (NASD) is the only association registered

under the Act. The Act contemplates that such associations will

serve as a medium for self-regulation by over-the-counter brokers and

dealers. Their rules must be designed to protect investors and the

public interest, to promote just and equitable principles of trade, and

to meet other statutory requirements. They are to operate under the
THIRTY-SECOND ANNUAL REPORT 63

general supervision of the Commission, which is authorized to review

disciplinary actions taken by them and to consider all changes in their

rules. Review of the NASD rules, generally speaking, is carried out

in the same manner and for similar purposes as the review of exchange

rules described above."

In adopting legislation permitting the formation and registration

of national securities associations, Congress provided an incentive to

membership by permitting such associations to adopt rules which preclude a member from dealing with a non-member except on the same

terms and conditions as the member affords the investing public. The

NASD has adopted such rules. Accordingly, membership is necessary

to profitable participation in underwritings since members may properly grant price concessions, discounts and similar allowances only

to other members. Loss or denial of membership due to expulsion

or suspension or other ineligibility due to a statutory disqualification,

or the failure to meet standards of qualification established in NASD

rules, may thus constitute a severe economic sanction.

At the close of the fiscal year the NASD had 3,707 members,

reflecting a net decrease of 158 members during the year. This decrease was the net result of 229 admissions to and 387 terminations of

membership. At the end of the year NASD member firms had 5,025

branch offices, reflecting a net increase of 197 offices during the year.

This increase was the net result of the opening of 768 new offices and

the closing of 571 offices. During the year the registered representative population, which generally includes all partners, officers, traders,

salesmen and other persons employed by or affiliated with member

firms in capacities which involve their doing business directly with the

public, increased by 6,798 to stand at 83,641 as of June 30, 1966. This

increase was the net result of 13,424 initial registrations, 11,418 reregistrations and 18,044 terminations of registrations during the year.

NASD Disciplinlll7' Actions

The Commission receives from the NASD copies of its decisions in

all disciplinary actions against members and registered representatives.

In general, such actions are based on allegations that the respondents

violated specified provisions of the NASD's Rules of Fair Practice.

Where violations are found the NASD may impose one or more sanctions upon a member, including expulsion, suspension, fine, or censure.

If the violator is an individual, his registration as a representative

may be suspended or revoked, he may be suspended or barred from

being associated with all members, and he may be fined and/or censured.

Under Section 15A(bH4) of the Exchange Act and the NASD's bylaws, no broker-dealer may be admitted to or continued in NASD

USee p, 38, 8upra.

238--643-67-6
64 SECURITIES AND EXCHANGE COMMISSION

membership without Commission approval if he has been suspended or

expelled from membership in the NASD or a national securities exchange; he is barred or suspended from association with a broker or

dealer or with all members of the NASD or an exchange; his registration as a broker-dealer has boon denied, suspended, or revoked; he has

been found to be a cause of certain sanctions imposed upon a member by

the Commission, the NASD or an exchange; or he has associated with

him any person subject to one of the above disqualifications.

During the past fiscal year the Association reported to the Commission its final disposition of disciplinary complaint actions against 197

member firms and 167 individuals associated with them. With respect

to 52 members, complaints were dismissed as a result of findings that

the allegations of violations had not been sustained.P In the remaining cases, violations were found and penalties were imposed on 145

members and 115 registered representatives or other individuals. The

maximum penalty of expulsion from membership was imposed against

14 members, and 6 members were suspended from membership for

periods ranging from 15 days to 3 months. In many of these cases,

substantial fines were also imposed. In another 104 cases, members

were fined amounts ranging from $50 to $7,500. In 21 cases, the only

sanction imposed was censure, although censure was usually a secondary penalty where a more severe penalty was also imposed.

Various penalties were also imposed on registered representatives

found in violation of NASD rules. The registrations of 50 representatives were revoked, and 23 representatives had their registration suspended for periods ranging from 30 days to 18 months," Fines in

various amounts were also imposed against many revoked or suspended

representatives. In addition, 42 other representatives were censured

and/or fined amounts ranging from $100 to $10,000. Complaints

against 52 representatives were dismissed on findings that no violations

had been established.

12 The majority of the cases where allegations against members were dismissed

involved misuse of customers' and/or firm securities or funds by a representative

under such circumstances that the member could not have known of or prevented

the impropriety. The Securities Acts Amendments of 1964 authorized registered securities associations to take disciplinary action directly against individuals associated with members. The NASD has amended its rules to provide for

such action. In the fiscal year there were eight cases in which the sole respondents were individuals associated with members.

11 As has been noted, a person found a cause of the expulsion or suspension of a

member is disqualified from association with a member. The cause finding is

therefore often used where an individual found to have violated Association rules

should have been but was not registered as a registered representative. The

numbers used in the text combine unregistered individuals found to have been a

cause of the expulsion or suspension of a member with registered representatives

whose registrations were revoked or suspended, since this is the practical consequence of a cause finding.
THIRTY-SECOND ANNUAL REPORT 65

Commission Review or NASD Disciplinary Action

Section 15A(g) of the Act, as amended, provides that disciplinary

actions by the NASD are subject to review by the Commission on its

own motion or on the timely application of any aggrieved person.

This Section also provides that upon application for or institution of

review by the Commission the effectiveness of any penalty imposed by

the NASD is automatically stayed pending Commission review, unless

the Commission otherwise orders after notice and opportunity for

hearing. Section 15A(h) of the Act defines the scope of the Commission's review. If the Commission finds that the disciplined party

committed the acts found by the NASD and thereby violated the rules

specified in the determination, and that such conduct was inconsistent

with just and equitable principles of trade, the Commission must sustain the NASD's action unless it finds that the penalties imposed are

excessive or oppressive, in which case it must cancel or reduce them.

At the start of the fiscal year, 19 NASD disciplinary decisions were

pending before the Commission on review. During the year 13 additional cases were brought up for review. Seventeen cases were disposed

of by the Commission. In 14 of these cases, the Commission sustained

the disciplinary action taken by the NASD,14 in one it set aside the

Association action," and in the remaining two cases the Commission

reduced the penalties imposed by the Association." Fifteen cases

were pending as of the end of the year.

In the course of the year there were two important decisions concerning the obligation of members to exercise adequate supervision over

employees.

The Commission sustained the NASD's action expelling L. B. Secu-

'l'ities Oorporation from membership in the Association and revoking

the registration as a registered representative of R. B. Marx, its president and sole stockholder." The action of the NASD was in large

part based upon the activities of C. Mackie Brown, Jr., a salesman,

who was found to have violated the Association's fraud rule by causing

the firm to send confirmations for the purchase of stock of L. F. Popell

& Co., Inc. ("Popell") to two customers who had never ordered the

stock.

14 Securities Exchange Act Release Nos. 7652 (July 22, 1965) ; 7676 (August

10,1965) ; 7696 (September 3,1965) ; 7718 (October 5, 1966) ; 7729 (October 22,

1965) ; 7762 (December 7, 1965) ; 7806 (January 28, 1966) ; 7809 (January 31,

1966) ; 7823 (February 15, 1966) ; 7834 (March 7, 1966) ; 7856 (April 8, 1966) ;

7875 (April 29, 1966) ; 7880 (May 3,1966) ; and 7907 (June 29, 1966).

:Ill Securities Exchange Act Release No. 7660 (July 28, 1965).

18 Securities Exchange Act Release Nos. 7682 (August 24, 1965) and 7864

(April 18, 1966).

11Securities Exchange Act Release No. 7806 (January 28,1966).
66 SECURITIES AND EXCHANGE COMMISSION

According to the Commission's opinion, at a time when L. B. Securities was making a market in Popell stock, Marx had telephone conversations with Brown who was then employed by another member and,

being impressed by his selling abilities, offered him a position. Marx

had never met Brown and knew nothing about his character and background. Marx's pre-employment investigation consisted of a telephone

conversation with Brown's former employer who told Marx that he had

had some "problems" with Brown, but that if he "could be controlled

he would be a heck of a salesman." The nature of the problems was

not identified and Marx did not inquire about them. While Marx

claimed that he had received a favorable recommendation concerning

Brown :from other firms who were trading Popel] stock, the Commission noted that Brown had never been employed by any of these firms

and that it appeared that the recommendations were related to his

selling abilities.

The Commission :found that during the 2 weeks Brown was employed

by L. B. Securities he sold large quantities of Popell stock to his prior

customers and that he was given a free hand and no attempt was made

to supervise him. The Commission rejected applicants' excuse that

they were unable to supervise Brown because Marx was the firm's sole

supervisor and the market :for Popell stock during Brown's association

with the firm was hectic and disorderly. Itstated that it was incumbent

upon applicants to provide supervisory controls adequate to the business being conducted and added that this duty was "heightened by the

fact that they were permitting a newly hired salesman with a doubtful

recommendation to engage in selling activities, directed to customers

who were not known to the applicants, in a highly speculative security

that was declining in price."

The Commission also sustained NASD findings that applicants

violated the Commission's net capital and books and records requirements and that the firm had permitted Brown to effect securities

transactions before he became registered with the NASD as a representative of the firm.

In another case involving failure to supervise, the Commission

sustained the NASD's action expelling A. J. Gabriel & 00., Inc. from

membership in the Association and revoking the registration of

Aaron J. Gabriel, its president and sole stoekholder.P It was undisputed that in a 20-month period the member confirmed as ageat

and charged customers commissions in 73 transactions in which the

member actually had acted as principal; failed to disclose in 28 transactions that it was acting in a dual agency capacity; and failed to

liquidate promptly 116 purchases by customers as to which payment

was not made within 7 business days as required by Regulation T of

18 Securities Exchange Act Release No. 7696 (September 3,1965).
THIRTY -SECOND ANNUAL REPORT 67

the Federal Reserve Board. It was also undisputed that the member's books and records were not maintained in accordance with the

Commission's rules and that on July 31, 1961,the member was not in

compliance with the Commission's net capital rule.

The Commission also sustained NASD findings that the applicants

violated the Association's interpretation with respect to ":free-riding"

and withholding by allocating 500 shares of the member's 2,000-share

participation in a public offering of Hupp Systems, Inc. stock to the

account of Gabriel's wife. Applicants contended that the NASD had

failed to establish that the member had unfilled orders from the public

or had failed to make a bona fide public offering. In rejecting this

contention, the Commission pointed out that the stock, offered at

$3 per share, was being quoted in the over-the-counter market immediately after the offering at $4 bid and $4.50 asked, and that within

a week the wife had sold 400 of her shares at $3.50 and another 100

shares at $3.75 per share. The Commission concluded that "these

facts lead to the inference that public purchasers were available at

the time of the underwriting."

Although the applicants did not deny their failure to supervise

adequately, they urged in mitigation that the violations, other than

the free-riding violations, were caused by the incompetence and carelessness of back officepersonnel and that a rapid increase in the firm's

business had forced Gabriel to spend most of his time dealing with

sales and supervision of registered representatives. However, the

Commission found that the violations were pervasive and representative of a general failure to supervise vital areas of the member's

operations, and stated that Gabriel "should have made arrangements

for additional supervision or restricted the business rather than rely

completely on clerical personnel for compliance with important

regulatory requirements." The Commission further held, however,

that while Gabriel was not qualified to manage a broker-dealer business, the public interest did not require that he be prohibited from

working in the securities business as an employee upon a showing of

adequate supervision.

Other decisions of interest involved the appropriate standards for

determining the fairness, under the NASD's markup policy, of prices

charged by members in retail sales.

Both in O. A. Benson & 00., Irw.r and Strathmore Securities,

Irw.,20 a principal issue related to the proper basis upon which to

compute the amount of markups. The Commission reaffirmed its

holdings in prior cases that in the absence of countervailing evidence

111 Securities Exchange Act Release No. 7856 (AprilS, 1966).

lIO Securities Exchange Act Release No. 7864 (April1S, 1966).
68 SECURITIES AND EXCHANGE COMMISSION

a dealer's contemporaneous cost is the best evidence of current market

price. Applicants contended that they were making wholesale markets and that the NASD should have computed the markups on the

basis of their own inside offering prices, but the Commission found

that they were selling the stocks in question entirely or almost entirely to retail customers and that the few sales made by the Strathmore firm to other broker-dealers were not made at its asked quotations.

The Commission concluded that under these circumstances the NASD

had properly disregarded those quotations. However, the Commission reversed the NASD's findings respecting 41 sales made by the

Strathmore .firm as to which the NASD had computed the markups

based on the cost of a large block of stock. The firm purchased that

block at a low price from a dealer who had sought unsuccessfully

to dispose of it for some time. The Commission determined that the

NASD should have based its computations on the higher prices paid

to other dealers in smaller transactions effected at about the same

time and concluded that on this basis the sales prices were not unfair.

COMMISSION REVIEW OF NASD ACITON ON MEMBERSBIP

As previously noted, Section 15A(b) (4) of the Act and the by-laws

of the NASD provide that, except where the Commission finds it

appropriate in the public interest to approve or direct to the contrary,

no broker or dealer may be admitted to or continued in membership

if he, or any person associated with him, is under any of the several

disabilities specified in the statute or the by-laws. A Commission

order approving or directing admission to or continuance in Association membership, notwithstanding a disqualification under Section

15A (b) (4) of the Act or under an effective Association rule adopted

under that Section or Section 15A(b) (3), is generally entered only

after the matter has been submitted initially to the Association by

the member or applicant for membership. The Association in its discretion may then file an application with the Commission on behalf

of the petitioner. Ifthe Association refuses to sponsor such an application the broker or dealer may apply directly to the Commission for

an order directing the Association to admit or continue him in membership. At the beginning of the fiscal year, one application for

approval of admission to or continuance in membership was pending.

During the year 18 additional applications were filed, 11 were approved, 1 was withdrawn, and 2 were denied," leaving 5 applications.

pending at the year's end.

The Commission denied an application by the NASD that a member

be continued in membership with Jerome H. Truen. in its employ."

11Securities Exchange Act Release Nos. rr52 (November 19, 1005) and 7865

(April 21, 1966).

:II Securities Exchange Act Release No. 7152 (November 19,1965).
THIRTY-SECOND ANNUAL REPORT 69

The actions giving rise to Truen's disqualification occurred while he

was employed as a salesman by N. Pinsker & Co., Inc. ("Pinsker")

between September 1957 and March 1959, when he engaged in an intensive high-pressure telephone campaign to sell two highly speculative

stocks to customers irrespective of their investment needs and objectives.28 In 1962 Truen's earlier misdeeds with the Pinsker firm formed

the basis for the Commission's action denying an application by A. J.

Oaradeas» & 00., Inc. for registration as a broker-dealer and finding

Truen a cause of such denial.v Truen was Caradean's president and

owned50per~ntofllsstock

It was contended by Truen and on his behalf that the Commission

should grant the continuance application because Truen was young

and inexperienced at the time of the violations and his duties with

the prospective employer would be confined to the areas of mergers,

acquisitions, and underwritings, where he would work in a supervised

capacity.

In its opinion, the Commission referred to its earlier statement

made at the time of the denial proceeding that Truen's conduct demonstrated "gross indifference to the basic duty of fair dealing required

of securities salesmen." The Commission also noted the representation made by Truen's prospective employer that Truen would not be

permitted to engage in retail sales or trading, but pointed out that

the standard of conduct required in other aspects of the securities

business is "no less high and exacting." Under the circumstances

the Commission found that Truen's prior conduct did not "inspire

confidence" that he would maintain high standards of fair dealing in

the area of his proposed employment. Indenying the application the

Commission concluded that Truen had failed to make a positive showing that his conduct since his violations had been on "such a high plane

as to demonstrate that he has changed his ways."

Commission Inspections of the NASD

Under the regulatory scheme of the Exchange Act the Commission

is also charged with general oversight of national securities associations in the perfonnance of their self-regulatory activities. In carrying out this responsibility the Commission staff conducts periodic

inspections of various phases of NASD activity. These inspections

assist the Commissiion in insuring that the NASD is complying with

its self-regulatory responsibilities and enable the Commission to recommend improvements designed to increase the effectiveness of such

self-regulation.

.. Pinsker's broker-dealer registration was revoked for, among other things,

conducting fraudulent sales activities with respect to one of these stocks. 40

S.E.C.285 (1960)

.. Securities ExchangeAct ReleaseNo.6903(October1, 1962).

•
70 SECURITIES AND EXCHANGE COMMISSION

During the past fiscal year, inspections were made of the entire

operation of the Association's district office in Chicago and of the

program of the NASD New York district office for handling public

complaints. Where it appeared to the staff of the Commission that

modifications of NASD procedures or policies were desirable in order

to improve the Association's performance, the staff's views were communicated to the Association and conferences were held to arrive at

appropriate solutions.

REVISION OF RULES, REGULATIONS AND FORMS

Parts I and II of this Report discuss several new or amended rules

which were adopted or proposed during the fiscal year in connection

with the implementation of the Report of the Special Study of Securities Markets and the Securities Acts Amendments of 1964. Additional revisions are summarized below.

Amendment of Rule 3a12-3

During the fiscal year the Commission adopted an amendment to

Rule 3a12-3.25 Notice of the proposed amendment was published earlier in the year 26 and all comments and suggestions received in response to that notice were considered in the preparation of the rule as

adopted by the Commission.

Rule 3a12-3 as previously in effect exempted securities of certain

foreign issuers listed on a national securities exchange and registered

under Section 12(b) of the Act from the operation of Sections 14(a)

and 16 of the Act. The amendment removes this exemption with

respect to certain equity securities and receipts and voting trust certificates therefor, if more than 50 percent of the outstanding voting securities of the issuer are held by United States residents and the

business of the issuer is administered principally in the United States

or 50 percent or more of the members of the board of directors are

residents of the United States.

Amendments to the Proxy Rules

During the fiscal year, the Commission adopted certain amendments

to its proxy rules contained in Regulation 14A under the Act which

clarified the existing rules and embodied in the rules certain longstanding practices of the Commission. A limited number of substantive changes in the rules were also adopted. For example, Rule 14a-4

was amended to require that where a proxy is solicited for elections to

office and for other specified matters, provision shall be made whereby

the security holder may withhold authority to vote for elections to

office. Rule 14a-9, which relates to false or misleading statements in

.. Securities Exchange Act Release No. 7868 (April 21, 1966).

llJI Securities Exchange Act Release No. 7746 (November 16,1965).
THIRTY-SECOND ANNUAL REPORT 71

proxy solicitations, was amended to state specifically that the filing of

proxy material with the Commission or the examination of such material by the Commission is not to be deemed a finding by the Commission that such material is accurate or complete or not false or misleading or that the Commission has passed upon the merits of the statements

contained therein or any matter to be acted upon by security holders.

Item 14 of Schedule 14A specifies the information to be furnished

where proxies are solicited in regard to a proposed merger, consolidation, acquisition or similar matter. The item previously required certain information to be furnished with respect to each person, other

than the issuer, involved in the proposed transaction. Itwas amended

to codify present administrative practice in requiring that such information be furnished for the issuer also in order that security holders

may have a complete picture of the nature and effect of the proposed

transaction. The amended item also codifies present administrative

practice in requiring information with respect to the existing and pro

forma capitalization and appropriate summaries of earnings on an

historical and pro forma basis for the persons involved in the proposed

transaction.

In addition, the scope of Item 7(f) of Schedule 14A, calling for a

description of any material interest of certain persons in transactions

with the issuer, was clarified and extended.

A detailed description of all of the amendments is contained in

Securities Exchange Act Release Nos. 7775 (December 22,1965) and

7804 (January 27, 1966).

Amendment of Rule 15b6-1 and Adoption of Related Form BDW

The Commission amended Rule 15b6-1 to require that notice of

withdrawal from registration as a broker-dealer be filed on a new form

designated Form BDW and to provide a 6O-day waiting period

between the filing of the form and the effective date of withdra waJ.21

Form BDW requires a broker-dealer seeking to withdraw to furnish

specified information: (a) whether he owes any money or securities to

any customer, broker, or dealer (and if he does, he must show the

amount involved and arrangements made for payment and submit a

current financial statement); (b) whether he is involved in any legal

actions or proceedings and whether there are any unsatisfied judgments or liens against him; (c) the name and address of the person

who will have custody or possession of his books and records required

to be preserved under Rule 17a-4; and (d) the address where such

books and records are located. The form also contains a consent by

the withdrawing broker-dealer to make the books and records he is

required to preserve available for examination by authorized members

., Securities Exchange Act Release No. 7847 (April 1, 1966).
72 SECURITIES AND EXCHANGE COMMISSION

of the Commission staff and an authorization to the custodian of such

books and records to make them so available.

Renumbering of Rules Under Sections 15(b) and 15A and Amendment of

Rules 15Al2-1, 17a-5, and 19a3-1 to Conform

Prior to the Securities Acts Amendments of 1964, Section 15 (b) consisted of 4 unnumbered paragraphs. As a result of those amendments the Section now consists of 10 numbered paragraphs. Therefore, the Commission renumbered its rules under Section 15 (b) to

identify the specific numbered paragraph of that Section to which

each rule primarily relates. In addition, to avoid confusion the Commission renumbered the rules under Section 15A by changing the initial lower case letter "a" in the designation of each of those rules

to the upper case letter "A." The Commission also amended renumbered Rule 15Al2-1 and Rules 17a-5 and 19a3-1 so that the references in those rules to the renumbered rules under Section 15 (b)

reflect the new designation of such rules."

Amendment of Rule 100-2

An amendment to Rule 16a-2 adopted during the fiscal year, relating to the method of computing percentage ownership under Section 16(a) of the Act (the insider reporting provision), was

described in the 31st Annual Report."

Proposed Amendment of Rule 100-6

During the fiscal year the Commission invited public comments on

a proposed amendment of Rule 16a-6 to require the reporting of

certain additional transactions under Section 16(a) of the Act.80

These would include the acquisition or disposition of any put, call,

spread, straddle or other option or privilege, the pledge, including the

hypothecation, of a security or the release of a security from a pledge,

and the loan of a security or the repayment of such a loan.

Amendment of Rule 16b-3

Rule 161>-3exempts from Section 16 (b) of the Act (providing for

the recovery of "short swing" trading profits realized by insiders)

acquisitions of shares of stock (other than stock acquired upon the

exercise of an option, warrant or right) by an officer or director pursuant to a stock bonus, profit sharing, retirement, incentive, thrift,

savings or similar plan, if such plan meets the conditions specified in

the rule. The rule also exempts the acquisition of a "qualified" or a

"restricted" stock option pursuant to a qualified or a restricted stock

Securities Exchange Act Release No. 7700 (September 10, 1965).

See pp. 8O-8L

.. Securities Exchange Act Release No. 7794 (January 20, 1966).

•

•
THIRTY-SECOND ANNUAL REPORT 73

option plan, and 81 stock option pursuant to an "employee stock purchase plan" as defined in the rule.

An amendment was adopted during the fiscal year which under

certain conditions excludes from the phrase "exercise of an option,

warrant or right" an election to receive a cash award, payment of

which is to be deferred. until after termination of employment, in

stock.s1

Amendment of Rule 16b--6

Rule 16b-6 provides an exemption from Section 16 (b) for long-term

profits arising from the disposition in certain transactions of securities

within 6 months after the purchase of such securities through the

exercise of an option or similar right acquired more than 6 months before its exercise or pursuant to the terms of an employment contract

entered into more than 6 months before its exercise.

During the fiscal year, the Commission amended the rule to provide

that the exemption shall also be available where the security acquired

through the exercise of the option or right is disposed of in a

transaction involving the transfer of the issuer's assets to a third person which is controlled by the issuer of the securities to be received in

the exchange. In such case, "control" is to be determined by the

definition in Section 368(c) of the Internal Revenue Code of 1954.82

Amendments of Rules 16b--8 and 16b-9

During the fiscal year the Commission invited public comments on

proposed amendments to Rules 16b-8 and 16b-9,33and, after consideration of the comments received and further consideration of the matter, adopted amendments to those rules.34

The amended Rule 16b-8 provides that the acquisition and disposition of equity securities pursuant to the deposit or withdrawal of such

securities under a voting trust or deposit agreement are exempt from

the operation of Section 16 (b) of the Act, subject to certain conditions.

Itrequires as a condition to the exemption that substantially all of the

assets held under the voting trust or deposit agreement immediately

after the deposit or immediately prior to the withdrawal consist of

equity securities of the class deposited or withdrawn.

The amended Rule 16b-9 provides an exemption from Section 16 (b)

for the conversion of an equity security into another equity security

of the same issuer, provided that no more than 15 percent of the value

of the security received at the time of the conversion is received or paid

in cash or other property other than the convertible security given in

.. Securities Exchange Act Release No. 7776 (December 23, 1965).

a Securities Exchange Act Release No. 7717 (October 1, 1965)

• Securities Exchange Act Release No. 7750 (November 18, 1005) •

.. Securities Exchang'eAct Release No. 7826 (Febro.ary 17, 1966).

•
74 SECURITIES AND EXCHANGE COMMISSION

exchange. The amended rule does not apply to the exercise of an

option to purchase a security.

Proposed Amendments to Forms 3 and 4

During the fiscal year, the Commission announced that it had under

consideration the proposed revision of Forms 3 and 4 which are used

for reporting security holdings and transactions pursuant to Section

16 (a) of the Exchange Act, Section 17 (a) of the Public Utility Holding Company Act of 1935 and Section 30 (f) of the Investment Company Act of 1940.35 Form 3 is prescribed for initial statements of

beneficial ownership and Form 4 for reporting changes in such

ownership.

Among other things, the amended forms would require the reporting

person to list his Social Security or I.R.S. Employer Identification

number, in order to provide a ready means of identification in connection with the Commission's automatic data-processing program.

Amended Form 4 would provide that the price per share be reported

with respect to securities bought or sold for cash, and that, with respect

to securities purchased or sold otherwise than in the open market, the

name and address of the seller or purchaser be given.

Proposed Amendments to Form 8-K

Certain proposed amendments to Form 8-K which were described

in the 31st Annual Report 36 were still under consideration at the close

of the fiscal year.

Amendments to Forms 10, 12, 100K and 12-K

During the fiscal year, the Commission adopted certain amendments

to the instructions contained in Forms 10,12, lO-K and 12-K.31 In

general, the amendments relax previous requirements with respect to

the disclosure required regarding the number of holders of non-transferable employee stock options and increases and decreases in such

options.

Amendments to Forms 16 and 16-K

Certain proposed amendments to Forms 16 and 16-K were described

in the 31st Annual Report.3s During the fiscal year, the Commission

adopted the revised forms in the form in which they were published

for comment with the exception of one change relating to the manner

in which the registration statement or annual report should be signed."

as Securities Exchange Act Release No. 7795 (January 20,1966)

.. See pp. 81-82.

Securities Exchange Act Release No. 7799 (January 21,1966).

as See p. 83.

.. Securities Exchange Act Release No. 7713 (September 28,1965).

•

~
THIRTY-SECOND ANNUAL REPORT 75

The revised forms provide that the document shall be signed by all

of the voting trustees or by any lesser number which will legally bind

all the trustees. If it is signed by less than all of the trustees it must

include an opinion of counsel as to the authority of the person signing

to bind the others.

Proposed Revisions of Form X-17A-5 and Minimwn Audit Requirements

Proposed revisions of Form X-17A-5 (the form for the annual

financial report required to be filed by brokers and dealers under Rule

17a-5) and of the minimum audit requirements under Rule 17a-5

were announced by the Commission during the year.40 The proposed

changes of the form are designed to strengthen it by expanding and

clarifying the requirements, especially for the benefit of the smaller

broker-dealers who may have difficulty in preparing the present form.

The proposed revision of the minimum audit requirements would emphasize (1) that the purpose of the audit is to enable the accountant

to express an opinion on the effectiveness of the internal control and

procedures for safeguarding securities as well as on the financial questionnaire, and (2) that the requirements are a minimum only and

should not be interpreted as limiting or permitting the omission of any

other audit procedure which may be necessary under the circumstances .

.. Securities Exchange Act Release No. 7683 (August 23, 1965).
PART VI

ADMINISTRATION OF THE PURtle UTILITY BOLDING

eoMP ANY ACT OF 1935

In administering the Public Utility Holding Company Act of 1935

the Commission regulates interstate public-utility holding-company

systems engaged inthe electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other non-utility companies which

are subsidiaries of registered holding companies. Although the matters under the Act dealt with by the Commission and its staff embrace

a variety of intricate and complex questions of law and fact generally

involving more than one area of regulation, briefly there are three

principal regulatory areas. The first covers those provisions of the

Act, contained principally in Section 11 (b) (1), which require the

physical integration of public-utility companies and functionally related properties of holding-company systems and those provisions,

contained principally in Section 11 (b) (2), which require the simplification of intercorporate relationships and financial structures of holding-company systems. The second covers the financing operations of

registered holding companies and their subsidiaries, the acquisition

and disposition of securities and properties, and certain accounting

practices, servicing arrangements and intercompany transactions.

The third includes the exemptive provisions of the Act, the provisions

covering the status under the Act of persons and companies, and those

regulating the right of a person affiliated with a public-utility company to acquire securities resulting in a second such affiliation. Matters embraced within this last area of regulation come before the Commission and its staff frequently. Many such matters do not result in

formal proceedings and others are reflected in such proceedings only

in an indirect manner when they are related to issues principally under

one of the other areas of regulation.

COMPOSITION OF REGISTERED HOLDING-COMPANY SYSTEMS

At the close of the fiscal year there were 26 holding companies registered under the Act. Of these, 21 are included in the 18 holdingcompany systems which are herein classified as "active registered

holding-company systems," 3 of the 21 being subholding utility operat76
THIRTY-SECOND ANNUAL REPORT 77

ing companies in these active systems,' The remaining 5 registered

holding companies are of relatively small size and are excluded from

the active holding-company systems," In the 18 active systems there

are 88 electric and/or gas utility subsidiaries, 69 non-utility subsidiaries, and 35 inactive companies, or a total, including the parent holding companies and the subholding companies, of 213 system companies.

The table on page 78 shows the number of active holding companies

and the number of subsidiaries (classified as utility, non-utility, and inactive) in each of the active systems as of June 30,1966, and the aggregate assets of these systems, less valuation reserves, as of December 31, 1965.

SECTION 11 MATI'ERS IN REGISTERED BOLDING-COMPANY SYSTEMS

As reported previously," the Court of Appeals for the First Circuit

disagreed with the Commission's interpretation of the phrase "loss of

substantial economies" in Clause (A) of Section l1(b) (1) and reversed the order of the Commission directing New England Electric

System to divest itself of its gas properties. However, in a decision

rendered on May 16, 1966, the Supreme Court of the United States

sustained the Commission's position, and remanded the case to the

Court of Appeals for further consideration in the light of its decision.'

On June 14, 1966, the Court of Appeals vacated its previous order and

directed the filing of further briefs,"

On December 21, 1965, immediately after its acquisition of approximately 42 percent of the outstanding common stock of United Gas

Corporation, Pennzoil Company registered as a holding company

under the Act. United is a gas utility company engaged in the retail

distribution of natural gas principally in Louisiana, Mississippi and

Texas. Pennzoil directly, and United through subsidiary companies,

are also engaged in substantial non-utility businesses.

Pennzoil and United subsequently filed a plan pursuant to Section

l1(e) of the Act. Part I of the plan proposes the sale of United's

gas distribution system, and Part II proposes the consolidation of

1The three subholding companies are The Potomac Electric Co. and Monongahela Power Oo., utility subsidiaries of Allegheny Power System, Inc., and

Southwestern Electric Power Co., a utility subsidiary of Central and South

West Corp.

These holding companies are American Gas Co.; British American Utilities

Corp.; Kinzua Oil & Gas Corp., and its subholding company, Northwestern Pennsylvania Gas Corp.; and Standard Gas & Electric Co., which is in process of

dissolution.

31st Annual Report, pp. 86-87.

384 U.S. 176 (1966).

For the status of similar Section l1(b) (1) problems of other registered holdIng companies which have not been disposed of, see 31st .Annual Report, p. 87.

•

•

•

•
78 SECURITIES AND EXCHANGE COMMISSION

Classification of companies as of June 30, 1966

Aggregate Solely RegIs- Electric system

registered tered and/or Non- Inactive Total assets, less

Registered holding company holding holding gas utility com. com- valuationsystems com- operating utility sub- panies panies reserves, at panies com- sub- sidiaries Dec. 31,

panies sidiaries 11165

Name (thousands)

--- --- --- --- 1. Allegheny Power System, Inc _______________________ 1 2 9 6 2 20 $701,881

2. American Electric Power

3. A~~=~a~~arG8S----- 1 0 12 9 1 23 1,828,931

Company ________________ 1 0 2 , 0 7 1,080,548 ,. Central and South West Corporation ______________ I 1 , 1 1 8 857,805

5. Columbia Gas System,

1,560,00 6. c~ollI~t~(n\j'-atUiai"(jiiS-- 1 0 13 8 0 22

Company ________________ 1 0 , 2 0 7 960,623

7. Delmarva Power & Light Company ________________ 0 1 2 0 0 3 250,'57 8. Eastern Utilities Associates, 1 0 , 0 2 7 109,889

9. General Public Utilities Corporation ______________ 1 0 5 , 0 10 1,244, 118

10. Middie South Utilities, Inc _______________________ 1 0 6 1 3 11 1,040,63' 11. National Fuel Gas Com- pany _____________________ 1 0 3 3 0 7 266,527 12. New England Electric System ___________________ 1 0 13 1 0 15 780,018 13. Northeast Unllnes _________ 1 0 6 7 6 20 827,411 14. OhIOEdison Company _____ 0 1 3 0 0 4 780,302 15. Pennzoil comlJany _________ 1 0 1 22 19 43 1,179,316

16. Philadelphia lectrlc Power Company _________ 0 1 1 0 1 3 59,772 17. Southern Company, The ___ 1 0 5 2 0 8 1,945,168

18. Utah Power & Light Company ________________ 0 1 1 0 0 2 330,153

Subtotals _____________--- --- --- ------- 14 7 W 70 35 220 15,803,598

Less: Adjustment to eliminate

duplication ill count resultIng from 3 companies being subsidiaries In 2 systems and 2 com&taniesbeing snbsld- iaries 3 systems , -6 -1 -7 Add: Adjustment to Include

the assets of these 5 jointly owned subsldraries and to remove the parent com- panies' investments therein

which 81"eincluded In the system assets above --------.- 288,923

Yankee Atomic Electric

Power and Connecticut

Yankee Atomic Power are Included as utility subsidiaries of Nortbeast Utilities.

These companies 81"ealso stat- utory subsidiaries of NEES

but they have not been

Included above as such.

Add: Adjustment to include

total assets ofthese two com- panies, less valuation re- serves, and to eliminate

Northeast Utilities' and

NEES's Investment thereln __---------- ---------- ---------- ---------- ---------- -------- 93,677

--- ------- -------- Total companies and assets In active systems. 14 7 88 69 35 213 16,186,198

Represents the consolidated assets, less valuation reserves, of each eystem as reported to the Commission on Form U5S for the year 1ll65. , These five companies are Beechbottom Power Co. Inc. and Windsor Power Honse Coal Co., which are Indirect subsidianes of American Electric Power Co:~c. and Allegheny Power System, Inc.; Ohio

Valley Electric Corp. and Its subsidiary, Indiana-KentuCKY Electric Corp., which are owned 37.8 percent by American Electric Power Co., Inc., 16.5 percent by Ohio Edison Co., 12.5 percent by Allegheny Power

System, Inc., and 33.2percent by other companies; and The Arklahoma Corp., which is owned 32 percent by Central and South West Corp. eystem, M percent by Middle South Utilities, Inc. eystem and M percent by an electric utility company not assoc!Btedwith a registered system.

•

__________---------- _M ________

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

__________---------- ---------- ---------- ---------- --------

•
TEaRTY-SECOND ~AL REPORT 79

Pennzoil and United. Itis contemplated that after the consolidation,

which is subject to Commission approval, Pennzoil's registration as a

holding company will be terminated pursuant to Section 5 (d) of the

Act. By order dated June 27, 1966,6 the Commission generally authorized the proposed sale and reserved jurisdiction with respect to the

price to be paid by an acceptable purchaser for the retail distribution

system.

Eastern Utilities Associates, a registered holding company, and its

three public-utility subsidiary companies have filed a plan under Section 11 (e) of the Act to eliminate the public minority interests in the

subsidiary companies," Hearings on the plan have been held and at

the close of the fiscal year, the matter was pending for decision by the

Commission.

American Gas Company, a gas utility company and a registered

holding company, filed a plan for its liquidation and dissolution pursuant to Section 11 (e) of the Act," Part I of the plan proposes the

sale by American to a non-affiliate company of all of its properties

and assets except its holdings of 88 percent of the common stock of

American Gas of Wisconsin, Inc. Part of the net proceeds are to be

applied toward the retirement of its outstanding bonds and bank loans.

A hearing has been held on Part I, and, at the close of the fiscal year,

the matter was pending for decision by the Commission.

PROCEEDINGS WITH RESPECT TO ACQUISITIONS, SALES, AND OTHER

MATTERS

The Commission approved a proposal by Northeast Utilities (formorly Western Massachusetts Companies), an exempt holding company,

to acquire, pursuant to an invitation for tenders, 80 percent or more

of the outstanding common stocks of The Connecticut Light and

Power Company and The Hartford Electric Light Company," As a

result of the tender offer Northeast acquired over 98 percent of the

common stocks of each of these companies, and on June 30, 1966, it

registered as a holding company under the Act. Northeast also owns

100 percent of the outstanding common stock of Western Massachusetts

Electric Company."

Pennzoil Oompany, Holding Company Act Release No. 15518.

Ea8tern UtiZitie8 A88ocnate8,Holding Company Act Release No. 15453 (April

21, 1966).

8 American Ga8 Oompany, Holding Company Act Release No. 15509 (June 16,

1966).

Northea8t ttttuue«, Holding Company Act Release No. 15448 (April 13, 1966).

10 After the close of the fiscal year Northeast and its two Connecticut subsidiary

companies tiled a plan under Section l1(e) of the Act to eliminate the public

minority interests.

238-643--67----7

•

•

•
80 SECURITIES AND EXCHANGE COMMISSION

Eastern Gas and Fuel Associates, an exempt holding company which

owns all the outstanding stock of Boston Gas Company, has filed an

application to acquire, pursuant to an invitation for tenders, the stock

of Brockton Taunton Gas Company, a non-associate gas utility company. The management of Brockton Tauton objected to the proposed offer, and extensive hearings have been held on the application.

The hearings were concluded shortly after the close of the fiscal year,

and briefs are scheduled to be filed."

American Natural Gas Company and a newly organized whollyowned subsidiary company filed an application during the fiscal year

to acquire through the subsidiary substantially all the assets of Central

Indiana Gas Company, a non-associate public-utility company."

Hearings were held after the close of the fiscal year and briefs are

scheduled to be filed.

As reported previously," the Commission denied a petition by The

Alabama Electric Cooperative, Inc. for leave to intervene and for a

hearing with respect to a financing proposal by Alabama Power Company, an electric utility subsidiary company of The Southern Company, a registered holding company. The Cooperative sought review

and the Court of Appeals for the District of Columbia Circuit affirmed

the Commission's order." In a second case, the Commission authorized

the public sale of bonds and preferred stock by Alabama Power Company and again denied a request by the Cooperative for leave to intervene and for a hearing. The Court of Appeals for the Fifth Circuit

affirmed the Commission's order." The Commission denied a similar

petition by the Cooperative with respect to a third financing proposal

by Alabama Power Company,16and the Cooperative again filed a petition for review in the Court of Appeals for the Fifth Circuit,"

Subsequent to the close of the fiscal year, this petition was dismissed

by stipulation of the parties.

U Eastern Gas and Fuel Associates, Holding Company Act Release No. 15406

(February 17, 1966).

12 American Natural Gas Oompany, Holding Company Act Release No. 15517

(June 23,1966).

13 31st Annual Report, p. 93.

l< See The Alabama Oooperative,Inc. v. S.E.O., 353 F. 2d 905 (1965), cert. denied

383 U.S. 968 (1966).

111 Alabama Power 00., Holding Company Act Release No. 15287 (July 29,1965),

aflirmed Bub. nom. The Alabama Electric Oooperative, Inc. v, 8.E.O., 359 F. 2d

434 (1966).

U Alabama Power Oompany, Holding Company Act Release No. 15415 (February

28,1966).

17 The Alabama Electric Oooperative, Inc. v. S.B.O., No. 22858.
-- 

THIRTY-SECOND ANNUAL REPORT 81 

FINANCING OF ACllVE REGISTERED PUBLICUlTLlTY EOWlNG 


COMPANIES AND THEIR SUBSIDIARIES 


During the fiscal year 1966, 11active registered holding-company 

systemssold 36 issuesof long-term debt and capital stock aggregating 

$823 million lato the public and financial institutions for cash pursuant 

to authorizations granted by the Commissionunder Sections 6 and 7 of 

tbAct. All of thm issues were sold for the purpose of raising new 

capital. 

Thefollowing table shows the amounts and types of securities issued 

and sold for cashby registered holding companies and their subsidiary 

companies during 6scal1966 : lo 

Securities iaaued and sold for cash to the public andfinamial institutions by regialered 

holding companied and their subsidiaries, fMcn1 yem 1966 

(Inmllllonsl 

Holdlog mmpany system 1 Boa& 1 ---

%-I Pr;idd 1 ow

"Debt securities are computed at their principal amount, preferred stock at 

par value or at PrIce to the company fi no par stated, and common stock at otPering or subseriptlon price. 

The active registered holding-company systems which did not issue and sell 

low-term debt or eapltal ~tmk for ash were Delrnarva Power & I.ig.ht ('0.. Ensr. 

ern Utilities Associates. Northeast Ctllitles. Ohio Edi~on Oo., Penneoil Company, 

Pblladelphla Electric Power Co., and Utah Power & Llght Co. 
82 SECURITIES AND EXCHANGE COMMISSION

The table does not include securities issued and sold by subsidiary

companies to their parent holding companies, short-term notes sold to

banks, portfolio sales by any of the system companies, or securities

issued for stock or assets of non-affiliated companies. These issuances

and sales also require authorization by the Commission except (under

Section 6(b) of the Act) the issuance of notes having a maturity of

9 months or less where the aggregate amount does not exceed 5 percent

of the principal amount and par value of the other securities of the

company.

Competitive Bidding

All of the 36 issues of securities sold for cash in fiscal 1966, as shown

in the preceding table, were offered for competitive bidding pursuant

to the requirement of Rule 50 under the Act.

During the period from May 7, 1941, the effective date of Rule

50, to June 30, 1966, a total of 941 issues of securities with an aggregate

value of $14,336 million were sold at competitive bidding under

the rule. These totals compare with 233 issues of securities with

an aggregate value of $2,407 million which have been sold pursuant to orders of the Commission granting exceptions from the

competitive bidding requirements of the rule under paragraph (a) (5)

thereof.t" Of the total amount of securities sold pursuant to such

orders, 128 issues with a total value of $1.,924million were sold by the

issuers and the balance of 105 issues with a dollar value of $483 million

were portfolio sales. Of the 128 issues sold by the issuers, 70 were

in an amount from $1 to $5 million, 2 bond issues were in excess of

$100 million each," and 2 stock issues totaling $36 million were issued

in :fiscal 1966 to holders of convertible debentures and employee stock

options.

POLICY AS TO REFUNDABILITY OF BONDS

In accordance with its long-standing policy under the Act, the

Commission has continued to require that bonds and preferred stock

sold by registered holding companies and their subsidiaries he fully

refundable at the option of the issuer upon reasonable notice and

that any redemption premium be reasonable in amount. During

fiscal year 1966, no companies subject to the Act took advantage of

the refunding privilege.

Continuing studies made by the Commission's staff for fiscal year

1966 with respect to electric and gas utility bond issues sold at com-

"Paragraph (a) (5) of Rule 50 provides for exceptions from the competitive

bidding requirements of the rule where the Commission finds such bidding is

not necessary or appropriate under the particular circumstances of the individual

case.

11 Ohio Valley Electric Corp., a $360 million issue, and United Gas Corp., a

$116 million issue.
THIRTY-SECOND ANNUAL REPORT 83

petitive bidding, whether or not subject to the Act, indicated that the

presence or absence of a restriction on free refundability has not

affected the number of bids received by an issuer at competitive bidding. The 31st Annual Report, pages 91-92, contains a summary of

the results of an examination of all electric and gas utility bond issues

(including debentures) sold at competitive bidding 'between May 14,

1957, and June 30, 1965, by companies subject to the Act as well as

those not so subject. This study was extended to include fiscal year

1966.

During the period from May 14, 1957, to June 30, 1966, a total of

591 electric and gas utility bond issues, aggregating $13,770.9 million

principal amount, was offered at competitive bidding. These included

434 refundable issues totaling $8,582.5 million principal amount, and

157 non-refundable issues totaling $5,188.4. The latter issues were all

non-refundable for a period of 5 years, except one which was nonrefundable for 7 years. The refundable issues thus represented 73.4

percent of the total number of issues and 62.3 percent of principal

amount.v

The weighted average number of bids received was 4.80 on the refundable issues and 4.30 on the non-refundable issues. The median

number of bids was 5 on the refundable and 4 on the nonrefundable

issues." With respect to the success of the marketing of the bond

issues, an issue was considered to have been successfully marketed if

at least 95 pereent of the issue was sold at the syndicate price up to the

date of termination of the syndicate. On this basis, 63.8 percent of the

refundable issues and 61.1 percent of the non-refundable issues were

successful." In terms of principal amount, 59.3 percent of the refundable issues were successful, while 59.4 percent of the non-refundable

ones were successful." Extension of the comparison to include the

aggregate principal amount of all issues which were sold at the applicable syndicate prices up to the termination of the respective syndicates,

regardless of whether a particular issue met the definition of a successful marketing, indicates that 80.9 percent of the combined principal

.. During fiscal year 1966, 79 bond issues were offered, aggregating $2,220

million principal amount, consisting of 55 refundable issues totaling $1,302

million and 24 non-refundable issues totaling $918 million. The number of

refundable issues represented 69.6 percent of all the issues, while, in terms

of principal amount, the refundable issues accounted for 58.6 percent.

.. During fiscal 1966, the weighted average number of bids was 5.07 on the

refundables and 4.29 on the non-refundables, while the median number of bids

was 5 on the refundables and 5 on the non-refundables .

.. During fiscal 1966, 41.8 percent of the refundable Issues were successful,

as against 45.8percent for the non-refundables.

...During fiscal 1966, In terms of principal amounts, 36.3 percent of the refundables were successful, as against 49.8percent for the non-refundables.
84 SECURITIES AND EXCHANGE COMMISSION

amount of all the refundable issues was so sold, as compared with 80.0

percent for the non-refundable issues," While the overall statistics

for the period from May 14, 1957, to June 30,1966, support the Commission's policy, the staff will continue its studies of refundability

provisions, particularly in light of the inconsistent marketing results

in.fiscal year 1966 .

.. During fiscal year 1966, the applicable percentages were 63.0 percent of the

refundables and 71.9 percent for the non-refundables.
PART VII

PARTICIPATION OF THE COMMISSION IN CORPORATE REORGANIZATIONS UNDER CHAPTER X OF THE BANKRUPTCY ACT

The Commission's role under Chapter X of the Bankruptcy Act,

which provides a procedure for reorganizing corporations in the U.8.

district courts, differs from that under the various other statutes which

it administers. The Commission does not initiate Chapter X proceedings or hold its own hearings, and it has no authority to determine any

of the issues in such proceedings. The Commission participates in

proceedings under Chapter X in order to provide independent, expert

assistance to the courts, the participants, and investors in a highly

complex area of corporate law and finance. It pays special attention

to the interests of public security holders who may not otherwise be

represented. effectively.

Where the scheduled indebtedness of a debtor corporation exceeds

$3 million, Section 172 of Chapter X requires the judge, before approving any plan of reorganization, to submit it to the Commission for its

examination and report. If the indebtedness does not exceed $3 million, the judge may, if he deems it advisable to do so, submit the

plan to the Commission before deciding whether to approve it. Where

the Commission files a report, copies or a summary must be sent to all

security holders and creditors when they are asked to vote on the

plan. The Commission has no authority to veto or to require the

adoption of a plan of reorganization.

The Commission has not considered it necessary or appropriate to

participate in every Chapter X case. Apart from the excessive administrative burden, many of the cases involve only trade or bank creditors

and few public investors. The Commission seeks to participate principally in those proceedings in which a substantial public investor

interest is involved. However, the Commission may also participate

because an unfair plan has been or is about to be proposed, public

security holders are not represented adequately, the reorganization

proceedings are being conducted in violation of important provisions

of the Act, the facts indicate that the Commission can perform a useful

service, or the judge requests the Commission's participation.

The Commission has lawyers, accountants and financial analysts

in its New York, Chicago and San Francisco regional offices who are

85
86 SECURITIES AND EXCHANGE COMMISSION

engaged actively in Chapter X cases in which the Commission has

filed its appearance. Supervision and review of the regional offices'

Chapter X work is the responsibility of the Division of Corporate

Regulation of the Commission, which, through its Branch of Reorganization, also serves as a field officein cases arising in the Atlanta and

Washington, D.C. regional areas.

SUMMARY OF ACTIVITIES

In the fiscal year 1966,the Commission continued to maintain a high

level of activity under Chapter X. During the year, the Commission

entered its appearance in 13 new proceedings involving companies

with aggregate stated assets of $105million and aggregate indebtedness

of approximately $109 million. These proceedings involve corporations engaged in various businesses including, among others, the construction of residential dwellings, the manufacture of aluminum and

automotive products, investment in real estate and real estate mortgages, small loan and retail installment financing, motels and nursing

homes, asphalt refining, and a securities broker-dealer.

During the year the Commission was a party in a total of 102 reorganization proceedings, including the new proceedings. The stated

assets of the companies in all these proceedings totaled approximately

$634 million and their indebtedness approximately $581 million. The

proceedings were pending in district courts in 31 States and the District of Columbia, as follows: 14 in New York; 10 in Florida; 9 in

Oalifornia; 5 each in Arizona, Illinois, Kentucky, Michigan and New

Jersey; 4 each in North Carolina, Texas and Washington; 3 each in

Montana, Nevada and Pennsylvania; 2 each in District of Columbia,

Colorado, Kansas, Oklahoma and South Dakota; 1 each in Arkansas,

Connecticut, Idaho, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Ohio, Tennessee, Utah, Virginia and West Virginia. Proceedings involving 14 principal debtor corporations were closed during the

year. Thus, at the end of the fiscal year the Commission was participating in 88 reorganization proceedings.

JURISDICTIONAL, PROCEDURAL AND ADMINISTRATIVE HAlTERS

In Chapter X proceedings in which it participates, the Commission

seeks to have the courts apply the procedural and substantive safeguards to which all parties are entitled. The Commission also attempts to secure judicial uniformity in the construction of Chapter X

and the procedures thereunder.

In Luslc Oorporationd an involuntary petition under Chapter X

was filed within 4 months of a preferential transfer by the debtor of

1D. Ariz., No. B-5696-Tac.
THIRTY-SECOND ANNUAL REPORT 87

a substantial portion of its property as security for an antecedent debt.

The debtor, after the expiration of the 4 months, filed an answer admitting all allegations in the petition except the act of bankruptcy,

and at the same time filed a voluntary petition which the court approved. The preferred creditor filed an answer and a motion to dismiss

the involuntary petition. The Commission was of the view that the

court should not have approved the voluntary petition when a prior

involuntary petition was pending. The Commission suggested that

the court vacate its order of approval and nunc pro tunc approve the

involuntary petition.

As reported previously," in Joe Newcomer Finance Oompany,S the

court initially directed the debentureholders' committee, which had

solicited contributions from public investors, to return the funds to

the contributors and refused to allow committee members reimbursement of expenses from these funds. Subsequently, the court modified

its order to provide that the cash still on hand be returned, but that

the amounts already spent to pay expenses of the committee need not

be reimbursed.

In Hydrocarbon Ohemicals, Inc.,4 the Court of Appeals for the

Third Circuit 5 affirmed an order of the district court which disallowed

a priority for the claim of a creditor who had advanced funds to the

receiver in the prior Chapter XI proceeding. The court agreed with

the Commission that the creditor was not entitled to a priority since

the borrowing had not, as required by the Bankruptcy Act, specifically

been authorized by the referee. In another appeal involving this

debtor, the same court of appeals held that the Chapter X court lacked

jurisdiction to enjoin a foreclosure sale of property owned by a corporation, not in reorganization, in which the debtor held a majority

of the stock,"

In The Sire Plan Management Oorp.,7 the district court denied a

motion by the indenture trustees for the public investors who owned

fractional interests in real estate leased to the debtor to direct the

Chapter X trustees to surrender possession and control of these properties. The indenture trustees alleged that the filing of the Chapter

X petition had terminated the leases by reason of forfeiture provisions contained therein. On appeal the Commission argued for affirmance on the ground that a Chapter X court may protect public

investors by refusing to surrender properties in its custody to an inden31st Annual Report, p. 98.

D. Colo., No. 34452.

D. N.J., No. B-743-68.

G854F.2d288 (1965).

361 F. 2d 610 (C.A. 3,1966).

S.D.N.Y., No. 63-B-191.

•

•

•

•

~
88 SECURITIES AND EXCHANGE COMMISSION

ture trustee who has failed to perform fiduciary responsibilities in

connection with the properties. The court of appeals did not reach

the argument of the Commission but affirmed because on the facts it

appeared the indenture trustees were estopped from invoking the

power of termination in the leases,"

In Tayl<Yl'Iraernationai Oorp.,9 a claim was filed against the debtor

for over $4 million, based upon (a) the alleged failure of the debtor

to complete construction of five large apartment buildings, and (b)

the default of the debtor in making payments on the debtor's guaranty

of a minimum monthly distribution to the public limited partners

in these ventures. Although the claim was filed several months after

the expiration of the date set by the court for filing of claims, the court

approved the allowance of a compromise claim in the amount of

$1.1 million.

In both General Economics Syndicate, Inc. and G.E.O. Funding

Oorp./o involving two related debtors, the district court entered an

order, over Commission objection, substituting both reorganized companies as plaintiffs in suits brought by the trustees against the former

management. The Commission had opposed the motion on the ground

that Section 216 of Chapter X required that causes of action accruing

to the estate should be prosecuted by the trustee. The Commission contended that, if the reorganized companies were seeking to take over

the lawsuits for the purpose of discontinuing them, as suggested in

the record before the court, the proper procedure was to file a motion

for an order directing the trustees to discontinue the suits.

In Yale EXPress System, Inc~,l1the district court agreed with the

Commission that a set-off under Section 68a of the Bankruptcy Act

should not be permitted in Chapter X proceedings where it would

jeopardize the chance for a successful reorganization," The Court

of Appeals agreed in principle but remanded the proceeding to the

district court on other grounds,"

Prior to the inception of the Chapter X proceeding in respect of this

same debtor, a number of present and past holders of the debtor's stock

and 41A, percent convertible subordinated debentures had commenced

at least 16 actions in State and Federal courts against a group of defendants including the debtor, its auditors and underwriters.v In

8 David8onv. J08eph, 354 F. 2d 946 (C.A. 2, 1966).

S.D. Fla., No. 346-62-Bk-EC.

S.D.N.Y., No. 63-B-618.

U S.D.N.Y., No. 65-B-404.

1J 251 F. Supp. 447 (S.D.N.Y., 1965), and 245 F. Supp. 790 (S.D.N.Y., 1965).

1& B08tonlnsurance 00. v. Nogg, 362 F. 2d 111 (C.A. 2, 1966) .

.. Most of the Federal actions have been consolidated with Fi8cher v. Jnetz,

S.D.N.Y., No. 65 Civ. 787.

•

"
THIRTY-SECOND ANNUAL REPORT 89

these actions, allegedly brought on behalf of all persons who purchased these securities between certain dates, the plaintiffs assert that

the prospectus, by which $6.5 million principal amount of the debentures and 400,000 shares of stock issued by the debtor were sold to

the public in 1963, and subsequent statements and reports issued by

the debtor, were false and misleading. These suits against the debtor

were stayed by the reorganization court and the trustee has been substituted in place of the debtor.

The managing underwriters of the 1963 issue of debentures and

stock have applied to the reorganization court for leave to file crossclaims against the trustee, contending that if they are adjudged liable

in the alleged class actions, they will be entitled to indemnification

from the debtor pursuant to the underwriting agreement, and that

the underwriters may also be defrauded purchasers of the debtor's

securities and be entitled to recover if the plaintiffs in the class actions

recover. The Chapter X court issued an order fixing September 30,

1966, as the last date for the debentureholders and stockholders to

file proofs of claim with the trustee. Any person who is a member

of the class on whose behalf the suits have been brought must file such

a claim to preserve his right to participate in awards or settlements

against or by the debtor or its trustee,"

In Yuba OonsoZidatedIndustries, Inc.,lB several stockholders asserted claims for over $1.3 million based on their allegations that

the debtor, prior to the Chapter X proceeding, had converted their

common stock by preventing the sale of such stock. These stockholders initially had acquired the stock for investment. Relying on advice

from the Commission's staff, the debtor had instructed its transfer

agent not to transfer their stock because the transfer might result in

a sale in violation of the registration requirements of the Securities

Act of 1933. Under a compromise approved by the court the claimants were paid $150,000 in cash and were allowed claims as creditors

to the extent of $225,000.

In Food Town, Inc.,tT the Protective Committee for Preferred

Shareholders filed a proof of claim on behalf of all preferred stockholders alleging false statements and material omissions in the offering circular pursuant to which the stock was sold to the public under

Regulation A.. Because of the debtor's insolvency, the plan of reor-

:Ill A Federal grand jury in the Southern District of New York has indicted a

former vice president and the former chief accountant of the debtor for filing

false 1963 annual reports of the debtor and its subsidiaries with the New York

Stock Exchange and the Interstate Commerce Commission, and for mail fraud.

11 N.D. osue, No. 64103.

1'1 D. Md., No. 11070.
90 SECURITIES AND EXCHANGE COMMISSION

ganization, confirmed in 1960,18 provided no participation for stockholders as such. The compromise approved by the court provided a

modest sum for distribution, pro rata, to non-management preferred

shareholders who filed proofs of claim within the time specified by the

court, but in no event was any stockholder to receive more than the

price he had paid for his stock.

TRUSTEE'S INVESTIGATION

A complete accounting for the stewardship of corporate affairs by

the prior management is a requisite under Chapter X. One of the primary duties of the trustee is to make a thorough study of the debtor to

assure the discovery and collection of all assets of the estate, including

claims against officers, directors, or controlling persons who may have

mismanaged the debtor's affairs.

In Hydrocarbon Ohemicals, Inc.,tU the trustee instituted a plenary

action against the Bank of Commerce of New York and officers and

directors of the debtor and others to recover over $2 million, alleging

that the debtor was defrauded in the issuance of its stock.

In Oontinental Vending Machine Oorp.,20 the trustee brought suit

against the former management and directors of the debtor, its accountants and others, seeking $41 million in damages to the debtor.

The court authorized the trustee to compromise the lawsuit against one

of the defendants, Meadow Brook National Bank, for $150,000in cash

and the release by the bank of claims against the estate of about $1.8

million."

In Swan-Finch Oil Oorp.,2' the trustee received $175,000 in settlement of an action for alleged fraudulent transfer of certain assets of

the debtor by Lowell M. Birrell, the former president of the debtor.

The assets had been placed in receivership and upon settlement with

the transferee of the property the action was discontinued."

REPORTS ON PLANS OF REORGANIZATION

Generally, the Commission files a formal advisory report only in a

case involving a substantial public investor interest and presenting

significant problems. When no such formal report is filed, the Com18 See 26th Annual Report, pp. 157-158.

18 D. N.J., No. B-743--63.

.. E.D.N.Y., No. 63-B-663.

1I1 The debtor's former president and chairman of the board and others were

indicted by a Federal grand jury on charges of mail fraud and securities law

violations based upon alleged misappropriation of vast sums from the debtor for

their own use between 1958 and 1963

.. S.D.N.Y., No. 93046-

II For other settlements by the trustee in this proceeding, see 31st Annual

Report, p, 99; 30th Annual Report, p. 103; 29th Annual Report, p. 91.

•
THIRTY-SECOND ANNUAL REPORT 91

mission may state its views briefly by letter, and authorize its counsel

to make an oral or written presentation to amplify the Commission's

views. During this fiscal year the Commission published one formal

advisory report.v

In F. L. Jacobs 00.,25 the plan of reorganization provided for the

internal reorganization of the debtor and the continuation of the

debtor's business. Under the plan, the reorganized company was to

assume all debts and obligations incurred by the trustees during the

proceeding. The plan provided for a distribution of debentures and

cash to the preferred stockholders, with the present common stock to

remain outstanding. The preferred stockholders were to receive 6

percent debentures in the aggregate principal amount of $2,706,350,

such amount being equal to the involuntary liquidation preference of

$50 per share on the outstanding preferred stock exclusive of dividend

arrearages. Dividend arrears of about $1 million on the preferred

stock were to be paid in cash, substantially from the proceeds of a $1

million bank loan. The debentures were to mature in 15 years from

the date of issue and under the proposed indenture the reorganized

company would deposit 40 percent of its annual net income in a

sinking fund for retirement of debentures by purchase in the open

market, solicitation of tenders or redemption. No dividends could be

paid on the common stock until one-half of the principal amount of

debentures was redeemed or otherwise retired, or the $1 million bank

loan was paid in full, whichever occurred first.

The Commission concluded that the plan was feasible and would be

fair and equitable if it were amended to remove the dividend restriction on the common stock. 28 The court agreed with the Commission

and the trustees amended the plan and as so amended the plan was

approved and confirmed.

InMuskegon Motor Specialties 00.,27 reported previously," the district court, after rehearing, reaffirmed its previous finding that the

.. F. L. Jacobs Co., Corporate Reorganization Release No. 243 (.April 14, 1966).

The Commission conveyed its views to the court on nine other plans, on some

by oral statement of its counsel at the hearing, and on the others by letter and

supporting memoranda. Brookwood Countrv ou», N.D. ru, No. 59-B-1281;

Coast Investors, Inc., W.D. Wash., No. 53448; Cosmo Capital Inc., N.D. TIl. No.

63-B-3880; Intercontinental MotelS, Ltd., W.D. N.C., Nos. 1716-1723; Magnolia

Park, Inc., D. La., No. 9010; Mason Mortgage and Investment Corp., D. D.C.,

No. 98-60; Prudential Diversified Services, D. Mont., No. 63-75--B; Republic

Aluminum Oo.; N.D. Texas, No. Bk-3-507; Twas Independent Coffee Organization, Inc., S.D. Texas, No. 65--e-1.

.. E.D. Mich., No. 42235

.. F. L. Jacobs Oo.,Corporate Reorganization Release No. 243 (.April 14, 1966).

17 E.D. Mich., No. 47795.

os 31st Annual Report, p. 96-97.

•
92 SECURITIES AND EXCHANGE COMMISSION

debtor was insolvent and that stockholders were not entitled to participate under the plan. The Commission supported an appeal by the

preferred stockholders' committee. After the close of the fiscal year,

the Court of Appeals for the Sixth Circuit affirmed, holding that the

district court's determination of insolvency "was supported by substantial evidence and is not clearly erroneous." 29

In Rocky Mountain Ohemical Oorp.,ao the court approved a plan of

reorganization which provided for the sale of the assets to a new company formed by a stockholders' committee, which raised funds from

the sale of stock pursuant to a Regulation A offering. The debtor had

been found insolvent and the amount paid by the stockholders'

committee was sufficient only to pay the expenses of administration.

In Edward N. Siegler &: 00.,31 a registered broker-dealer which was

a member of the Midwest Stock Exchange filed a petition for reorganization in Cleveland, Ohio on May 23, 1966. With the assistance of the

Commission, an agreement was worked out which provided for the

satisfaction of the claims of all customers in full by the transfer of

the customers' accounts to Hartzmark & Co., Inc., a Cleveland brokerdealer. Hartzmark has undertaken to honor all of the customers' paid

security positions and free credit balances. This agreement was approved by the court on August 1, 1966. The assets held by the debtor

for customers were approximately $160,000 short of the amount required to satisfy these liabilities. The Midwest Stock Exchange

contributed $135,000 towards the deficiency and Hartzmark provided

the balance.

In Twentieth Oentury Foods OOrp.,82the Commission objected to the

petition of the trustee to sell the assets of a wholly-owned subsidiary

of the debtor, which constituted the major asset of the estate, unless a

sale were made pursuant to a plan of reorganization. The trustee

thereupon agreed to incorporate the offer to purchase the assets into a

proposed plan.

In TMT Trailer F67'ry Inc.,aa as reported previously," the Stockholders' Protective Committee appealed from the order of the district

court confirming an internal plan of reorganization. While the district court denied the objections of the Commission to consummation

of the plan pending ultimate determination of the issues on appeal, the

court accepted the suggestion of the Commission that the new com-

"366 F. 2d 522 (C.A. 6,19(6)

.. D. Idaho, No. 64-198.

11N.D. Ohio, No. 66-2957

.. E.D. Ark., No. B-61-B-6 .

.. S.D. Fla., No. 3659-M:

.. 31st Annual Report, p. 100. For previous reports on the plan of ;reorganizatlon, see also 30th Annual Report, p. 105 ; 29th Annual Report, pp. 91-92.

•

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THIRTY-SECOND ANNUAL REPORT 93

mon stock to be issued to creditors bear a legend disclosing the pendency of the appeal. After the close of the fiscal year, the court of

appeals rendered its decision affirming the order of the district court."

ACTIVITIES WITH REGARD TO ALWW ANCES

Every reorganization case ultimately presents the difficult problem

of determining the allowance of compensation to be paid to the

various parties for services rendered and for expenses incurred in the

proceeding. The Commission, which under Section 242 of the Bankruptcy Aot may not receive any allowance for the services it renders,

has sought to assist the courts in assuring economy of administration

and in allocating compensation equitably on the basis of the claimants'

contributions to the administration of estates and the formulation of

plans. During the fiscal year 197 applications for compensation

totaling about $6.9 million were reviewed,

InAutomatic Washer Oompfi:n,y,36 the court disagreed with the view

of the Commission th3Jt no compensation or reimbursement of expenses

should be allowed a fee applicant in connection with the preparation

of his application for an allowance or attendance at the hearing on his

application. The court said that the preparation of a fee application

and attendance at a hearing thereon in a Chapter X proceeding may

require a substantial amount of time, which would be considered in

ma.king an allowance for fees,"

In General Eoonomios Syndwate, Inc.,33 application for final allowances totaled $276,000, the Commission recommended $136,000, and the

district court allowed $160,500. On appeal, the court reduced the

allowances to the trustees and their counsel to the amount recommended Iby the Commission and agreed with the Commission that the

allowance to counsel for certain stockholders was so low as to constitute an abuse of discretion. Counsel for the stockholders had requested $25,000, the Oommission recommended $15,000, and the

district court awarded $3,500. The court of appeals allowed $10,000.39

The court of appeals stressed the necessity for attorneys who expect to

obtain an allowance to keep accurate time records.

InSwan-Finch Oil 007'p07'ation,40 20 applicants requested a total of

about $1,204,000 in final allowances. The Commission recommended a

total of about $760,000. The Commission's recommendations were

Protectwe Oommittee, eto. v. Anderson, 364 F. 2d 936 (O.A.. 5, 1966).

S.D. Iowa, No. 5-426 Bankruptcy.

IT Oontra: In re Solar Mfg. Oorp., 215 F. 2d 555, 561 (C.A.. 3, 1954) ; In re

OelotefIJ Oorp., 13 F. Supp.l011, 1013 (D. DeL, 1936).

S.D.N.Y., No. 63-B-{l18.

• In re General Economics Oorp., et al., 360 F. 2d 762 (O.A.. 2, 1966) •

.. S.D.N.Y., No. 93046.

•

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94 SECURITIES AND EXCHANGE COMMISSION

adopted by the court, except for allowance to the trustee. The latter

had requested $650,000, the Commission had recommended $450,000,

and the district court allowed $490,000.

In Tucker Oorporation,41 a proceeding in which the Commission

was not participating, the Commission informed the attorney for the

trustee that final allowances to four law firms had been approved by

the court on the basis of applications which had understated the

amounts previously received by these firms as interim allowances. All

four firms admitted having received interim payments which they did

not report to the court at the time they applied for final allowances, but

sought court approval to correct the record to show the amounts

actually received as interim allowances.

The Commission moved for leave to file its appearance in the

Chapter X proceeding and urged that the court order the return by

the four firms of the full amount of the excess payments received by

them, plus interest. The Commission also suggested that there should

be an inquiry as to the circumstances surrounding the overpayments.

The court denied the Commission's motion to enter the proceeding and

granted the motion of the four law firms to correct the record, finding

that the inaccuracies in the petitions for fees "were the result of inadvertent and honest mistakes." As a result, two of the firms actually

received payments in excess of the total originally requested.

INTERVENTION IN CHAPTER XI PROCEEDINGS

Chapter XI of the Bankruptcy Act provides a procedure by which

debtors can effect arrangements with respect to their unsecured debts

under court supervision. Where a proceeding is brought under that

chapter but the facts indicate that it should have been brought under

Chapter X, Section 328 of Chapter XI authorizes the Commission or

any other party in interest to make application to the court to dismiss

the Chapter XI proceeding unless the debtor's petition is amended to

comply with the requirements of Chapter X, or a creditors' petition

under Chapter X is filed.

InImperial "4(){}" National, Inc.,42 a company engaged in the business of developing and operating motels on a co-ownership basis proposed an arrangement under Chapter XI whereby the interests of the

850 common stockholders were to be eliminated and the estimated

several hundred holders of the $994,000of convertible debentures were

to receive 50 percent of the stock of the reorganized company. The

Commission's motion under Section 328 was based on the major adjustment of the rights of the debenture holders and the fact that the debtor

.. N.D. 111.,No. 48-B-530

.. D. N.J., No. B-656-65.

•
THIRTY-SECOND ANNUAL REPORT 95

was attempting a comprehensive reorganization under Chapter XI

rather than a simple composition of its unsecured debts. The court

agreed with the Commission's position and granted the motion stating,

among other things, that there was a need for the appointment of a

disinterested trustee with broad powers of investigation and for the

assistance of the Commission. The debtor subsequently amended its

petition to comply with Chapter X.

In American Guar«:nty Uor-poraiionc" reported previously," the

district court affirmed its previous denial, in 1963,45 of the Commission's Section 328 motion, which was again before the district court on

remand from the Court of Appeals for the First Circuit," The Commission advised the court of appeals, which had retained jurisdiction

over the matter, that it did not desire to press its appeal further and

the court of appeals dismissed the appeal.

In First Mortgage Oorp. of Stuart,41 the debtor, on the complaint of

the Florida Securities Commission, had been placed in a State court

receivership together with several other corporations alleged to be related to or affiliated with the debtor, including Tower Oredit (Iorporation. A few days thereafter the debtor filed a petition under Chapter

XI. This Commission's motion under Section 328, joined in by the

Florida Securities Commission and many attorneys representing

public investors, was denied without prejudice. Shortly thereafter the

court adjudicated the debtor bankrupt. Several months later an involuntary petition under Chapter X was filed by three purported

creditors against Tower,48 which the court dismissed on the ground

that the petitioning creditors did not have valid claims. After the

close of the fiscal year, three different creditors filed another involuntary Chapter X petition against Touter."

.. D. R.I., No. 63-B-17

.. 31st Annual Report, 'Pp. 10!-105; 29th Annual Report, PP. 95-96.

221 F. Supp. 961 (D. R.I., 1963) .

.. S.B.C. v. Burton, 342 F. 2d 782 (C.A.l, 1965)

•f S.D. Fla., No. 65-812-Bk-eF •

.. M.D. Fla., No. 66-81-Bk-T .

.. M.D. Fla., No. 66-171-Bk-T.

238-643--67----8

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•
PART vm

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, debentures and similar securities publicly offered for sale, 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 Act requires that indentures to be qualified include

specified provisions which provide means by which the rights of

holders of securities issued under such indentures may be protected and

enforced. These provisions relate to designated standards of eligibility and qualification of the corporate trustee to provide reasonable

financial responsibility and to minimize conflicting interests. The Act

outlaws exculpatory provisions formerly used to eliminate all liability

of the indenture trustee and imposes on the trustee, after default, the

duty to use the same degree of care and skill in the exercise of the

rights and powers vested in it by the indenture as a prudent man would

use in the conduct of his own affairs.

The provisions of the Trust Indenture Act are closely integrated

with the requirements of the Securities Act. Registration pursuant

to the Securities Aot of securities to be issued under a trust indenture

subject to the Trust Indenture Act is not permitted to become effective unless the indenture conforms to the requirements of the latter

Act, and necessary information as to the trustee and the indenture

must be contained in the registration statement. In the case of securities issued in exchange for other securities of the same issuer and

securities issued under a plan approved by a court or other proper

authority which, although exempted from the registration requirements of the Securities Act, are not exempted from the requirements

of the Trust Indenture Act, the obligor must file an application for the

qualification of the indenture, including a statement of the required

information concerning the eligibility and qualification of the trustee.

Number of indentures filed under the Trust Indenture Act of 1939

Number Aggregate

filed amount

~~:=Ki~~ ~ :===::::::::::::::::=::::::::=:===:::=::=::=:== 35 $489, 464, 799 260 7, 568, 387, 693

Total for dlspoIlSJ. ________________________________________________________ 2115 8, 057, 852, 392

Dl8positlon during 1lsclIl year: ~~:=a:edby-amendiiieiitiir-ViiihdraWii::==:=:=====:=====:=:===::=: 250 7,256,419,050

12 110,77" 639 Indentures pending June 30,1966 ____________________________________________ 33 690, 658, 703

Total __________________________________________________________________ 295 8, 057, 852, 392

96
THIRTY-SECOND ANNUAL REPORT

REVISION OF RULES. REGULATIONS AND FORMS

97

Adoption of Rule 7a-9

During the fiscal year, the Commission adopted a new Rule 7a-9

which provides for the filing with an application for the qualification

of an indenture under the Act, or as an amendment to such an application which has not become effective, of an amendment which will delay

the effectiveness of the application until the 20th day after a superseding amendment is filed, or until the Commission upon request

accelerates the effective date.' The purpose of the new rule is to

make it unnecessary to file successive delaying amendments to such

applications.

Amendmenlll to FormsT-I and T-2

Forms T-l and T-2 are prescribed for statements of eligibility and

qualification of corporations or individuals, respectively, designated

to act as trustees under indentures qualified under the Act. During the

fiscal year, the Commission amended these forms to clarify and simplify them in certain respects, to delete certain required information

deemed not essential to a determination of the eligibility and qualifications of the trustee, to require certain additional information deemed

significant, and to bring the forms in line with the format of the

Commission's more recently adopted forms under other acts. 2

1Trust Indenture Act Release No. 225 (September 20, 1965).

• Trust Indenture Act Release Nos. 225 and 226 (September 20,1965).
PART IX

ADMINISTRATION OF THE INVESTMENT COMPANY ACT

OF 1940

The Investment Company Act of 1940 provides for the registration

and regulation of companies primarily engaged in the business of

investing, reinvesting, owning, holding, or trading in securities. The

Act, among other things, requires disclosure of the financial condition

and investment policies of such companies; prohibits changing the

nature of their business or their investment policies without shareholder approval; regulates the means of custody of the companies'

assets; requires management contracts to be submitted to security

holders for approval; prohibits underwriters, investment bankers, and

brokers from constituting more than a minority of the directors of

such companies; and prohibits transactions between such companies

and their officers,directors, and affiliates except with approval of the

Commission. The Act also regulates the issuance of senior securities

and requires face-amount certificate companies to maintain reserves

adequate to meet maturity payments upon the certificates.

The securities of investment companies which are offered to the

public are also required to be registered under the Securities Act of

1933 and the companies must file periodic reports. Such companies

are also subject to the Commission's proxy rules and certain "insiders"

of closed-end companies are subject to reporting and "short swing"

trading rules. In November 1964, certain functions relating to investment companies were reallocated from the Division of Corporation

Finance to the Division of Corporate Regulation, including the administration of the disclosure requirements with respect to registration

statements filed by such companies under the Securities Act of 1933

and the administration of the periodic reporting, proxy solicitation

and other provisions of the Securities Exchange Act of 1934 with

respect to registered investment companies. On the basis of the experience since the transfer of functions, the resulting concentration of

responsibility in the Division of Corporate Regulation for the administration of the securities laws as they apply to investment companies

has been of material convenience to registrants and other persons

concerned with investment companies.

98
I F 


! 

THIRTY-SECOND ANNUAL REPORT 99 

COMPANIES REGISTERED UNDER THE ACT 

As of June 30, 1966, there were 775 investment companies registered under the Act, including 70 small business investment cornpan&. 

Of this total, 667 were "active" companies, wl~ose assets had an aggregate market value of approximately $49.8 billion. Compared with 

the corresponding totals at June 30, 1965, these figures represent an 

overall increase of approximately $5.2 billion in the market value of 

assets and an increase of 51 in the number of active registered companies. The asset increase is partly due to the appreciation in assets 

of previously registered companies and partly to the large increase 

in the number of registered companies. The classification of the registered wmpanies and the approximate market value of the assets in 

each category as of June 30, 1966, are shorn in the following table: 

l.lmwment -4md ......................... 408 S18.175 


Man ment olosed-md........................ 6, SBP 


~n~tTvestment t~st .-...................... la 4.013


Fao%emount wrti8oste ........................ 8 : 1,074 


~otal.................................... 6~7 108 775 a.811 


."lnacrlve' rarer~lor%btomdeoxn~rutlaewlrlrhasolIund30 IM,aerdln'thenrwessort~el~ailqtrldnled or me WI or have filed an ~p~~~car~ort ~urrua~~i IO seetior, b ir 01t1.e he, lor dercg#stral!on,or rhlch

hsv~3~;w190aone ma of exlswncs and rrm~tnreg~.romdoillg unt,lmch t~neaarhe ComruWonllNos

orders under Seerloo 810 formloattnp tbclrregls~rallou. 

The approximately $4billion of assets of the "active" registered unit 

investment trusts include approximately $3.5 billion of assets of registered unit investment trusts which invest in securities of other registered investment companies, substantially all of them management 

open-end wmpanies. 

During -the fiscal vear. 78 new com~anies. including 5 small business -" , - investment companies, registered under the Act while the registrations 

of 30 companies, including 3 small business investment wmpanies, 

were terminated. The classification of these companies is as follows: 

Rwbtersd Rqlstnrtion during the temloated 

&"~alYBar d"d"8 the I I hcal yea. 

Msnagement oven-end....................................................... 13 


Mana ementolored-end..................................................... 16 
 Unit fnupstment tru* ....................................................... 
 Bacbamaunt owate 
100 SECURITIES AND EXCHANGE COMMISSION

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of assets of investment companies over the years since the enactment of the Investment Company Act:

Number of inv68tment eumpani68 regi8tered under the Inv68tment Cumpany Act and

their 68timated aggregate a88et8, in round amounts, at the end of each Meal year,

1941 through 1966

Number of companies Estimated

aggregate FlscaJ year ended lune 30 market value Registered Registered Reglstratlon Registered of assets at at beginning dnrlng year tennlnated at end of end of year of year during year year (Inmllllons).

1941 _____________________________ 0 450 14 436 $2, 500 194:L ____________________________ 436 17 46 407 2,400 1943 _____________________________ 407 14 31 390 2,300 1944 _____________________________ 390 8 Z7 371 2,200 19411_____________________________ 371 14 19 366 3, 250 1946 _____________________________ 366 13 18 361 3,750 1947 _____________________________ 361 12 21 352 3,600 1948_____________________________ 352 18 11 359 3,825 1949_____________________________ 359 12 13 358 3,700 195(1-____________________________ 358 26 18 366 4, 700 1951 _____________________________ 366 12 10 368 5,600 1952 _____________________________ 368 13 14 367 6,800 1953_____________________________ 367 17 15 369 7,000 19M _____________________________ 369 20 Ii 384 8,700 1955_____________________________ 1956_____________________________ 384 37 34 387 12, 000

1957_____________________________ 387 46 34 399 14, 000 399 49 16 432 15,000 1953_____________________________ 432 42 21 453 17,000 1959_____________________________ 453 70 11 512 20,000 1960. ____________________________ 512 67 9 570 23,500 1961_____________________________ 1962_____________________________ 1170 118 25 663 29,000

663 97 33 7Z7 Z7,300 1963_____________________________ 7Z7 48 48 7Z7 36, 000 1964 _____________________________ 7Z7 52 48 731 41,600 1965 _____________________________ 731 50 54 m 44, 600 1966 _____________________________ 7Z7 78 30 775 49,800

The Increase In aggregate llSSets reIloots the sale of new securities as well as capital appreclatlon.

INSPECl'ION AND INVESTIGATION PROGRAM

During fiscal year 1966, 152 investment company inspections were

completed pursuant to Section 31 (b) of the Act. Many of the inspections disclosed violations not only of the Investment Company

Act but also of other statutes administered by the Commission. A

number of the violations uncovered during routine inspections were

serious in nature. They included failure to observe the procedures

which had been established for safekeeping of the company's assets,

and failure to disclose the true sources of periodic income dividends and

capital gain distributions paid to shareholders. The inspections also

disclosed several situations in which the procedures for pricing shares

for purposes of purchase or redemption did not conform with statutory

requirements or with the procedure set forth in the company's prospectus. The inspections further uncovered a number of instances

in which self-dealing transactions had been effected by affiliated

persons in violation of Section 1'7of the Act. .

•
THIRTY-SECOND ANNUAL REPORT 101

Largely as an outgrowth of information obtained during routine

inspections, 17 private investigations were commenced during the fiscal year to develop the facts concerning what appeared to be serious

violations of the statutes administered by the Commission.

On the basis of the facts obtained in private investigations, three

civil actions were instituted by the Commission during the fiscal year

1966. One action sought, among other things, to enjoin an investment company and its officers and agents from issuing, selling,

purchasing, or redeeming any securities while it failed to maintain

and keep current its books and records. 1 The action further sought

appointment of a conservator for the company's assets to protect the

interests of shareholders. Inanother action the Commission obtained

a preliminary injunction restraining a company and its wholly-owned

subsidiaries from doing business as unregistered investment companies

in violation of the Act.2 This action further seeks to enjoin affiliated persons from engaging in transactions which, had the company

been registered, would have been prohibited by Section 17(a) of the

Act. The complaint also alleges that certain defendants caused the

filing of false reports with the Commission. In the third action the

Commission seeks to enjoin certain affiliated persons of a registered

investment company from effecting self-dealing transactions with the

investment company, and alleges gross abuse of trust and gross misconduct within the meaning of Section 36 of the Act.s

As a result of an investigation by the Commission, Herman I.

Weiner, former secretary of Revere Fund, Inc., a registered investment company, was charged in a criminal information in the Eastern

District of Pennsylvania with conversion and embezzlement of the

company's assets and transmitting a materially false and misleading

letter to the Commission with respect to his activities. Weiner entered a plea of nolo contendere, and is to be sentenced at a later

date.4

As a result of the Commission's inspection and investigation program, approximately $316,000 was returned to investors either directly

or indirectly during the 1966 fiscal year. The major portion of

this recovery resulted from a court-approved settlement inan injunctive proceeding instituted by the Commission, involving Electro1H.E.O.v, The First Hartfora EfDchangeFuna, Civ. Act. No. 66-433 (S.D.N.Y.,

January 25,1966).

HoE.O.v. B P National OOrf)oration et al., Civ. Act. No. 66--512 (S.D.N.Y.,

February 21,1966).

HoE.O.v, Quing N. Wong et al., Civ. Act. No. 65-375 (Dist. Puerto Rico,

August 81,1965).

4 See S.E.C. Litigation Release No. 3460 (March 17,1966).

• ~

•
102 SECURITIES AND EXCHANGE COMMISSION

Science Investors, Tnc." Under the terms of the settlement, a former

director of this investment company agreed to pay $225,000 to the

company. The injunctive action had stemmed largely from the director's personal transactions in a security which was also included in

the company's portfolio. In addition, the Commission settled several matters out of court with resulting benefits to investors.

ANNUAL REPORTING BY MANAGEMENT INVESTMENT COMPANIES

During the fiscal year, the initial annual reports to the Commission

by registered management investment companies on the revised reporting form, captioned N-1R, were utilized by the Division of Corporate Regulation in the examination of investment company matters,

including the program of inspection and enforment." The reports

have been of substantial assistance in the processing of investment

company filings, the inspection of investment companies, and the disclosure of violations of the Act. They provide considerable savings

in time and expense by making available information relating to individual companies which could otherwise only be obtained through

more frequent and detailed inspections. The reports also enable the

Commission to develop information on various industry practices

as an important aid to the exercise of the Commission's responsibilities

under the statute.

FILINGS REVIEWED

As previously noted, investment companies offering their shares

for sale to the public must register them under the Securities Act of

1933. The companies themselves, of course, must register under the

Investment Company Act. The registration statements of investment companies filed pursuant to the Securities Act are reviewed for

compliance with that Act and the Investment Company Act. The

Commission's rules promulgated under the Investment Company

Act generally require that the basic information contained in notifications of registration and in registration statements of investment

companies filed under the Investment Company Act be kept current

through periodic and other reports. In addition, proxy soliciting

material filed by investment companies is reviewed for compliance

with the Commission's proxy rules. The following table sets forth

the nature and volume of filings processed during the past fiscal year:

a S.E.C. v, Ling et at; No. CA-~7 (N.D. Tex.) August 3, 1965 (final order

approving settlement).

The adoption by the Commission of Form N-1R and the primary purposes

of the revisions of the form are described in the 31st Annual Report, pp. 111-112.

•
TIDRTY-SECOND ANNUAL REPORT 103

Pending Pending Type of material June 30, Filed Processed June 30,

1965 1966

Registration statements and post-etrective amendments under the Securities Act 0 1933______________________ 72 974 983 63 Beglstrations under the Investment Company Act of 1940__________________________________________________ 28 71 58 41 Proxy-sollcitmg materiaL ______________________________ .Annual reports _________________________________________ 17 421 408 30

Quarterly 326 601 315 612 reports ______________________________________ 39 283 255 67

Periodic reports to shareholders contaming financial statements ___________________________________________ 599 1,565 1,459 705 Copies ofsales lIterature ________________________________ 636 2,166 2,169 633

APPLICATIONS AND PROCEEDINGS

Under Section 6(c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt

any person, security, or transaction from any provision of the Act

if and to the extent such exemption is necessary or appropriate

in the public interest and consistent with the protection of investors

and the purposes fairly intended by the policy and provisions of the

Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), 17(d), and

23 (c), contain specific provisions and standards pursuant to which

the Commission may grant exemptions from particular sections of the

Act or may approve certain types of transactions. Also, under certain

provisions of Sections 2, 3, and 8, the Commission may determine

the status of persons and companies under the Act. One of the principal activities of the Commission in its regulation of investment

companies is the consideration of applications for orders under the

sections referred to.

During the fiscal year, 213 applications .filedunder various sections

of the Act were before the Commission, and 183 applications were

disposed of. As of the end of the year, 100 applications were pending. The sections of the Act with which these applications were concerned and the disposition of applications are shown in the following

table:

Applications filed with or acted upon by the Commission under the Investment Company Act during the fiscal year ended June 30, 1966

o

3

7

o

o

1

00

Pend- PendSections Subject ing Filed Closed ing July I, June 30,

1965 1966

-- -- 2________________Dellnltion of controlled person ______________________ 6 0 6 3 and 6__________Status and exemptron _______________________________.12 51 41 22 7~d)_____________Registration of foreign investment companies. _______ 0 5 2 3 8 0----- _________Termination of registration __________________________ 22 38 27 33 9,10, 16__________Regulation of afliliation of direetors, officers, em- ployees, investment advisers, underwriters, and

3 othera.; ___________________________________________1 1

12,13,14(a),15 ___ Regulation of functions and activities ofinvestment

2 38 33 companies ________________________________________ 11,26 ____________Regulation orsecurtnes exchange offers and reorgani- 0 2 zation matters ____________________________________ 17_______________ 2 0

Regulation of transactions with aflillated person. ____ .20 48 47 21

18,19,21,22,23 ___ Requirements as to capital structure, loans, dtstrr27_______________ butions and redemptions and related matters ______ 4 29 23 1 Periodic payment plans _____________________________ 0 0 0 28. ______________Regulation of face-amount cerilflcate companies _____ .1 1 1

TotaL ____ -- -- ----------------------------------------- ------.- ----- 70 213 183 1

-These figures represent an adjustment oflast year's ligures.

~
104 SECURITIES AND EXCHANGE COMMISSION

Some of the more significant matters in which applications were

considered are summarized below:

On March 9,1966 the Commission, with one Commissioner dissenting, issued its opinion and order granting in part, and denying in

part, an application filed pursuant to Section 6(c) of the Act by First

National City Bank of New York requesting exemptions from certain

provisions of the Act, principally Sections 10(b) (3), 10(c), and 10

(d) (2), with respect to a Commingled Investment Account ("Account") which the Bank proposed to establish and to register under

the Act as a diversified open-end management investment company,"

The Bank's application proposed that the Account would operate

as a collective investment fund pursuant to regulations of the Comptroller of the Currency and accept investments of $10,000 or more

pursuant to agreements between inv.estors and the Bank. No sales

load would be imposed. The Bank would serve as investment adviser

for the Account, subject to investor approval. The operation of the

Account was to be subject to the supervision of a Committee of at

least three persons, at least one of whom would be unaffiliated with

the Bank. The Commission denied an exemption from Section 10

(d) (2) of the Act. This exemption would have permitted all but one

of the members of the Committee, which would be equivalent to a board

of directors, to be affiliated with the Bank. However, the Commission granted exemptions from Sections 10(b) (2), 10(b) (3), and 10(c)

of the Act, which provide in substance that the majority of the board

of directors of a registered investment company may not be (a)

affiliated with the principal underwriter of the investment company,

(b) affiliated with an investment banker, or (c) officersor directors of

anyone bank. The effect of the exemptions granted by the Commission was thus to permit a majority of the Committee to consist of

officers or directors of, or persons otherwise affiliated with, the Bank.

The Account remains subject to Section 10(a) of the Act, under which

not more than 60 percent of the members of the Committee may consist of persons who are affiliated with the Bank.

In granting the exemptions, the Commission stressed, among other

things, that the Account differed substantially from the bank-dominated investment companies with which Congress was concerned in

enacting Section 10(c) and that there were substantial safeguards

Investment Company Act Release No. 4538, corrected March 14, 1966, Investment Company Act Release No. 4538a. Petition for rehearing denied, Investment

Company Act Release No. 4563 (April 6, 1966).

•
TIDRTY-SECOND ANNUAL REPORT 105

against conflicts of interest which could arise as a result of the Bank's

commercial banking activities.

Commissioner Budge, dissenting from the Commission's decision,

stated that the granting of the exemptions was contrary to the expressed

statutory prohibition against bank domination of investment companies. He referred to the statutory history which indicated

conflicts and potential conflicts of interest between a bank and the

investment company it dominates. He expressed the view that if the

restrictions of Section 10(c) are to be avoided, this should be accomplished through legislation and not through ad hoc exemptions, particularly when, as here, the Commission and the bank regulatory agencies have adopted contrary interpretations as to the very nature of the

proposed investment company.

The National Association of Securities Dealers, Inc. which appeared in opposition to the Bank's application, has filed a petition

to review the Commission's order in the Court of Appeals for the

District of Columbia Circuit. The Investment Company Institute,

which also opposed the application, filed a complaint in the District

Court for the District of Columbia against the Comptroller of the

Currency seeking, among other things, to enjoin his approval of the

Bank's plan.

On May 6, 1966, the Commission released its Findings and Opinions

and Order in Electric Bond and Share Oompany.8 This opinion

denied the application of Electric Bond and Share Company

("Bond and Share") for an order pursuant to Section 8(f) of the Act

declaring that it had ceased to be an investment company and also

denied Bond and Share's alternative applications pursuant to Section

3(b) (2) of the Act for an order declaring that it is not primarily engaged in the business of an investment company and, pursuant to Seetion 6 (c) of the Act, for an order exempting it from the Act. The

Commission also denied the application of American & Foreign Power

Company Inc. ("Foreign Power"), a majority-owned subsidiary of

Bond and Share, for an order pursuant to Section 3(b) (2) of the Act

declaring that Foreign Power is not an investment company, or

alternatively, for an order exempting it from the Act pursuant to

Section 6(c).

In rejecting the applications, the Commission stated that obligations of foreign countries, which Foreign Power had received in

exchange for various of its foreign utility interests, are investment

securities as that term is used in the Act. Such securities constituted over 80 percent of Foreign Power's assets from which it derived

about 76 percent of its income. Therefore, the Commission held that

•Investment Company Act Release No. 4590.
106 SECURITIES AND EXCHANGE COMMISSION

Foreign Power was no longer primarily engaged in utility operations and that it was not entitled to exemption from the Act. In

addition, the Commission held that Bond and Share was not entitled

to exemption from the Act since about two-thirds of its assets from

which it derived about 60 percent of its income consisted of marketable investment securities and securities of Foreign Power.

On May 11, 1966, the Commission issued its opinion and order

denying motions to dismiss an application filed pursuant to Section

2(a) (9) of the Act by Randolph Phillips, a stockholder of four

investment companies for which Investors Diversified Services, Inc.

("IDS") serves as investment adviser and principal underwriter, and

denying the control determinations sought by Phillips," In refusing

to dismiss the application, the Commission, adhering to the conclusions

reached by it in Fwndamental Investors, Ino./o held that a shareholder

of a registered investment company is an "interested person" within

the meaning of Section 2 (a) (9) of the Act and entitled to file with

the Commission an application for an order that, contrary to the

presumptions contained in that section, a person or group of persons

are in control of an investment company's adviser and the company

controlling such adviser, and that the Commission may make a

determination relating to a period preceding such determination.

Phillips' application alleged that in 1962Bertin C. Gamble and two

affiliated companies had acquired control of Alleghany Corporation,

which controls IDS, and of IDS. The Commission concluded,

however, that the presumption under Section 2(a) (9) of the Act

that the Gamble group, as the owner of less than 25 percent of

Alleghany's stock, did not control that company had not been rebutted.

In October 1962, John D. Murchison and Clint W. Murchison, Jr.

and their associates, who had gained control of Alleghany in a 1961

proxy contest, sold 15 percent of the voting stock of Alleghany to

the Gamble group and granted that group a right to purchase an

additional 15-20 percent and to assume 2 seats on the 10-man board

of directors. However, the Gamble group failed to reach an accord

with Alan P. Kirby, Sr., a 33 percent stockholder of Alleghany who

was engaged in efforts to regain control of Alleghany, and its contemplated succession to the Murchison group's holdings and positions

did not materialize. The Commission also found that the record

did not establish the existence of a claimed secret agreement between

the Murchison and Gamble groups to transfer control to the latter or

show that certain actions of Alleghany and IDS were attributable to

9InvestmenJt Company Act Release No. 4595.

10 Investment Company Act Release No. 3596 (December 27,1962).
THIRTY-SECOND ANNUAL REPORT 107

the controlling influence of the Gamble group. Phillips has filed a

petition for review in the Court of Appeals for the Second Circuit.

At the close of the fiscal year there were pending for determination

by the Commission two proceedings involving the issuance of stock

options. In one of these cases, State Bond & Mortgage Company,

a registered face-amount certificate company, was seeking authorization for certain stock options theretofore issued, and to be issued,

under a stock option plan for its officers and employees.u Section

18 (j) of the Act prohibits a face-amount certificate company from

issuing any security, except in accordance with Commission authorization thereunder, other than (i) a face-amount cer:tificate, (ii) a

non-preference voting common stock, and (iii) short term, privately

issued indebtedness. It also prohibits the issuance of any securities

except for cash or securities.

In the other proceeding, the Variable Annuity Life Insurance Company of America ("VALIC"), a registered open-end management

investment company, sought an exemption under Section 6 (c) of the

Act for the proposed issuance of stock options under a stock option

plan for its officers and employees." Section 18(d) of the Act, with

certain inapplicable exceptions, prohibits a registered management

investment company from issuing any warrant or right to subscribe

to a security of which it is the issuer. Section 22(g) of the Act as

applicable prohibits a registered open-end investment company from

issuing any of its securities for services or for property other than

cash or securities. Subsequent to the close of the fiscal year, the Commission denied both applications."

REVISION OF RULES, REGULATIONS AND FORMS

Proposed Rule l1a-1

During the fiscal year, the Commission invited public comments on

proposed Rule l'7a-'7 to exempt certain purchase or sale transactions

between affiliated registered investment companies from the provisions

of Section 17(a) of the Act.14 That section prohibits an affiliated

person of a registered investment company or an affiliated person of

such a person, acting as principal, from knowingly selling to or purchasing from the investment company or a company controlled by the

investment company any security or other property, unless the ComnInvestment Company Act Release No. 4305 (July 20, 1965).

12 Investment Company Act Release No. 4307 (July 21,1965)

.. State Bona t£ Mortgage Company, Investment Company Act Release No. 4685

(August 25, 1966) j Variable Annuity Life Insurance Companyof America, Invest.

ment Company Act Release No. 4686 (August 25,1966).

11 Investment Company Act Release No. 4604 (May 20,1966).

•
108 SECURITIES A..'ID EXCHANGE COMMISSION

mission grants an exemption. The proposed rule would exempt transactions involving a security traded on a national securities exchange

and effected at a price determined in accordance with the provisions

of the rule. The exemption would be available only where the transaction is consistent with the policy of each registered investment company, as recited in its registration statement and reports filed under

the Act, and where no brokerage commission, fee or other remuneration is paid in connection with the transaction, except for customary

transfer fees.
PART X

ADMINISTRATION OF THE INVESTMENT ADVISERS ACf

OF 1940

The Investment Advisers Act of 1940 established a pattern of

regulation of investment advisers similar to that contained in the

Securities Exchange Act with respect to the conduct of broker-dealers.

With certain specific exceptions, the Act requires persons engaged for

compensation in the business of advising others with respect to securities to register with the Commission and to conform to statutory

standards designed to protect the public interest. The Act prohibits

fraudulent conduct, and authorizes the Commission to define, and

prescribe means reasonably designed to prevent fraudulent, deceptive

or manipulative acts or practices. Pursuant to such authority, Rule

206(4)-1 proscribes, among other things, the use of testimonials, circumscribes permissible references to past recommendations and the

use of graphs and charts, and prohibits the use of false or misleading

statements. Under Rule 206(4)-2, an investment adviser who has

custody or possession of the funds or securities of clients must segregate them, maintain them in the manner provided in the rule and

comply with certain other conditions.

The Act prohibits an investment adviser from basing his compensation upon a share of the capital gains or appreciation of his

client's funds, and prohibits the assignment of investment advisory

contracts without the client's consent. Advisers are also required to

make, keep and preserve books and records in accordance with the

Commission's rules and the Commission is empowered to conduct

inspections of such books and records.

Investment advisers who violate any of the provisions of the Act

or of the rules thereunder are subject to appropriate administrative,

civil or criminal sanctions. The Act provides, in Section 203 (d) ,

that the Commission shall deny, revoke, or suspend for not more than

12 months, the registration of an investment adviser if it finds that

such action is in the public interest and that the investment adviser

or any partner, officer, director or controlling or controlled person

of the investment adviser is subject to a specified disqualification.

These disqualifications include wilful misstatements in an application

or report filed with the Commission, the existence of a conviction or

injunction based on or related to specified types of misconduct, wilful

109
110 SECURITIES AND EXCHANGE COMMISSION

violation of any provisions of the Securities Act, Securities Exchange

Act or Investment Advisers Act or any rule or regulation thereunder,

and aiding and abetting any other person's violation of such provisions,

rules or regulations. In addition, the Commission may seek injunctions to restrain violations of the Act and may recommend criminal

prosecution by the Department of Justice for fraudulent misconduct

or wilful violation of the Act or the Commission's ru1es thereunder.

Registration Statistics

At the close of the fiscal year 1,633 investment advisers were registered with the Commission. The following tabulation contains other

statistics relating to registrations and applications for registration:

Investment adviser registrationa-jiscalyear 1966

Effective registrations at close of preceding year 1, 600

Applications pending at close of preceding year_________________________ 23

Applications filed during year________________________________________ 278

Registrations cancelled or withdrawn during year______________________ 233

Registrations denied or revoked during year____________________________ 2

Applications withdrawn during year__________________________________ 7

Applications pending at end of year___________________________________ 26

Inspection Program

During fiscal 1966, 251 inspections of investment advisers were completed by the Commission's staff (as compared to 260 the preceding

year). These inspections disclosed a total of 151 indicated violations

of the Act and the rules and regulations promulgated thereunder, as

reflected in the following table:

Violations noted in investment adviser inspection reports-fiscaZ year 1966

]Books and records deficient___________________________________________ 44

Registration application inaceurate___________________________________ 44

False, misleading, or otherwise prohibited advertising__________________ 20

Improper "hedge clause" B_____________________________________________ 23

Failure to provide for non-assignability in investment advisory eontraet..., 11 Others 9

Total indicated violatlons______________________________________ 151

"Hedge clauses" used in literature distributed by investment advisers generally state

in substance that the informadon fnrnished is obtained from sources believed to be reliable, but that no assurance can be given as to its accuracy. A clause of this nature may

be improper where the recipient may be led to believe that he has waived any right of

action against the investment adviser.

Administrative Proceedings

Set forth below 'are statistics with respect to administrative proceedings under the Investment Advisers Act which were pending

during fiscal year 1966 :

•
TIDRTY-SECOND ANNUAL REPORT 111

Proceedings pending at beginning of fiscal year:

Against investment adviser registrants____________________________ 2

Against investment adviser applicants____________________________ 1

Total 3

Proceedings instituted during fiscal year:

Against investment adviser registrants____________________________ 8

Against investment adviser applicants____________________________ 0

Total 8

Total proceedings current during fiscal year__________________ 11

Disposition of proceedings:

Registra tion revoked_________ __ 1

Registration denied______________________________________________ 1

Members of firm required to dissociate themselves from firm for period of time___________________________________________________ 1

Total 3

Proceedings pending at end of fiscal year:

Against investment adviser registrants____________________________ 8

Against investment adviser applicants____________________________ 0

Total 8

Total proceedings accounted for____________________________ 11

REVISION OF RULES, REGULATIONS AND FORMS

Amendment of Rule 204-2 (a)

During the fiscal year the Commission invited comments on a proposed amendment of Rule 204-2 (a) to require investment advisers to

maintain records containing specified information concerning securities transactions in which they or certain of their personnel have any

beneficial interest. Shortly after the end of the year the amendment

was adopted.' The background and significance of this amendment

are discussed in Part I of this Report. 2

1Investment Advisers Act Release No. 203 (August 11,1966),

See pp. 7-8, 8upra,

288-643-66-9

•
PART XI

OTHER ACTIVITIES OF THE COMMISSION

CIVIL liTIGATION

The several statutes administered by the Commission authorize the

Commission to seek injunctions against continuing or threatened violations of such statutes. Such violations may involve a wide range of

illegal practices, including the purchase or sale of securities by fraud,

and the sale of securities without compliance with the registration requirements of the Securities Act. The Commission also participates

in various other types of proceedings, including appearances as amicus

curiae in litigation between private parties where it is important that

its views regarding the interpretation of the statutory provisions involved be furnished to the court, corporate reorganization proceedings

under Chapter X of the Bankruptcy Act, and various types of civil

appellate proceedings.

Tables 10 and 12 in the appendix to this report contain statistics

with respect to the various types of civil proceedings in which the Commission participated prior to and during the fiscal year. A summary

of injunction proceedings instituted by the Commission since 1934

may be found in Table 11. This section describes a few of the more

noteworthy cases which were pending during the fiscal year, not including, however, cases arising under the Public Utility Holding

Company Act or Chapter X of the Bankruptcy Act; such cases are

discussed in the sections of this report dealing with those statutes.

In an important decision involving the scope of the "insurance" exemptions to the disclosure and regulatory provisions of the Securities

Act of 1933 and the Investment Company Act of 1940, the Court of

Appeals for the District of Columbia Circuit, in 8E.0. v. United

Benefit Life Insurance 00,1 affirming the decision of the district court,"

held that the "Flexible Fund Annuity" offered and sold by the United

Benefit Life Insurance Company is a contract of insurance and therefore exempt from the coverage of the 1933 and 194:0Acts by virtue of

the statutory exemptions relating to insurance and annuities.

The Commission had urged that the insurance exemptions were unavailable because the Flexible Fund contract is offered and promoted

1359F. 2d619 (C.A.D.C., 1966).

See 31st Annual Report, p, 127.

112

•
TEIRTY-SECOND ~AL REPORT 113

as a vehicle for investing in the stock market and because the purchaser's fortunes during the pay-in period, when he is a participant

in the Flexible Fund, are, to a substantial extent, directly dependent

on the investment experience of a portfolio of securities managed by

the company. The court of appeals, rejecting the Commission's

position, held that the exemptions were available, because (1) under

the minimum guarantee the company has assumed a substantial part

of the investment risk during the pay-in period, and (2) the company

has assumed the major part of the investment risk over the duration of

the entire contract including both pay-in and pay-out periods. After

the close of the fiscal year the Supreme Court granted a petition for

certiorari filed by the Commission.

In Kaplan v. Lehmasi Brothers.' a derivative action on behalf of

certain investment companies seeking injunctive relief and treble damages against the New York Stock Exchange and several member firms

for alleged violations of the anti-trust laws in fixing minimum commission rates for transactions on the Exchange, the district court, relying on Silver v. New York Stock Ernchange,4 held that the Exchange's commission rate rules did not violate the anti-trust laws, since

such rules were specifically contemplated under the regulatory scheme

'of the 1934 Act. The court further held that determination of the

reasonableness of the Exchange's rates should be left to the prospective

decisions of the Commission. Plaintiffs have appealed to the Court of

Appeals for the Seventh Circuit I; and that court has granted the Commission leave to participate as amicue curiae.

In Fifth Avenue Ooach Lines, 1M. v. New York Stock Ernchange,6

the Appellate Division of the New York Supreme Court unanimously

reversed the lower court which had denied the EXChange's motion to

dismiss an action brought by Fifth A venue Coach Lines, Inc. to enjoin

the Exchange from delisting its stock. Fifth Avenue had alleged that

such delisting would be arbitrary and harmful to the interests of stockholders. The Exchange had applied to the Commission to delist the

stock. Adopting the position of the Commission, amicus curiae, the

court held that the State court lacked jurisdiction of the subject matter of the action in that the Securities Exchange Act of 1934 provides

the exclusive procedure for delisting securities and such procedure

constitutes a pre-emption of the area by the Federal Government.

The court stated that the "statutory provisions constitute an integrated

'administrative and judicial procedure by which, it seems clear, Congress intended the delisting process to be specially regulated and

controlled. "

.250 F. Supp. 562 (N.D. m, 1966).

'313 U.S. 341 (1963).

Case No. 15663.

210 N.Y.S. 2d 852 (1966).

•

•
114 SECURITIES AND EXCHANGE COMMISSION

During the year, the Commission was involved in numerous actions

seeking injunctive and other relief against practices which it claimed

to be unlawful under the securities laws.

The case of S.E.O. v. Texas Gulf Sulphur 00.,' whose institution

was discussed in the last annual report," proceeded to trial during the

year. Following the close of the fiscal year, the district court rendered

a decision agreeing with certain of the contentions of the Commission

both as to law and fact and disagreeing with others. Itdismissed the

Commission's complaint against Texas Gulf Sulphur Co. and 10 individual defendants but found that 2 other individual defendants committed violations of Section 10 (b) of the Securities Exchange Act of

1934 and Rule 101-5 under that Act by purchasing Texas Gulf stock on

the basis of material inside information. Texas Gulf began exploratory

drilling near Timmins, Ontario, in November 1963. On April 16, 1964,

it issued a press release announcing that it had made a major discovery

of copper, zinc and silver. The Commission charged that officers, directors, and employees of Texas Gulf violated Section 10 (b) and Rule

101-5 by purchasing Texas Gulf stock and calls during the intervening period on the basis of undisclosed inside information about the

drilling results and by divulging this information to their relatives

and friends so that these "tippees" could also purchase Texas Gulf

securities on this basis. Some of the individual defendants were also

charged with accepting stock options from the corporation during

this period without disclosing the information in their possession

about the drilling results to those making the decision to issue the

options. Finally, the Commission charged the corporation with issuing a false and misleading press release 4 days before the press

release announcing the discovery.

The court rejected defendants' contentions that the Commission

must prove scienter, intent to deceive, reliance and causation in order

to establish violations of Rule 101-5 and that Section 16 of the 1934

Act is the only limitation on insider trading. Itheld that under Rule

101-5 "an insider's liability for failure to disclose material information

which he uses for his own advantage in the purchase of securities

extends to purchases made on national securities exchanges as well as

to purchases in 'face-to-face' transactions." The court further ruled

that "insiders subject to the disclosure requirements of Section 10 (b)

and Rule 101-5 may include employees as well as officers, directors, and

controlling stockholders who are in possession of material undisclosed

information obtained in the course of their employment."

'258 F. Supp.262 (S.D. N.Y., 1966).

8 31st Annual Report, pp. 122-123.
TffiRTY-SECOND ANNUAL REPORT 115

On the basis of these legal rulings the court found violations by the

two individual defendants who purchased Texas Gulf securities on

April 15, and April 16, 1964. It rejected their contentions that they

were free to trade merely because rumors about the discovery were

current in the press and financial circles, an article emanating from the

corporation had appeared in a trade publication of limited circulation

and an official of the Canadian government had issued a statement of

undetermined circulation. It referred to the press release by the

corporation as the "official announcement."

Contrary to the position urged by the Commission, the court held

that other insiders who purchased stock and gave tips on April 16, 1964,

did not commit violations, stating that insiders are free to trade on

the basis of inside information once this information has been delivered

to the news media, even though it has not appeared anywhere. The

court also decided that purchases of stock and calls and the giving of

tips by insiders prior to April 9 did not violate Rule 101-5 because

the results of the mineral exploration did not constitute material facts

at that time. The court agreed with the Commission that corporate

officials responsible for the issuance of stock options are entitled to

rely on the information furnished to them by management. It concluded that a member of the higher echelon of management who

accepts a stock option without disclosing to the responsible officers

all material information violates Section 10 (b) and Rule 101-5, but

that employees who are not members of the higher echelon are entitled

to assume that information already known to their superiors will be

reported by them to the appropriate corporate officials.

In clearing the corporation of charges of violation the court ruled

that a press release issued by a corporation is issued "in connection

with the purchase or sale of any security" and, therefore, comes within

Section 10 (b) and Rule 101-5 only "if its purpose is to affect the

market price of a company's stock to the advantage of the company or

its insiders." It found no such purpose in this case. Alternatively,

the court held that the accuracy of the press release must be judged

only on the basis of information actually known to the drafters of the

release at the time of its issuance, and that on the basis of such information the release in this case was not false or misleading. The Commission has appealed.

In 8E.0. v. Georgia-Pacific Oorporationr the defendants consented to the entry of a decree enjoining them from violating Section

10(b) of the Exchange Act and Rules 101-5 and 101-6 thereunder.

Georgia-Pacific had entered into agreements to purchase the assets or

stock of several corporations through the issuance of Georgia-Pacific

• S.D.N.Y., 66 Civ. 1215, May 23, 1966.
116 SECURITIES AND EXCHANGE COMMISSION

stock. The agreements provided that the acquisition price would depend in part on the future price of Georgia-Pacific stock on the New

York Stock Exchange during certain periods which were to be determined by Georgia-Pacific itself. The Commission's complaint

alleged that certain officers and an employee of Georgia-Pacific had

caused the employee pension funds to purchase Georgia-Pacific stock

on the Exchange for the purpose of raising the price of the stock and

resulting in the issuance of fewer shares by Georgia-Pacific. The

consent decree set forth restrictions on future purchases of GeorgiaPacific stock by the company and its pension funds, including a

prohibition on such purchases during any valuation period or within

a 10-day period prior thereto.

In S.E.O. v. Skagit Valley Telephone 00., et al.,I° the Commission

charged certain officials of the company with violations of the antifraud provisions of the securities acts in connection with the purchase

and sale of the company's securities. The complaint alleged that these

officials purchased shares from stockholders at prices of $5 and $10

per share without disclosing the true value of the stock and the offers

that had been made for the stock, and thereafter sold such shares

at $300 per share. The Commission also charged the company which

purchased the stock at $300 from the officials and from other stockholders with violations of the anti-fraud provisions for conspiring

with the other defendants to conceal the fact that others were willing

to pay even more than $300 per share. In addition to consenting to

the issuance of decrees enjoining future violations, the defendants filed

undertakings with the court as a result of which approximately

$400,000 was deposited in a fund to be distributed to the defrauded

stockholders.

In S.E.O. v, VTR, Ino., et al.,l1 the Commission charged that a

group of defendants controlling VTR had misappropriated company

funds to finance their own personal investment ventures and had concealed their misappropriations through false annual reports and proxy

statements. The Commission sought injunctive relief and the appointment of a receiver. The defendants consented to a permanent injunction requiring them to make an accounting and restitution for their

unauthorized withdrawals and enjoining them from further violations

of the reporting and anti-fraud provisions of the Securities .Act of 1933

and the Securities Exchange .Act of 1934. In lieu of appointing a

receiver, the court directed the controlling group to cause the election

of four independent directors (of a five-man board) designated by the

court to supervise the filing of proper annual reports and proxy state-

" w, D. 'Vashington, No. 286.

nS.D.N.Y., No. 65 Civ. 2621.
THIRTY-SECOND ANNUAL REPORT 117

ments with the Commission and to supervise a determination of the

exact amount misappropriated. Pursuant to the consent judgment,

the defendants were ordered to make restitution of more than $1.2

million. Restitution has been made of all but about $70,000,for which

a note has been given.

A significant aspect of this case was the court's determination that

jurisdiction under the Securities Act over a foreign business entity

and a resident foreign national could be acquired by personal service

of the summons and complaint in West Germany. This was the first

opinion dealing with this question. The defendants had argued that

such service was ineffective and that as foreign nationals they should

not be subject to United States courts, since" 'physical power' is the

sine qua non of jurisdiction." The court stated:

"Here there clearly was business transacted by the defendants

in this state. Further, the SEC rules which protect both foreign

and domestic investors who trade on our national exchanges could

be evaded at will if injunctions could not be had against foreign

based brokers and individuals who trade in large volume on such

exchanges."

InS.E.O. v. Seaboard Securities Oorporation,12 the court enjoined

the defendant securities dealer and its president, Leon Nash, from

charging their customers prices not reasonably related to the prevailing market prices with respect to any securities, not merely the two

securities referred to in the complaint. In granting the Commission's

request for a broad injunction, the court stated

"Having observed the defendant Nash, and having heard his

insistence that the statutory and regulatory prohibitions are intolerable, we think it insufficient to enjoin repetitions of the

forbidden actions only with respect to the two particular stocks

in question . . ."

In SE.O. v. S &: P National Corporation; et 01.,18 the Commission

alleged (1) that the corporate defendants have been unregistered investment companies for many years and have transacted business in

violation of the Investment Company Act of 1940, (2) that reports

filed by S & P National Corporation pursuant to the requirements or

the Securities Exchange Act of 1934 were false and misleading in

failing to state that David M. Milton, one of the individual defendants,

was a parent or director of S & P and in stating that certain persons,

11 S.D.X.Y., June 6,1966,66 Clv. 489.

,. CCB Fed. Sec. Law Rep. para. 91,670 (S.D.N.Y., April 21, 1966), a11trmetl,

360 F. 2d 741 (C.A. 2, 1966).

•
118 SECURITIES AND EXCHANGE COMMISSION

who had resigned or abandoned their offices,were directors of S & P 14

and (3) that the individual defendants had been derelict in permitting

or causing the above violations. Upon motion of the Commission, preliminary injunctions were granted restraining the coporate defendants

in the operation of their business as investment companies, and a

receiver-trustee for the corporations was appointed.

In affirming the above orders, the Court of Appeals for the Second

Circuit stated that although the Securities Exchange Act does not

expressly provide for the appointment of a receiver or trustee, such

an appointment may be made under that Act by virtue of the court's

equitable powers, as well as under the Investment Company Act,

which provides for the appointment of a trustee, to "bring the companies into compliance with the law, 'ascertain the true state of affairs

. . . and report thereon' to the court and public shareholders and preserve the corporate assets." The court also held that if a company

initially met and presently meets the assets test established by the

Investment Company Act, then it has been, over the intervening years,

an investment company subject to the Act even though it might not

have met that test in every one of those years.

In S.E.O. v. Wong,I5 the United States District Court for the District of Puerto Rico denied motions to dismiss by the defendants.

The court rejected the argument that the change in the status of Puerto

Rico (in 1952) from a territory of the United States to a Commonwealth deprived the court of jurisdiction over violations of the Federal securities laws. The court also ruled that under Section 36 of

the Investment Company Act, providing for injunctive action for

gross abuse of trust against "a person serving or acting" as an officer

or director of a rep-stered investment company, an action may be

brought against a former officeror director who had resigned prior to

institution of the action, The court stated that the quoted phrase referred to the defendant's capacity at the time the abuse of trust occurred. It further ruled that in an action under Section 36 or under

Section 10(b) of the Exchange Act, the Commission may seek as

ancillary relief restitution and an accounting, since the prayer for injunctive relief invokes the full equitable powers of the court.

In S.E.O. v, Tam Service, Inc. and John O. Bennett." the Court of

Appeals for the Fourth Circuit affirmed a permanent injunction entered by the district court enjoining the defendants from offering or

It See discussion of the Commission's earlier action against S & P National

Corporation, et al., for failure to file these types of reports, in 31st Annual Report

at p. 130.

lJ5 259 F. Supp. 66 (1966).

,. 357 F. 2d 143 (C.A. 4, 1966) •
TEITRTY-SECOND ~AL REPORT 119

selling unregistered shares of Tax Service, Inc. The issuer is the

publisher and distributor of "Tax Calculators" which contain a series

of tables for the use of attorneys, accountants and others engaged in

preparing income tax returns. The court held that the offer or sale of

these securities, although limited to the issuer's subscribers and to the

members of a local bar association, did not meet the requirements for

a private offering exempt from registration under the Securities Act.

Itstated that neither an offeree's position asa subscriber nor the general acumen of attorneys in tax matters has any bearing on their access

to the kind of information which registration would make available

and that "obviously, familiarity with the issuer's publications would

not connote familiarity with the issuer's financial status."

Decisions of the Commission dismissing applications for review of

disciplinary 'action taken by the National Association of Securities

Dealers, Inc. (NASD) were upheld in Merritt, Vickers, Inc. v. S.E.O,17

and Handley Investment Oompany v. S.E.O.18 In the Merritt,

Vickers case, the NASD had found that the firm and its principals

violated NASD rules by selling securities at prices not reasonably related to the current market; improperly extending credit; failing to

maintain required books and records; and failing to disclose the firm's

dual agency role and double commissions received. Rejecting the contention that the NASD improperly relied on the ''pink sheets" in assessing the fairness of mark-ups, the court agreed with the Commission

that "although the quotations in the sheets are not firm offers for a

fixed number of securities, and final prices are subject to change, they

constitute sufficient proof of prevailing market prices 'in the absence

of evidence to the contrary'."

Petitioners urged that the Commission should have permitted them

to adduce additional evidence bearing on the fairness of the mark-ups,

claiming that they did not request production of such evidence in the

hearings before the NASD because it would have been futile in view

of the NASD's lack of subpoena power. The court found the argument "not persuasive," stating that "there is nothing in the record to

demonstrate that process would have been required to obtain the desired information. Mere speculation cannot serve as an excuse for

failure to produce relevant evidence before the NASD."

In the Handley case, the court rejected the argument that the

NASD's disciplinary proceedings were akin to criminal proceedings

and that violations had to be established by convincing evidence overcoming a presumption of innocence. The court indicated that the

NASD and Commission should have wide latitude in establishing professional standards, stating,

17 353 F. 2d 293 (C.A. 2, 1965).

18 354 F. 2d 64 (C.A. 10, 1965).
120 SECURITIES AND EXCHANGE COMMISSION

"Absent constitutional or statutory infirmities, none of which

appear here, the professional standards established by NASD

and SEC for those engaging in over-the-counter securities business will not be upset by the courts. Petitioner failed to abide

by those standards. The disciplinary action was not excessive,

oppressive, or an a:buseof discretion."

In M. G. Davis & 00., 1M. v. Oohen,I9 the court granted the Commission's motion for summary judgment dismissing an action to enjoin

the Commission from continuing a public proceeding instituted to

determine whether the broker-dealer registration of the corporate

plaintiff should be revoked and whether corresponding sanctions

should be imposed against the individual plaintiffs. In considering

the question of its jurisdiction to entertain an action for injunctive

relief against the Commission prior to exhaustion of administrative

remedies the court stated:

"... a District Court under its general federal question equity

jurisdiction, 28 U.S.C. 1331, is empowered to correct agency

conduct 'in excess of its delegated powers and contrary to specific

prohibition of the Act' .... The test to be applied in determining

whether this 'narrow' exception to the customary avenues of review may be invoked ... is 'whether the Commission has stepped

plainly beyond the bounds of its statutory authority, or has acted

in clear defiance of [plaintiffs'] constitutional rights to [their]

irreparable damage'."

The opinion also provides an important interpretation of Section

15(b) (7) of the Exchange Act, which was part of the 1964 amendments to that Act. It held that the provisions of that Section, permitting censure, barring, or suspension of any person, may be applied

with respect to statutory violations which occurred prior to the enactment of the provision. Plaintiffs had argued against such a "retroactive" application, but the court observed that "the amendment simply

provides the Commission with a procedural device for accomplishing

the same enforcement objectives which could formerly be achieved

only circuitously," and ruled that "salesmen who have committed

securities violations in the past could with justification be excluded or

suspended from a profession demanding the utmost in probity from its

members."

In Holmes v. Oary,20 the Court of Appeals for the Fifth Circuit

affirmed per curiam a decision of the United States District Court for

the Northern District of Georgia 21 that the Commission need not

J0254F. Supp.402 (S.D.N.Y., 1966).

355 F. 2d 150 (O.A. 5, 1966).

11284 F. Supp.23 (N.D. Ga., 1964).

~

•
THIRTY-SECOND ANNUAL REPORT 121

accept for filing a purported registration statement under the Securities Act of 1933 which was "totally frivolous" and "obviously not a

bona fide attempt to qualify to sell securities to the investing public."

Two cases challenging the validity of the Commission's action under

its Rules Relating to Investigations were concluded this year. In

Oommerclai Oapital Oorporation v. B.E.O.,22 the Court of Appeals

for the Seventh Circuit held that a denial by the Commission, pursuant to Rule 6 of those rules, of a witness' request to purchase

copies of the transcript of his testimony in a private investigation did

not deprive the witness of due process and that "the sale or the withholding of copies of the transcript was within the sound discretion"

of the Commission. The court stated that the legislative history of

the Administrative Procedure Act shows that Congress was aware

that investigations of the Commission, like those of a grand jury,

might -be thwarted if witnesses were able to obtain copies of their

investigative transcripts. Suspected violators, if in possession of

such transcripts, would be able to tailor their own testimony to that

given by other witnesses or take economic or other reprisals against

those who were about to testify. Accordingly, the court found that

Congress had given agencies authority to deny for good cause a witness' request for a transcript of his testimony in a nonpublic investigation. In the course of its opinion, the court also questioned

whether Congress intended a direct court review of orders entered

by the Commission in the course of a non-public investigation.

In B.E.C. v. Higashi,28 the Court of Appeals for the Ninth Circuit

held that a district court could properly condition enforcement of a

subpoena issued in a private Commission investigation upon the Commission's permitting a director of the corporation to be accompanied

and represented by the attorney for the corporation, despite the fact

that the sequestration provisions of Rule 7(b) of the Commission's

Rules Relating to Investigations had been invoked. While stating

that "the reason for and purpose of the Commission's rule are clear

and there can be no question as to its necessity and general propriety,"

the court held that in this case the interests of the director were

"directly and prejudicially" affected by his not being able to use the

corporation's attorney and, accordingly, that invocation of the sequestration rule exceeded the discretion of the Commission.

In a companion subpoena enforcement action, Jenks v. B.E.C.,:' the

court of appeals rejected the defense of harassment advanced by

a witness who had been subpoenaed, where the harassment charged

was not of the witness but of the subjects of the investigation .

.. 360 F. 2d 856 (C.A. 7, 1966).

II 359 F. 2d 550 (C.A. 9, 1966)

.. 359 F. 2d 550 (C.A.. 9, 1966).

-

•
122 SECURITIES AND EXCHANGE COMMISSION

The Commission has successfully defended its administrative investigatory subpoenas in court proceedings to quash them. In

Fountaine v. S.E.O.25 and S.E.O. v, lsbrandtsen,26 recalcitrant witnesses attempted to have such subpoenas declared to be of no effect.

The decisions in these cases, based upon the Supreme Court's ruling

in Reisman v. Oaplin,27 make it clear that since a witness is not subject

to penalties in advance of judicial enforcement proceedings, the subpoenas may not be challenged prior to such proceedings. The Commission therefore retains the right to decide whether or not court

proceedings reviewing and enforcing its subpoena should be

instituted.

The Commission participated as amicus curiae this year in several

cases relating to the applicability of the "short-swing" recovery provisions of Section 16(b) of the Securities Exchange Act of 1934 to

transactions by insiders involving conversions of senior securities. In

Heli-Ooil Oorp. v. Webster,28 described in the last Annual Report,"

convertible debentures were converted into common stock by an insider

within 6 months after he had purchased the debentures. He then sold

the common stock within 6 months after the conversion. The Court

of Appeals for the Third Circuit, agreeing with the views expressed

by the Commission as amicus curiae, held, in an en bane decision, that

the conversion of the debentures into common stock constituted a sale

of the debentures and a purchase of the common stock within the

meaning of Section 16(b), that the stock acquired upon conversion

was not exempt from Section 16(b) as a security "acquired in good

:faith in connection with a debt previously contracted," and that the

conversion was not exempt from Section 16(b) as an arbitrage transaction, but that no profit was realized from the disposition of the debentures upon conversion. Accordingly, the court held that recovery

should be limited to the profits realized from the sale of the common

stock.

In Blau v, Lamb,30 the Court of Appeals for the Second Circuit, disagreeing with the decision in Heli-Ooil, held that a conversion of preferred stock into common was not a sale of the preferred within the

meaning of Section 16(b) . The court also held, inter alia, (1) that

an acquisition of stock by a corporation wholly owned or controlled by

an individual from another corporation 97-percent owned or controlled

by him is not a purchase within the meaning of Section 16(b) and (2)

25 District of Puerto Rico, Civil Action No. 525-65, January 31, 1966.

"245 F. Supp. 518 (S.D.N.Y., 1965). 27375 U.S. 440 (1964) .

.. 352 F. 2d 156 (C.A. 3, 1965) .

.. 31st Annual Report, pp.129-130 .

.. 363 F. 2d 507 (C.A. 2, 1966) .
THIRTY-SECOND ANNUAL REPORT 123

that when transactions which precede a stock dividend or stock split

are to be matched against transactions which follow it, there must be

a proportionate adjustment in the price of the shares involved in the

earlier transactions in order to determine the true measure of the

profit realized. The court's holdings on the latter two points were in

accord with the views expressed by the Commission as amicus curiae.

With respect to the conversion question, however, the Commission had

urged that although, in its view, no profit was realized from the disposition of the preferred stock upon conversion, the conversion nevertheless constituted a sale of the preferred within the meaning of Section 16(b).

In Blass v, Oppenheim,3! the court adopted the view urged by the

Commission as amicus curiae that a plaintiff who purchased shares in

a corporation whose wholly-owned subsidiary had acquired all the

assets and by merger succeeded to the business of the issuer in whose

securities the Short-swing trading occurred was entitled to sue under

Section 16(b) of the 1934Act to recover the short-swing profits. The

court held that there is "no support for the defendant's position that

Congress intended that suits for the recovery of short-swing profits

be restricted to the initial issuer whose securities were the subject of

the illicit gains and its security holders, thus leaving no remedy in

those instances where, as here, the issuer by a transfer of all its assets

to another corporation has become extinct and is without its original

security holders."

The case of S.E.O. v. Golconda Mining 00. and Harry F. MarJ1l!Ur

son 32 had been instituted by the Commission in the Southern District

of New York. The defendants moved to transfer the action to the

District of Idaho, but the district court, agreeing with the contentions

of the Commission, denied the motion. The court of appeals 33 held

that a petition for a writ of mandamus rather than for leave to appeal

was the appropriate procedure for review of such an order but declined to grant the writ in this case since there had been "no clear-cut

abuse of discretion."

CRIMINAL PROCEEDINGS

The statutes administered by the Commission provide that the Commission may transmit evidence of violations of any provisions of these

statutes to the Attorney General, who in turn may institute criminal

proceedings. Where an investigation by the Commission's staff indicates that criminal prosecution is warranted, a detailed report is prepared. After careful review by the General Counsel's Office,the report

81250 F. Supp.881 (S.D.N.Y., 1966).

"246 F. Supp.54 (S.D.N.Y., 1966). See 31st Annual Report, p.123 .

.. Sub nom. Golconda Mining 00. v. Herland8. C.A. 2, No. 30221, August 8, 1966.
124 SECURITIES AND EXCHANGE COMMISSION

and the General Counsel's recommendations are considered by the

Commission, and if the Commission believes criminal proceedings are

warranted the case is referred to the Attorney General and to the

appropriate U.S. Attorney. Commission employees familiar with

the case generally assist the U.S. Attorney in the presentation of the

facts to the grand jury, the preparation of legal memoranda for use in

the trial, the conduct of the trial, and the preparation of briefs on

appeal.

During the past fiscal year 44 cases were referred to the Department

of Justice for prosecution. As a result of these and prior referrals, 50

indictments were returned against 193 defendants and 16 defendants

were convicted in 39 cases. Convictions of 17 defendants were affirmed

in 11 cases and appeals were still pending in 9 other criminal cases at

the close of the fiscal year. Of 10 defendants in 7 contempt cases pending during the year, 4 defendants were convicted and 5 cases involving

6 defendants were still pending.

As in prior years, the majority of criminal cases prosecuted involved

the offer and sale of securities by fraudulent representations and other

fraudulent practices. It is obviously not feasible to describe individually each of the many criminal matters pending or decided during

the fiscal year; only a few of the more noteworthy ones can be singled

out for discussion.

The conviction of Daniel E. Armel and others by a jury in the

Southern District of Ohio culminated the Commission's investigation

of the corporate "empire" of Armel. The fraudulent offer and sale of

securities of the numerous corporations which made up the "empire"

resulted in the loss of over 9 million dollars to investors. Two of the

defendants convicted, Donald Hathaway and Jack Singleton, were

certified public accountants who actively assisted Armel in perpetrating this fraud. Armel, the chief architect of the fraudulent

promotion, received a sentence of 15 years imprisonment.

The Commission continued its enforcement of the registration requirements of Section 5 of the Securities Act of 1933 with the prosecution of criminal violations of these requirements not accompanied by

charges of fraud. Herman Shaw and The Aquafilter Corporation, of

which Shaw was president and controlling stockholder, were indicted

in the Southern District of New York for violating Section 5 in the

offer and sale of unregistered securities of Aquafilter. William F.

Kane and Myron Freudberg were indicted in the same district for

violating Section 5 in the offer and sale of unregistered securities of

American Dryer Corporation. Shaw and Aquafilter pleaded guilty,

and Shaw was sentenced to 30 days' imprisonment, fined $3,000 and

placed on probation for 1 year, while the corporation was fined $12,500.

Kane and Freudberg are awaiting trial.
. THIRTY-SECOND ANNUAL REPORT 125

The Commission's investigation of the sale of American Bonded

Mortgage Company, Inc. securities culminated in the indictment of

Mark H. Kroll, William Cahn and six other persons in the Southern

District of Florida, for the fraudulent sale of various securities of this

company and its affiiliates. The indictment charged the defendants

with devising and employing a fraudulent scheme to distribute notes

purportedly "guaranteed" by mortgages on owner-occupied homes.

This case is the latest in the Commission's continued effort to combat

new variations of the old "Ponzi" scheme whereby investors are paid

purported "interest" at very high rates with their investments "guaranteed" by alleged valuable collateral. The so-called interest is in

fact paid with funds obtained from other investors.

Near the close of the fiscal year, an indictment was returned by a

Federal Grand Jury in Indianapolis charging 23 individuals and 6

corporations with defrauding investors in securities of Air and Space

Underwriters, Inc. The indictment also charged The Indiana Investor and Business News, Inc. and its editor, Van C. Vollmer, with

publishing and causing the publication of newspaper articles which,

though not purporting to offer the securities of Air and Space Underwriters, Inc., described these securities for a consideration without

disclosing the receipt of such consideration.

During the year the first criminal action for violations of Section

37 of the Investment Company Act of 1940 was prosecuted. The case S.

is further discussed at p. 101, supra.

One of the more important appellate decisions rendered during the

year was that of the Court of Appeals for the Second Circuit in

United States v. Abrams." In affirming the convictions of Joseph

Abrams and Sydney Albert for violating and conspiring to violate the

registration provisions of the Securities Act in the distribution of their

shares of Automatic Washer Company, the court found that there was

more than sufficient evidence from which the jury could conclude that

Abrams utilized nominee accounts as conduits for the subsequent distribution of these securities. The court also found that the evidence

presented a question for the jury to determine whether Albert, in

placing his Automatic stock with various banks as collateral for the

repayment of loans, intended not to repay the loans and to have the

stock distributed without registration. The affirmance of these convictions should serve as a warning to unscrupulous promoters that they

cannot evade the registration requirements of the Securities Act by

spurious reliance on exemptions from those requirements .

..tt.s.v. Weiner (E.D. Pa).

• 351 F. 2d 539 (C.A. 2,1966).
126 SECURITIES AND EXCHANGE COMMISSION

COMPLAINTS AND INVESTIGATIONS

Each of the Acts administered by the Commission specifically authorizes investigations to determine whether violations of the Federal

securities laws have occurred.

The nine regional officesof the Commission, with the assistance of

their respective branch offices, are chiefly responsible for the conduct

of investigations. In addition, the Officeof Enforcement of the Division of Trading and Markets of the Commission's headquarters office

conducts investigations dealing with matters of particular interest or

urgency, either independently or assisting the regional offices. The

Office of Enforcement also exercises general supervision over and

coordinates the investigative activities of the regional officesand recommends appropriate action to the Commission.

There are available to the Commission several sources of information concerning possible violations of the Federal securities laws.

The primary source of information is complaints by members of the

general public concerning the activities of certain persons in securities

transactions. The Commission's staff gives careful consideration to

such complaints and, if it appears that violations may have occurred,

an investigation is commenced. Other sources of information which

are of assistance to the Commission in carrying out its enforcement

responsibilities are the national securities exchanges, the National Association of Securities Dealers, Inc., brokerage firms, state and Canadian securities authorities, better business bureaus, and various law enforcement agencies.

It is the Commission's general policy to conduct its investigations

on a confidential basis. Such a policy is necessary to effective law enforcement and to protect persons against whom unfounded or unconfirmed charges might be made. The Commission investigates many

complaints where no violation is ultimately found to have occurred.

To conduct such investigations publicly would ordinarily result in

hardship or embarrassment to many interested persons and might

affect the market for the securities in question, resulting in injury to

investors with no countervailing public benefits. Moreover, members

of the public would tend to be reluctant to furnish information concerning violations if they thought their personal affairs would be made

public. Another advantage of confidential investigations is that persons suspected of violations are not made aware that their activities are

under surveillance, since such awareness might result in frustration or

obstruction of the investigation. Accordingly, the Commission does

not generally divulge the result of a non-public investigation unless it

is made a matter of public record in proceedings brought before the

Commission or in the courts.
TIDRTY-SECOND ANNUAL REPORT 127

When it appears that a serious violation of the Federal securities

laws has occurred or is occurring, a "case" is opened and a full investigation is conducted. Under certain circumstances it becomes necessary for the Commission to issue a formal order of investigation which

appoints members of its staff as officers to issue subpoenas, to take

testimony under oath and to require the production of documents.

Usually this procedure is resorted to only when the subjects of the investigation and others involved are uncooperative and it becomes necessary to invoke the subpoena power to complete the investigation.

During the fiscal year ended June 30, 1966,the Commission issued 136

such :formal orders.

When an investigation has reached the stage at which enforcement

action appears appropriate, the Commission may proceed in one of

several ways, although the use of one procedure may not necessarily

preclude the use of another. The Commission may: (1) refer the

case to the Department of Justice or appropriate local enforcement

authorities for criminal prosecution, (2) institute through its own

staff, in the appropriate U.S. district court, civil proceedings for injunctive relief to halt further violations of law, and, (3) institute administrative proceedings if the case is one where it has the power to

do so.

The following table reflects in summarized :form the investigative

activities of the Commission during fiscal 1966:

Investigations of possible violations of the Acts administered by the Commission

Pending June 30,1965___________________________________ 833

New cases . . . 340

Total_ ___ ______________________________________ ____________ I, 173

Closed_______________ 401

Pending June 30,1966_____ 772

ENFORCEMENT PROBLEMS WITH RESPECf TO FOREIGN sscuamss

In recent years the volume of unlawful Canadian promotions

reaching into the United States has declined sharply from the 1950's

when Montreal and Toronto "boiler-rooms" were conducting extensive

high-pressure mail and telephone stock-selling campaigns into the

United States. The decline is due primarily to the increased cooperation and liaison with the Commission by the Ontario and Quebec

Securities Commissions and quasi-official regulatory bodies such as

the Toronto Stock Exchange and the Broker-Dealers' Association

of Ontario. In .fiscal 1966 the unlawful offer and sale of Canadian

securities in the United States remained at a low level.

As a result of an investigation of Windfall Oils and Mines Limited

by an Ontario Royal Commission, in which this Commission assisted,

238-643-66-10

• _ _

_
128 SECURITIES AND EXCHANGE COMMISSION

several persons, including the promoters of Windfall, were charged

with criminal violations. The Commission has also assisted the

Ontario Royal Commission on Atlantic Acceptance Corporation

Limited in its investigation into the circumstances surrounding the

downfall in June 1965 of Atlantic Acceptance, a large Canadian

finance company. A member of this Commission's staff has testified

at public hearings of the Royal Commission. That commission was

appointed in the wake of Atlantic's financial collapse, which has had

substantial repercussions in both Canada and the United States and

caused substantial losses to certain United States institutional investors. Criminal charges have already been brought in Ontario against

several persons.

The Commission continued to be confronted by unlawful promotions

from the Bahamas, particularly those involving unregistered time

deposit certificates issued by so-called "banks" chartered there. Following the Commission's issuance of a public warning release and the

obtaining of injunctive relief against a Bahamian bank, '" the Bahamas

passed new banking legislation designed to prevent the issuance of

unregistered securities by Bahamian banks, and to reduce sharply

the number of 'bank charters available. As a result of such legislation,

there has been a noticeable reduction in unlawful offers and sales of

unregistered Bahamian hank securities in the United States.

Indealing with fraudulent promotions from the Bahamas, Jamaica,

Brazil and elsewhere, the Commission is continuing to benefit from the

new, simplified procedures for obtaining foreign postal fraud orders.

The Post Office Department has cooperated fully with the

Commission's program.

During the year the Commission maintained its Foreign Restricted

List, consisting of foreign companies whose securities the Commission

had reason to believe were being, or recently had been, distributed

in the United States in violation of the registration requirements of

the Securities Act of 1933. As of June 30, 1966, 73 companies were

on the list. Continuing the trend of recent years, it was necessary

to add only 2 Canadian companies to the list during the year, while

53 others were deleted following compliance with esta:blished procedures. The names of 15 Bahamian companies, 1 Panamanian company and 1 company whose place of incorporation has not been

ascertained were added to the list. The current list and supplements

thereto are issued to and published by the press, and copies are mailed

to all registered broker-dealers and are made available to the public.

Ie Securities Act Release No. 4785 (June 16, 1965).

'" Securitie8 and Ea:change Oommi88ion v. Long I8land Btm:e of the Bahamas,

ts«, U.S.D.O., Northern District of Oalifornia, No. 44088, September 3, 1965.

•
TEITRTY-SECOND ~AL REPORT 129

.As a practical matter, most United States broker-dealers refuse to

execute transactions in securities on the restricted list .

.As of September 30, 1966, the list contained the names of 49

Canadian and 16Bahamian companies, 1 Panamanian company, and 2

companies whose place of incorporation has not been ascertained

(representing the addition of 2 companies and the deletion of 7 others

since the end of the fiscal year) as follows:

FOREIGN RESTRI<:.TED LIST

Canadian issuers

Alaska Highway Beryllium Venture

Anuwon Uranium Mines, Ltd.

Associated Livestock Growers of Ontario

Autofab, Ltd.

Bayonne Mine, Ltd.

Bonwitha Mining Co., Ltd.

Canol Metal Mines, Ltd.

Canford Explorations, Ltd.

Consolidated Woodgreen Mines, Ltd.

Crusade Petroleum Corp., Ltd.

Dayjon Explorers, Ltd.

Devonshire Mining Oo.,Ltd.

Fairmont Prospecting Syndicate

The Fort Hope Grubstake

Guardian Explorations, Ltd.

International Claim Brokers, Ltd.

Ironco Mining & Smelting Oo., Ltd.

Jack Haynes Syndicate

Keele Industrial Developments, Ltd.

Kenilworth Mines, Ltd.

Kennament Development Oorp., Ltd.

Ladysmith Explorations, Ltd.

Leader Mining Oorp., Ltd.

Mack Lake Mining Corp., Ltd.

Maple Leaf Investing Corp., Ltd.

March Minerals, Ltd.

Merrican International Mines, Ltd.

Mid-National Developments, Ltd.

New Mallen Red Lake Mines, Ltd.

Norart Minerals Limited

Norbank Explorations, Ltd.

North West Pacific Developments,

Ltd.

Nu-Gord Mines, Ltd.

Nu-World Uranium Mines, Ltd.

Outlook Explorations, Ltd.

Paracanusa Coffee Growers, Ltd.

St. Lawrence Industrial Development

Corp.

Ste. Sophie Development Corp.

St. Stephen Nickel Mines, Ltd.

Sastex Oil & Gas, Ltd.

Sinclair Prospecting Syndicate

Success Mines, Ltd.

Trans-Oceanic Hotels Oorp., Ltd.

Turbenn Minerals, Ltd.

Tyndall Explorations, Ltd.

Victoria Algoma Mineral Oo.,Ltd.

Vimy Explorations, Ltd.

Western Allenbee Oil & Gas Co., Ltd.

Wingdam & Lightning Creek Mining

Co., Ltd.

Bahamian issuers

Bankers International Investment

Corporation

British Colonial Bank of Commerce

(Bahamas) Ltd.

Commons Bank and Trust Company,

Ltd.

Compressed Air Corporation, Ltd.

Essex Bank and Trust Company, Ltd.

First Bahamas Investment Trust

Investment Bankers of Bahamas, Ltd.

Investments and Trust Company, Ltd.

Jomur Trust Company, Ltd.

Long Island Bank of the Bahamas,

Ltd.

Lords Bank and Trust Company,

Ltd.

New Zealand Bank and Trust Company (Bahamas) Ltd. now known

as Marlboro Bank and Trust Company

Parliament Bank and Trust, Ltd.

The Bank of World Commerce, Ltd.

TransworJd Investment Bank, Ltd.

Whitechapel Bank, Ltd.
130 SECURITIES AND EXCHANGE COMMISSION

Panamanian issuers

Victoria Oriente, Inc.

Issuers whose place of incorporation not ascertained

American International Mining Darien Exploration Company, S.A..

SECTION OF SECURITIES VIOLATIONS

A Section of Securities Violations is maintained by the Commission

as a part of its enforcement program to provide a further means of

detecting and preventing fraud in securities transactions. The Section maintains files which provide a clearinghouse for other enforcement agencies for information concerning persons who have been

charged with or found in violation of various Federal and state

securities statutes. Considerable information is also available concerning Canadian violators. The specialized information in these

files is kept current through the cooperation of various governmental

and nongovermental agencies. At the end of the fiscal year, the files

contained information concerning 73,511 persons and firms. Included inthe data processed by the Section during the year was information received from several states and Canada respecting 106 criminal actions, 45 injunctive actions, 246 cease and desist type orders

and 116 other administrative orders, such as denials, suspensions and

revocations.

During the fiscal year, the Section received and disposed of 3,180

"securities violations" letters and dispatched 1,634 communications to

cooperating agencies. It added to the Commission's files information

respecting 5,431 persons or firms, including information on 2,028 persons or firms not previously identified.

APPLICATIONS FOR NONDISCLOSURE OF INFORMATION

The Commission is authorized under the various Acts administered

by it to grant requests for nondisclosure of certain types of information which would otherwise be disclosed to the public in applications,

reports or other documents filed pursuant to these statutes. Thus,

under paragraph (30) of Schedule A of the Securities Act of 1933,

disclosure of any portion of a material contract is not required if the

Commission determines that such disclosure would impair the value of

the contract and is not necessary for the protection of investors. Under Section 24(a) of the Securities Exchange Act of 1934,trade secrets

or processes need not be disclosed in any material filed with the Commission. Under Section 24 (b) of that Act, written objection to public

disclosure of information contained in any material filed with the

Commission may be made to the Commission which is then authorized

to make public disclosure of such information only if in its judgment

such disclosure is in the public interest. Similar provisions are con-
TEITRTY-SECOND ~AL REPORT 131

tained in Section 22 of the Public Utility Holding Company Act of

1935 and in Section 45 of the Investment Company Act of 1940. These

statutory provisions have been implemented by rules specifying the

procedure to be followed by applicants for a determination that public

disclosure is not necessary in a particular case.

The number of applications granted, denied or otherwise acted upon

during the year are set forth in the following table:

Applications for nondisclosure during fiscal year 1966

Number Number Number pending Number Number denied pending

July 1, received granted or with- July 1, 1965 drawn 1966

---- --- --- --- Securities Act of1933 (filed under Rule 485) _________ 4 50 39 12 3 Secuntles Exchange Act of 1934 (filed under Rule 24b-2) _____________________________________________ 27 52 33 15 31

Investment Company Act of 1940 (filed under Rule 458-1) _____________________________________________ 3 2 1 --.------.

Totals _________________________________________--- --- --- --- --- 31 105 74 28 34

ACTIVITIES OF THE COMMISSION IN ACCOUNTING AND AUDITING

The several Acts administered by the Commission recognize the

importance of dependable informative financial statements which disclose the financial status and earnings history of a corporation or other

commercial entity. These statements, whether filed in compliance with

the requirements under those statutes or included in other material

available to stockholders or prospective investors, are indispensable to

investors as a basis for investment decisions. The Congress, cognizant

of the fact that such statements lend themselves readily to misleading

inferences or even deception, whether or not intended, included express

provisions in the various Acts with respect to financial information

required to be disclosed. Thus, for example, the Securities Act

requires the inclusion in the prospectus of balance sheets and profit and

loss statements "in such form as the Commission shall prescribe" 38 and

authorizes the Commission to prescribe the "items or details to be

shown in the balance sheet and earnings statement, and the methods

to be followed in the preparation of accounts .... " 39 Similar

authority is contained inthe Securities Exchange Act,40and even more

comprehensive power is embodied in the Investment Company Act 41

and the Public Utility Holding Company Act,42

38 Sections 7 and 10(a) (Schedule A, pars, 25, 26)

.. Section 19(a) .

..,Section 13 (b).

41 Sections 30, 31.

.. Sections 14, 15.

---~------

_
132 SECURITIES AND EXCHANGE COMMISSION

Pursuant to the broad rulemaking power thus conferred with respect

to the preparation and presentation of financial statements, the Commission has prescribed uniform systems of accounts for companies

subject to the Holding Company Act; 43 has adopted rules under the

Securities Exchange Act governing accounting for and auditing of

securities brokers and dealers; 44 and has promulgated rules contained

in a single comprehensive regulation, identified as Regulation S-X,45

which governs the form and content of financial statements filed in

compliance with the several Acts, This regulation is supplemented

by the Commission's Accounting Series Releases, of which 104 had

been issued as of the end of the fiscal year. These releases were

inaugurated in 1937 and were designed as a program for making

public from time to time opinions on accounting principles for the

purpose of contributing to the development of uniform standards

and practice in major accounting questions. The rules and regulations thus established, except for the uniform systems of accounts

which are regulatory reports, prescribe accounting principles to be

followed only in certain limited areas. In the large area of financial

reporting not covered by such rules, the Commission's principal means

of protecting investors from inadequate financial reporting, fraudulent

practices and overreaching by management is by requiring a certificate of an independent public accountant, based on an audit performed in accordance with generally accepted auditing standards,

which expresses an opinion as to whether the financial statements are

presented fairly in conformity with accounting principles and practices which are recognized as sound and which have attained general

acceptance.

The Securities Act provides that the financial statements required

to be made available to the public through filing with the Commission

shall be certified by "an independent public or certified accountant." 46

The other three statutes permit the Commission to require that such

statements be accompanied by a certificate of an independent public

aoconntant," and the Commission's rules require, with minor excep-

.. Uniform System of Accounts for Mutual Service Companies and Subsidiary

Service Companies (effective August 1, 1936) ; Uniform System of Accounts for

Public Utility Holding Companies (effective January 1,1937; amended effective

January 1, 1943; revised by Accounting Series Release No. 84, November 24,

1959)

.. Rule I7a-5 and Form X-I7A-5 thereunder.

411 Adopted February 21, 1940 (Accounting Series Release No. 12); revised

December 20, 1950 (Accounting Series Release No. 70)

.. Sections 7 and IO(a) (Schedule A, pars. 25, 26) .

.. Securities Exchange Act, Section 13(a) (2) ; Investment Company Act, Section 3O(e) ; Holding Company Act, Section 14.

•

•
THIRTY-SECOND ANNUAL REPORT 133

tions, that they be so certified. The value of certification by qualified

accountants has been conceded for many years, but the requirement as

to independence, long recognized and adhered to by some individual

accountants, was for the first time authoritatively and explicitly introduced into law in 1933. Under the Commission's rules, an accountant

who is qualified to practice in his own state is qualified to practice before the Commission unless he has entered into disqualifying relationships with a particular client, such as becoming a promoter,

underwriter, voting trustee, director, officer, employee, or stockholder; 48 has demonstrated incompetence or subservience to management; or has engaged in unethical or improper professional conduct."

The Commission endeavors to encourage and foster the independence

of the accountant in his relationships with his client so that he may

better be able to perform the service to the public contemplated by the

Congress in the various Acts administered by the Commission. Because of his special status and responsibility, the accountant has a

unique opportunity to be a leader in raising standards of investor protection. The financial statements provide the key information both

in the distribution and trading of securities. The work of the accountant in their preparation and publication is vital. Independent

accountants lend authority to management's representations by their

opinions as experts, and they operate as a check on management in

assuring that the financial data are fairly presented in accordance

with generally accepted accounting principles.

The Commission is vigilant in its efforts to assure itself that the

audits which it requires are performed by independent accountants;

that the information contained in the financial reports represents full

and fair disclosure; and that appropriate auditing and accounting

practices and standards have been followed in their preparation. In

addition, it recognizes that changes and new developments in financial

and economic conditions affect the operations and financial status of

the several thousand commercial and industrial companies required

to file statements with the Commission and that accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. The Commission's accounting staff, therefore, studies

the changes and new developments for the purpose of establishing and

maintaining appropriate accounting and auditing policies, procedures

and practices for the protection of investors. The primary responsibility for this program rests with the Chief Accountant of the Commission, who has general supervision with respect to accounting and

auditing policies and their application .

.. See, for example, Rule 2--01 of Regulation S-X

.. see Rule 2(e) of Rules of Practice.

•
134 SECURITIES AND EXCHANGE COMMISSION

Progress in these activities requires continuing contact and consultation between the staff and outside accountants both individually and

through such representative groups as, among others, the American

Accounting Association, the American Institute of Certified Public

Accountants, the American Petroleum Institute, the Financial Analysts Federation, the Financial Executives Institute, and the National

Association of Railroad and Utilities Commissioners, as well as many

Government agencies. Recognizing the importance of cooperation in

the formulation of accounting principles and practices, adequate disclosure and auditing procedures which will best serve the interests of

investors, the American Institute of Certified Public Accountants, the

Financial Analysts Federation, and the Financial Executives Institute

appoint committees which maintain liaison with the Commission's

staff.

In recent years the Accounting Principles Board of the American

Institute of Certified Public Accountants has performed a vital function in this area. The work of the Board is reflected in accounting

research studies and opinions for the guidance of the profession.

Drafts of these studies are referred to the Commission's accounting

staff for review and comment prior to publication.

The many daily decisions to be made which require the attention of

members of the Chief Accountant's staff include questions raised by the

operating divisions of the Commission, the regional offices, and the

Commission itself. As a result of this day-to-day activity and the need

to keep abreast of current accounting problems, the Chief Accountant's

staff continually reexamines accounting and auditing principles and

practices. From time to time members of the staff are called upon to

assist in field investigations, to participate in hearings and to review

Commission opinions insofar as they pertain to accounting matters.

Prefiling and other conferences with officials of corporations,

practicing accountants and others are also an important part of the

work of the staff. Resolution of questions and problems in this manner

saves registrants and their representatives both time and expense. The

1964 amendments to the securities acts have brought many heretofore

"unregulated" companies into contact with the Commission. In many

cases, the independent accountants certifying the financial statements

of such companies have been a primary bridge between the companies

and the Commission. These companies and the accountants have

also been assisted by members of the Commission and of its staff who

have lectured and participated in institutes and symposiums sponsored

by various groups in different parts of the country where the 1964

amendments have been explained.

Many specific accounting and auditing problems are found in the

examination of financial statements required to be filed with the Com-
TEURTY-SECOND~AL REPORT 135

mission. Where examination reveals that the rules and regulations of

the Commission have not boon complied with or that applicable generally accepted accounting principles have not been adhered to, the

examining division usually notifies the registrant by an informal letter

of comment. These letters of comment and the correspondence or conferences that follow continue 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. Where particularly difficult or novel questions arise which cannot be settled by

the accounting staff of the divisions and by the Chief Accountant, they

are referred to the Commission for consideration and decision.

The increasing use by many companies of installment sales and

similar credit practices and the significance of the increasing amounts

of the related deferred income taxes involved caused the Commission

to state its opinion as to the proper reporting to be followed with

respect to such deferred income taxes. 50 The opinion states that where

installment receivables are classified as current assets in accordance

with the operating cycle practice, the related liabilities or credit items

maturing or expiring in the time period of the operating cycle, including the deferred income taxes on installment sales, should be classified

as current liabilities. Installment receivables not realizable within

1 year and the related deferred income taxes may be classified consistently as noncurrent items. In financial statements filed with the

Commission for fiscal years ending on or after December 31, 1965,

assets and liabilities entering into the operating cycle must be classified

consistently as current or noncurrent items. In addition, appropriate

disclosure of the classification followed and amounts involved should

be made.

During the year a review was made of the accountants' certificates

filed under paragraph (a) (5) of Rule 206(4)-2 under the Investment

Advisers Act of 1940, which requires that at least once a year an independent public accountant verify by actual examination all funds and

securities of clients held by an investment adviser. This review

showed that there was a wide variation in the scope of the examinations made and in the content of the accountants' certificates. Accordingly, the Commission issued an accounting series release 51 describing the nature of the examination to be made and the content

of the accountant's certificate.

Comments received with respect to the proposed revision of Form

.. Accounting Series Release No. 102 (December 7, 1965). See also Accounting

Series Release No. 96, reaffirming position taken in Accounting Series Release

No.4.

11 Accounting Series Release No. 103 (May 26, 1966.)
136 SECURITIES AND EXCItANGE COMMISSION

X-17A-5,52 the annual report of financial condition required to be filed

by brokers and dealers pursuant to Section 17 of the Securities Exchange Act of 1934, were under review during the fiscal year.

On the basis of information obtained in a non-public investigation

conducted during the fiscal year, the Commission had reason to believe

that there may have been a lack of adherence to auditing standards

by a certified public accountant in connection with the preparation

and submission of certain material to the Commission. As a conclusion to the investigation the Commission issued an order accepting the accountant's resignation from practice before the Commission. 53

Shortly after the close of the fiscal year the Commission issued

its order accepting the withdrawal from practice before the Commission of Homer E. Kerlin, a certified public accountant. 54 Proceedings

had been instituted pursuant to Rule 2 (e) of the Commission's Rules

of Practice to determine whether Kerlin, an accounting firm of which

he had been a partner, and the senior partner of such firm, had engaged in unethical or improper professional conduct in connection

with the preparation and certification of financial statements of the

Olen Company, Inc. and its successor, the Olen Division of H. L.

Green Company, Inc., in 1958and 1959. Subsequent to the institution

of such proceedings, the partnership was dissolved and the senior

partner died. The remaining respondent, Kerlin, without admitting

the allegations against him, agreed that he would not appear or practice before the Commission in the future, with the understanding

that the proceedings would be dismissed as to him and that the Commission might issue a statement with respect to its action. Concurrently with its order accepting Kerlin's withdrawal and dismissing

the proceedings, the Commission released a report of the staff's investigation, on the basis of which the staff had concluded that the conduct of the accounting firm in its audit of the Olen accounts, books

and records represented a complete abdication of the responsibilities

of an independent public accountant.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Section 15 of the Bretton Woods Agreements Act, as amended, exempts £rom registration under both the Securities Act of 1933 and the

Securities Exchange Act of 1934 securities issued, or guaranteed as

to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the

Commission such annual and other reports with respect to such

.. Securities Exchange Act Release No. 7683 (August 23, 1965). See 31st

Annual Report, p. 145.

II Accounting Series Release No. 104 (June 1, 1966)

.. Accounting Series Release No. 105 (July 29,1966).

•
THIRTY-SECOND ANNUAL REPORT 137

securities as the Commission determines to be appropriate in view of

the special character of the Bank and its operations, and necessary in

the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the

Bank to file quartely reports and also to file copies of each annual report of the Bank to its board of governors. The Bank is also required

to file reports with the Commission in advance of any distribution in

the United States of its primary obligations. The Commission, acting

in consultation with the National Advisory Council on International

Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed

by the Bank during the period of such suspension.

The Bank reported a net income of $143.7 million for the fiscal

year ending June 30, 1966. This compared with net earnings of $136.9

million in the fiscal year 1965.

On July 28, 1966, the Executive Directors allocated $67.8 million

from the year's net income to the Supplemental Reserve against losses

on loans and guarantees, increasing it to $731.6 million. This raised

the Bank's total reserves, including the Special Reserve, to $1,021.4

million. . The Executive Directors recommended to the Board of

Governors that $75 million of the year's earnings be transferred to

the Bank's affiliate, the International Development Association.

During the year, the Bank made 37 loans totaling $839.2 million,

compared with a total of $1,023.3 million last year. The loans were

made in Brazil, Chile, Colombia, Ethiopia, Finland, Guinea, Iran,

Israel, Jamaica, Japan, Kenya, Tanzania and Uganda (East African

Common Services Authority), Liberia, Malaysia, Mexico, Morocco,

New Zealand, Nigeria, Pakistan, Paraguay, Peru, Philippines, Portugal, Spain, Sudan, Thailand, Tunisia and Venezuela. This brought

the total number of loans to 461 in 79 countries and territories and

raised the gross total of commitments to $9,793.8 million. By June 30,

as a result of cancellations, exchange adjustments, repayments and

sales of loans, the portion of loans signed still retained by the Bank

had been reduced to $6,527.9 million.

During the year the Bank sold or agreed to sell $81.9 million principal amounts of loans, compared with sales of $106.2 million Iast year.

As of the end of the fiscal year, the total of such sales was $1,966.6

of which all except $69 million had been made without the Bank's

guarantee.

On June 30, 1966, the outstanding funded debt of the Bank was

$2,805.9 million, reflecting a net increase of $81.9 million in the past

year. During the year the funded debt was increased through the

private placement of bonds and notes totaling the equivalent of
138 SECURITIES AND EXCHANGE COMMISSION

$269.5 million, by the public sale in Canada of bonds totaling Can$

20 million (US$18.5 million) and by the issuance of $17.9 million of

bonds under delayed delivery arrangements. The debt was decreased

through the retirement of bonds and notes totaling the equivalent of

$175.6million, and by sinking and purchase fund transactions amounting to $48.4million.

During the year Malawi and Zambia became members of the Bank,

and Indonesia withdrew from membership. (On July 5, 1966, Indonesia applied for readmission.) The following 20 countries increased

their capital subscriptions to the Bank by a combined total of $908.7

million: Austria, Ceylon, Finland, Germany, Guatemala, Iran, Iraq,

Ireland, Israel, Jamaica, Japan, Jordan, Mexico, Norway, Saudi

Arabia, South Africa, Spain, Sweden, Thailand and Uruguay. Thus

on June 30, 1966, the subscribed capital of the Bank amounted to

$22,426.4 million.

INTER.AMERICAN DEVEWPMENT BANK

The Inter-American Development Bank Act, which authorizes the

United States to participate in the Inter-American Development Bank,

provides an exemption for certain securities which may be issued by

the Bank similar to that provided for securities of the International

Bank for Reconstruction and Development. Acting pursuant to this

authority, the Commission adopted Regulation lA, which requires

the Bank to file with the Commission substantially the same information, documents and reports as are required from the International

Bank for Reconstruction and Development. The Bank is also required

to file a report with the Commission prior to the sale of any of its

primary obligations to the public in the United States.

During the year ended .rune 30, 1966, the Bank made 14 loans

totalling the equivalent of $97,750,000 from its ordinary capital resources, bringing the gross total of loan commitments outstanding to

129, aggregating $678,020,422. During the year, the Bank sold or

agreed to sell $4,159,528in participations in these loans. All participations were without the guarantee of the Bank except for a participation of $400,000extended to one participant under a special agreement.

The loans from the Bank's ordinary capital resources were made in

Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Nicaragua,

Peru and Venezuela.

During the year the Bank also made 43 loans totaling the equivalent

of $270,530,000 from its Fund for Special Operations, bringing the

gross total of loan commitments outstanding to 99, aggregating

$461,300,671. In addition, the Bank made 5 loans aggregating

$18,800,000from the Social Progress Trust Fund, which it administers
TEITRTY-SECOND ~AL REPORT 139

under an Agreement with the United States, bringing the gross total

of loan commitments outstanding to 117, aggregating $501,233,534.

On June 30, 1966, the outstanding funded debt of the ordinary capital resources of the Bank was the equivalent of $373,900,000, reflecting

an increase during the year of the equivalent of $89 million. This increase consisted of two bond issues, including a $65 million short term

issue of which $57 million was placed with the central banks or other

central financial institutions of 15 Latin American member countries

and $8 million with central financial institutions of 2 non-member

countries, Israel and Spain. The other bond issue consisted of Italian

Lire in the amount of LIT 15,000,000,000 ($24,000,000). On June 27,

1966, the Bank entered into a loan agreement under which it is entitled

to borrow the equivalent of $10 million in local currency from the Export-Import Bank of Japan. As of June 30,1966, the Bank had not

borrowed any Japanese Yen.

The subscribed ordinary capital of the Bank on June 30, 1966, was

the equivalent of $1,769,820,000, of which $1,388,240,000 represented

callable capital.

ASIAN DEVELOPMENT BANK

The Asian Development Bank Act, approved March 16, 1966,55 authorizes United States participation in a new Asian Development Bank

and provides an exemption for certain securities which may be issued

by the Bank similar to the exemptions afforded to the International

Bank for Reconstruction and Development and the Inter-American

Development Bank. As of the end of the fiscal year, the Asian Development Bank had not been formally organized.

STATISTICS AND SPECIAL STUDIES

The regular statistical activities of the Commission and its participation in the overall Government statistical program under the

direction of the Officeof Statistical Standards, Bureau of the Budget,

have been continued in the Office of Policy Research. The statistical

series described below are published in the Commission's monthly

Statistical Bulletin. In addition, current figures and analyses of the

data are published quarterly on new securities offerings, individuals'

savings, stock trading of financial institutions, financial position of

corporations, and plant and equipment expenditures.

Issues Registered Under the Securities Act or 1933

Monthly statistics are compiled on the number and volume of registered securities, classified by industry of issuer, type of security, and

use of proceeds. Summary statistics for the years 1935-66 are given

II Public Law 89-369.
140 SECURrnES AND EXCHANGE CO~S~ON

in Appendix Table 1 and detailed statistics for the fiscal year 1966

appear in Appendix Table 2.

New Securities Offerings

Monthly and quarterly data are compiled covering all new corporate and non-corporate issues offered for cash sale in the United

States. The series includes not only issues publicly offered but also

issues privately placed, as well as other issues exempt from registration

under the Securities Act such as intrastate offerings and offerings of

railroad securities. The offerings series includes only securities actually offered for cash sale, and only issues offered for account of issuers.

Estimates of the net cash flow through securities transactions are

prepared quarterly and are derived by deducting from the amount of

estimated gross proceeds received by corporations through the sale of

securities the amount of estimated gross payments by corporations to

investors for securities retired. Data on gross issues, retirements and

net change in securities outstanding are presented for all corporations

and for the principal industry groups.

Individuals' Savings

The Commission compiles quarterly estimates of the volume and

composition of individuals' savings in the United States. The series

represents net increases in individuals' financial assets less net increases

in debt. The study shows the aggregate amount of savings and the

form in which they occurred, such as investment in securities, expansion of bank deposits, increases in insurance and pension reserves, etc.

A reconciliation of the Commission's estimates with the personal savings estimates of the Department of Commerce, derived in connection

with its national income series, is published annually by the Department of Commerce as well as in the Securities and Exchange Commission Statistical Bulletin.

Private Pension Funds

An annual survey is published of private pension plans other than

those administered by insurance companies, showing the flow of money

into these funds, the types of assets in which the funds are invested

and the principal items of income and expenditures. Quarterly data

on assets of these funds are published in the Statistical Bulletin.

Stock Trading of Financial Institutions

A new statistical report published in June 1966 contained data on

stock trading of four principal types of financial institutions. Information on purchases and sales of common stock by private non-insured

pension funds and non-life insurance companies has been collected on

a quarterly basis by the Commission since 1964; these data- are com-
TEITRTY-SECOND ANNUAL REPORT 141

bined with similar statistics prepared for mutual funds by the Investment Company Institute and for life insurance companies by the Institute of Life Insurance. A quarterly release is being published in

the current fiscal period.

Financial Position of Corporations

The series on the working capital position of all United States corporations, excluding banks, insurance companies and savings and loan

associations, shows the principal components of current assets and liabilities, and also contains an abbreviated analysis of the sources and

uses of corporate funds.

The Commission, jointly with the Federal Trade Commission, compiles a quarterly financial report of all United States manufacturing

concerns. This report gives complete balance sheet data and an abbreviated income account, data being classified by industry and size of

company.

Plant and Equipment Expenditures

The Commission, together with the Department of Commerce, conducts quarterly and annual surveys of actual and anticipated plant

and equipment expenditures of all United States business, exclusive of

agriculture. After the close of each quarter, data are released on actual capital expenditures of that quarter and anticipated expenditures

for the next two quarters. In addition, a survey is made at the beginning of each year of the plans for business expansion during that

year.

Directory of Registered Companies

The Commission annually publishes a listing of companies required

to file annual reports under the Securities Exchange Act of 1934. In

addition to an alphabetical listing, there is a listing of companies by

industry group classified according to The Standard Industrial

Classification Manual.

Stock Market Data

The Commission regularly compiles statistics on the market value

and volume of sales on registered and exempted securities exchanges,

round -lot stock transactions on the New York exchanges for account

of members and non-members, odd-lot stock transactions on the New

York exchanges and block distributions of exchange stocks. Publication of odd-lot transactions in '75 selected stocks on the New York

Stock Exchange was begun in the fall of 1964. Since January 1965,

the Commission has also been compiling statistics on volume of overthe-counter trading in common stocks listed on national securities

exchanges based on reports filed under Rule 1'l&-:-9 of the Securities

Exchange Act dealing with the ''third market."
142 SECURITIES AND EXCHANGE COMMISSION

Data on round-lot and odd-lot trading on the New York exchanges

are released weekly. The other stock market data mentioned above, as

well as these weekly series, are published regularly in the

Commission's Statistical Bulletin.

OPINIONS OF THE COMMISSION

Formal administrative proceedings under the statutes administered

by the Commission generally culminate in the issuance of an opinion

and order. Where hearings are held, the hearing officer who presides

normally makes an initial decision following the hearings, unless such

decision is waived by the parties. Under an amended procedure which

went into effect in April 1966, the initial decision includes an appropriate order. If Commission review is not sought, and if the case is not

called up for review on the Commission's own initiative, the initial

decision becomes the final decision of the Commission.

In those instances where it prepares its own decision, upon review

or waiver of an initial decision, the Commission, or the individual

Commissioner to whom a case may be assigned for the preparation of

an opinion, is generally assisted by the Office of Opinions and Review.

This Office is directly responsible to the Commission and is completely

independent of the operating divisions of the Commission, consistent

with the principle of separation of functions embodied in the Administrative Procedure Act. Where the parties to a proceeding waive

their right to such separation, the operating division which participated in the proceeding may assist in the drafting of the Commission's

decision.

The Commission's opinions are publicly released and are distributed

to the press and to persons on the Commission's mailing list. In addition, they are printed and published periodically by the Government

Printing Office in bound volumes entitled "Securities and Exchange

Commission Decisions and Reports."

Procedures for Publishing Hearing Examiners' InItial Decisions

The Commission recently adopted procedures to make the initial

decisions of its hearing examiners more readily available to the

public."

In accordance with the Commission's Rules of Practice, an announcement of the issuance of an initial decision in public administrative proceedings is carried in the Commission's News Digest. Copies

of such decisions will be made available in the public reference room

of the Commission's headquarters office, and in each regional and

branch office. Those initial decisions which become the decisions of

the Commission, and which the Commission determines are of prec-

.. Securities Exchange Act Release No. 7942 (August 23, 1966).
TEITRTY-SECOND ~AL REPORT 143

edential significance, will be published in whole or in part in the

Securities and Exchange Commission Decisions and Reports.

In administrative proceedings which are conducted privately, the

initial decision will not be made publicly available, unless the Commission otherwise orders, until the period within which review may

be sought or ordered has expired and no review has been sought or

ordered. Thereupon, except as noted below, the fact that the initial

decision has been issued and become final will be announced by the

Secretary, and copies will be made available and included in the Decisions and Reports as described above. Initial decisions in private

proceedings which grant an application for confidential treatment or

conclude that the evidence does not sustain the violations charged will

generally not be made public.

Only a limited supply of initial decisions is printed at the time of

their issuance. Requests for copies will be honored until the supply

is exhausted; thereafter, copies may be obtained only upon payment

of the prevailing rate for reproductions.

DISSEMINATION OF INFORMATION

As the discussion in prior sections of this Report indicates, most large

corporations in which there is a substantial public investor interest

have filed registration statements or applications under the Securities

Exchange Act or the Securities Act with the Commission and are

required to file annual and other periodic reports. The financial

and other data included in these documents receive widespread dissemination through the medium of securities manuals and other financial publications, thus becoming available to broker-dealer and

investment adviser firms, trust departments and other financial institutions and, through them, to public investors generally.

Various activities of the Commission facilitate public dissemination

of corporate and other information. Among these is the issuance of a

daily "News Digest" which contains (1) a resume of each proposal for

the public offering of securities for which a Securities Act registration

statement is filed; (2) 'a listing of those companies whose shares are

traded over-the-counter which register with the Commission and of all

companies which file interim reports reflecting significant corporate

developments; (3) a summary of all orders, decisions, rules and rule

proposals issued by the Commission; (4) a brief report of court 'actions

resulting from the Commission's law enforcement program; and (5)

a brief reference to each release issued by the Commission in its statistical studies. During the year, the News Digest reported information

concerning among other things 1,697 registration statements filed

under the Securities Act, 950 orders, decisions, rules and rule proposals,

272 court enforcement actions, and 74 statistical releases.

238-643--66----11
144 SECURITIES AND EXCHANGE COMMISSION

The News Digest is made immediately available to the press, and

it is also reprinted and distributed by the Government Printing Office,

on a subscription basis, to some 2,350 investors, securities firms, practicing lawyers and others. In addition, the Commission maintains

mailing lists for the distribution of the full text of its orders, decisions,

rules and rule proposals.

During the year, individual members of the Commission and numerous staff officers addressed various professional, business and other

groups and participated in panel discussions of the laws administered

by the Commission, the rules and regulations thereunder, and the

policies, procedures and practices of the Commission. These speeches

and discussions are helpful in promoting a better understanding of the

functions and activities of the Commission, thus facilitating compliance

with the laws and rules. In addition, they stimulate public discussion

of ways and means of improving the administrative process.

Information Available for Public Inspection

The many thousands of registration statements, applications, declarations and annual and other periodic reports filed with the Commission each year are available for public inspection at the Commission's

principal office in Washington, D.C. In addition, copies of recent

reports filed by companies having securities listed on exchanges other

than the New York Stock Exchange and the American Stock

Exchange, and copies of current reports of many non-listed companies, may be examined in the Commission's New York Regional

Office. Recent reports filed by companies whose securities are listed

on the New York and American Stock Exchanges may be examined

in the Commission's Chicago Regional Office. Moreover, there are

available for examination in all regional offices copies of prospectuses

relating to recent public offerings of securities registered under the

Securities Act; and all regional offices have copies of broker-dealer

annual financial reports and Regulation A letters of notification filed

in their respective regions.

Reports of companies whose securities are listed on the various

exchanges may be seen at the respective exchange offices. Inaddition,

the registration statements filed pursuant to the new Section 12(g)

of the Securities Exchange Act of 1934 are available for public

inspection in the principal office in Washington, D.C., the New York,

Chicago and San Francisco Regional Offices, and the regional office

nearest the registrant.

In order to facilitate wider dissemination of financial and other

information contained in corporate reports filed with the Commission

under the Federal securities laws (an objective strongly urged by

the Special Study Report), the Commission has arranged to take
TmRTY-SECOND ANNUAL REPORT 145

standing orders, on an experimental basis, for photocopies of annual

reports filed on Form 1O-K. This service may be extended later to

other reports, depending upon public reception and the experience

gained in supplying copies of annual reports.

Under the existing contract with a printing company for the reproduction of material in the Commission's public files in response to

requests of members of the public, photocopies may be obtained at

a cost of 10 cents per page for pages not exceeding 81;2" x 14" in size.

The detailed per page prices are given in Release No. 34-7910, which

may be obtained from the Publications Unit of the Commission.

The charge for each certification of any document by the Commission

is $2.

In order to make corporate reports more readily available for

examination by interested members of the public, the Commission

has also made arrangements for the Form 1o-K annual reports and

Form 10 registration statements to be placed on open shelves in the

public area of its Public Reference Room in Washington, D.C., thus

making these reports available for immediate inspection. There are

presently three coin-operated photocopiers in the Public Reference

Room to enable visitors to make immediate reproductions of reports

at a cost of 25 cents per page. (The New York Regional Office has

a similar maehine.)

Each year many thousands of requests for photocopies of and information from the public files of the Commission are received in the

Public Reference Room in Washington, D.C. During the year 6,110

persons examined material on file in the Washington, D.C. office,and

several thousand others examined files in the New York and Chicago

regional offices. More than 15,400 searches were made for individuals

requesting information and approximately 2,714 letters were written

with respect to information required.

PUBLICATIONS

Inaddition to the daily News Digest, and releases concerning Commission action under the Acts administered by it and litigation involving securities violations, the Commission issues a number of other

publications, including the following:

Weekly:

Weekly Trading Data on New York Exchanges: Round-lot and odd-lot

transactions effected on the New York and American Stock Exchanges

(information is also included in the Statistical Bulletin).

Monthly:

Statistical BUlletin."

Official Summary of Securities Transactions and Holdings of Officers, Directors and Principal Stockholders."

Footnotes on following page.
146 SECURITIES AND EXCHANGE COMMISSION

Quarterly:

Financial Report, U.S. Manufacturing Corporations (jointly with the Federal Trade Commission.) G (Statistical Series Release summarizing this

report is available from the PUblications Unit.)

Plant and Equipment Expenditures of U.S. Corporations (jointly with the

Department of Commerce).

New Securities Offerings.

Volume and Composition of Individuals' Saving.

Working Capital of U.S. Corporations.

Stock Transactions of Financial Institutions.

Annually:

Annual Report of the Commission. G

Securities Traded on Exchanges under the Securities Exchange Act of 1934.

List of Companies Registered under the Investment Company Act of 1940.

Classification, Assets and Location of Registered Investment Companies under the Investment Company Act of 1940. b

Private Noninsured Pension Funds (assets available quarterly in the Statistical Bulletin).

Directory of Companies Filing Annual Reports. a

Other Publications:

Decisions and Reports of the Commission. a

Judicial Decisions. a

A Study of Mutual Funds (by The Wharton School). a

Report of Special Study of Securities Markets. a

Accounting Series Releases-Compilation of 1-89. a

Securities and Exchange Commission-The Work of the Securities and

Exchange Commission.

Commission Report on Public Policy Implications of Investment Company

Growth,s

ORGANIZATION

During fiscal year 1966 and shortly thereafter, certain organizational changes were effected in accordance with the Commission's policy

of continuing review of its organization and functional alignments.

In April 1966, the staff and functions of the Branch of Market

Analysis of the Division of Trading and Markets were transferred to

the Officeof Policy Research, to be consolidated with the Commission's

economic and statistical studies and the compilation of data on program activities. At the same time, the staff and functions of the Chief

Counsel's Office in the Office of Policy Research were transferred to

the Office of Regulation in the Division of Trading and Markets, to

assist directly in that Division's responsibilities for the regulation of

the securities market. In addition, two Associate Directors were appointed for the Division of Trading and Markets, one to be responsible

for Markets and Regulation and the other for Enforcement.

a Must be ordered from the Superintendent of Documents, Government Printing Office,Washington, D.C., 20402.

b This document is available in photocopy form. Purchasers are billed by the

printing company which prepares the photocopies.
SECURITIES AND EXCHANGE COMMISSI

THE COMMISSION 


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148 SECURITIES AND EXCHANGE COMMISSION

In July 1966, a number of organizational changes were effected in

the Division of Trading and Markets. The Office of Criminal Reference and the Office of Proceedings, which performed similar functions,

were consolidated; the Branch of Distribution and Stabilization was

abolished; and the three Branches of Enforcement were consolidated

into two Branches.

PERSONNEL AND FINANCIAL MANAGEMENT

Highlights of the Commission's personnel management-program in

fiscal 1966 included (1) revision of its Conduct Regulation, (2) the

granting of SEC "Distinguished Service" awards for outstanding

career service, (3) participation with other regulatory agencies in a

joint seminar program for summer students, and (4) the addition of

an important fringe benefit in the form of income protection insurance.

Under Executive Order 11222 of May 8, 1965, "Prescribing Standards of Ethical Conduct for Government Officers and Employees,"

the Civil Service Commission issued broad regulations which established a uniform pattern for agency regulations and minimum requirements to be met. The Commission's Conduct Regulation, first

adopted in 1953, "to restate the ethical principles which it believes

should govern and have governed the conduct of Members and employees and former Members and former employees of the Securities

and Exchange Commission," was accordingly revised as of March 21,

1966. The revised version clarified certain provisions of existing rules

and added new rules required by the basic regulations of the Civil

Service Commission, including rules relating to the disclosure by employees of information relating to their finances.

As part of its Eleventh Annual Service and Merit Awards Ceremony

held in October 1965, the Commission inaugurated a new series of

"Distinguished Service" awards for outstanding career service. The

first four recipients of the awards-Commissioner Byron D. Woodside; Robert H. Bagley, Associate Director, Division of Corporation

Finance; Orval L. DuBois, Secretary of the Commission; and William Green, Administrator of the Atlanta Regional Office-had a combined total of 124 years of SEC service.

The Commission and seven other regulatory agencies supplemented

the 1965 White House Seminar Program for summer students by

conducting a joint program entitled "Regulation in a Democracy."

This half-day program, which included prepared statements by the

panel members and a question and answer session, was devoted to three

topics:

"The Purpose of Regulation in a Democracy"

"The Tasks of Regulatory Agencies"

"Effects of Regulation on Our Daily Lives"
TEITRTY-SECOND ANNUAL REPORT 149

Almost 100 students attended, including 17 employed by the Commission.

InJanuary 1966, under the sponsorship of the SEC Recreation and

Welfare Association, all Commission employees were offered low-cost

income protection insurance designed to minimize the financial burden

in cases of illness or disability. The insurance, offered as an employee

service at no cost to the Commission, is part of a continuing effort to

make special-type insurance available to employees at low-cost group

rates.

During the fiscal year 1966, within-grade salary increases in

recognition of high quality work performance were granted to 54

employees. These awards are authorized by Section 702 of the Classification Act of 1949, as amended by the Salary Reform Act of 1962.

In addition, cash awards totaling $3,500 were presented to 19 employees for superior performance and 6 employees received a total

of $100 for adopted suggestions.

The following comparative table shows the personnel strength of

the Commission as of June 30, 1965 and 1966 :

June 30, 1965 June 30, 1966

Commlssioners __________________________________________________________ 5 5

Staff:Headquarters office__________________________________________________ 876 887 Regional omces ______________________________________________________ 539 493

Total staff _________________________________________________________ 1.415 1,380

Grand total_. _____________________________________________________ 1,420 1,385

The table on page 151 shows, for the fiscal years 1962 to 1967, the

status of the Commission's budget estimates from the initial submission to the Bureau of the Budget to final enactment of the annual

appropriation.

The Commission is required by law to collect fees for or from (1) the

registration of securities proposed to be offered; (2) qualification of

trust indentures; (3) registration of exchanges; (4) brokers and

dealers who are registered with the Commission but who are not members of a registered national securities association (the National Association of Securities Dealers (NASD) is the only such organization) ;

and (5) certification of documents filed with the Commission. 51

07 Principal rates are (1) 1/50 of 1 percent of the maximum aggregate price

of securities proposed to be offered, or 20 cents per $1,000, with a minimum fee

of $100 (Public Law 89-289, approved October 22, 1965, effective January 1, 1966) ;

(2) 1/500 of 1 percent of the aggregate dollar amount of securities sales on the

exchanges; (3) for fiscal 1965 : a basic registration fee of $100 for each non-NASD

broker-dealer, plus $2 per associated person up to a limit of 100 persons, plus $1

for each additional associated person. For fiscal 1966 : a base fee of $150 for each

non-NASD broker-dealer, plus $7 for each associated person, plus $30 for each

office and $25 for each associated person joining such broker-dealer after

August 1, 1966.
150 SECURITIES AND EXCHANGE COMMISSION

The following table shows the Commission's appropriation, total

fees collected, percentage of fees collected to total appropriation, and

the net cost to the taxpayers of Commission operations for the fiscal

years 1964, 1965 and 1966.

Percentage of

fees collected Net cost of

Year Appropriation Fees collected to total Commrssion

appropriation operations (percent)

1964____________________________________ $13,937, 500 $3,106,213 22 $10,831,287 1965____________________________________ 15,«2,000 3,300,165 21 12,141,835 1966____________________________________ 16,«2,000 6,607,064 40 9,834,936
TEURTY-SECOND ~AL REPORT 151

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PART XII

APPENDIX

STATISTICAL TABLES

TABLE I.-A 3e-year record of registrations effective under the Securities Act of

1933-fiscal years 1935-1966

[Amounts In millions of dollars]

For cash sale for account of issuers Number

Fiscal year ended June 30 of All regisstate- trations Bonds, Preferred Common ments I Total debentures, stock stock and notes

1935 , _________________________

1936___________________________ 284 $913 $686 $490 $28 $168

1937___________________________ 689 4, 835 3,936 3,153 252 531

1931L _________________________ 840 4,851 3,635 2,426 406 802 412 2,101 1,349 666 209 474 1939___________________________ 344 2,579 2,020 1,593 109 318 1940___________________________ 306 1,787 1,433 1,112 110 210 1941. __________________________ 313 2,611 2,081 1,721 164 196 1942___________________________ 193 2,003 1,465 1,041 162 263 1943___________________________ 123 659 486 316 32 137 1944___________________________ 1945___________________________ 221 1,760 1,347 732 343 272

1946___________________________ 840 3,225 2,715 1,851 407 456

1947___________________________ 661 7,073 5,424 3,102 991 1,331

1948___________________________ 493 6,732 4,874 2,937 787 1,150

1949___________________________ 435 6,405 5,032 2,817 537 1,678 429 5,333 4,204 2,795 326 1,083 1950___________________________ 487 5,307 4,381 2,127 468 1,786 195L __________________________ 487 6,459 5,169 2,838 427 1,904 1952___________________________ 1953___________________________ 635 9,500 7,529 3,346 851 3,332 593 7,507 6,326 3,093 424 2,808 1954___________________________ 631 9,174 7,381 4,240 531 2,610 1955___________________________ 779 10,960 8,277 3,951 462 3,864 1956___________________________ 906 13,096 9,206 4,123 539 4,544 1957___________________________ 876 14,624 12,019 5,689 472 5,858 1958___________________________ 813 16,490 13,281 6,857 427 5,998 1959___________________________ 1,070 15,657 12,095 5,265 443 6,387 1960___________________________ 1,426 14, 367 11,738 4, 224 253 7,260 196L __________________________ 1,550 19,070 16,260 6,162 248 9,850 1962___________________________ 1968___________________________ 1,844 19,547 16,286 4,512 253 11,521

1,157 14, 790 11,869 4,372 270 7,227 1964___________________________ 1,121 16,860 14, 784 4,554 224 10,006 1965___________________________ 1,266 19,437 14,656 3,710 307 10,638 1966___________________________ 1,523 30,109 25,723 7,061 444 18,218

I Statements registering Amencan Depositary Receipts against outstanding foreign securities as provided

by Form 8-12 are Included.

'For 10 months ended June 30,1935

155
156 SECURITIES AND EXCHANGE COMMISSION

TABLE 2.-Regi8trati01l8 effective under the Securities Act of 1999, fiscal year ended

June 90, 1966

PART i.-DISTRIBUTION BY MONTHS

[Amounts In thousands of dollars I]

AU registrations Proposed for sale for account of Issuers

Totals • Corporate •

Year and month Number Number

of state- of Amount ments Issues Number Number

of Amount of Amount

Issues' Issues.

--- ---- 1965 July ______________________ 112 128 $1,438,048 106 $1,185,130 60 $698,178 August ___________________ 103 120 1,334,638 98 1,164,067 47 440,339 September _______________ 108 136 2,369,658 110 1,872,970 66 728,859 October __________________ 100 115 1,024,652 95 839,850 61 350,873 November _______________ 107 119 2,459,253 101 2,279,301 52 848,597 December ________________ 135 160 2,322,120 133 2,016,334 60 420,913

1966 January __________________ 119 145 4,639,11711 117 4,224,084 44 666,340 February ________________ March 84 102 2,093,3117 83 l,Il66,271 38 667,672 ___________________

A 118 146 2,304,428 108 1,1167,107 68 1,182,1117 pril, ____________________ 216 2211 3,668,307 1111 3,180, 140 68 723,642 May _____________________ 152 170 3,779,477 146 2,1132,5211 53 1,204,623 June _____________________ 170 214 2,685,610 1611 2,126,516 80 1,066,619

--- Total, fiscal year I

1,623 25,723,287 11166______________ 1,783 30,100,466 1,457 646 8,779,272

PABT2.-PURPOSE OF REGISTRATION AND TYPE OF SECURITY

(Amounts In thousands of dollarS 1]

Type of security

Purpose of registration AU types

Bonds,de- Preferred Common

bentures, stock stock 7

and notes ,

AU reglstrstlons (estimated value) __________________ $30, 100,466 $7,170, 1146 $763,887 $22,174,634 For account of Issuer for cash sale ______________ 26,723,287 7,060,800 444, 1111 18,218,398 For Immedlate offerlng' ___________________ Corporste 1I,261,53Il 6, 7lIl, 787 383,1l46 2,167,857 ______________________________ 8,779,272 6,267,470 363,1l46 2,167,857 Offered to: General publlc _________________ 7,283,4211 6,066,004 284,270 1l33,166 Security holders ________________ 1,444,645 178,727 79,21l4 1,186,624 Other special groups ___________ 61,l1l1! 12,738 382 38,079

For ;~~!~n~;i"oiJieriSSii;;s-C=

482,317 462,317 20,000 0 16,461,698 341,021 60, 136 16,060,641 For account of Issuer for other than cash sale ___ 2,422,1ll1 61,771 234,860 2,136,461 For account of other than Issuer ________________ l,ll64, 007 68,366 84,1l46 1,820,785 For cash sale _______________________________ Other 1,700,276 22,202 362 1,677,721 ______________________________________ 263,823 36,164 84,6Il6 143,064

See footnotes at end of part 4 of table.

•

•
THIRTY-SECOND ANNUAL REPORT 157

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THIRTY-SECOND ANNUAL REPORT 
 159 

Taece 3.-Bvokcrs and dealers registered under the Securities Ezchange Ad,of 193'4 1-efective registratirms as of June 3'0, 1980, classifid by type of organizatron 

and by location of principal ofice 

Number oi pio~netors partners, omcsn, eto.ai 
160 SECURITIES AND EXCHANGE COMMISSION

TABLE 4.-Number of 8ecurity i88ue8 and i88uer8 on exchangea

PARTl.-UNDUPLICATED COUNT AS OF JUNE 30, 1966 OF THE NUMBER OF STOCK

AND BOND ISSUES ADMITTED TO TRADING ON EXCHANGES UNDER SECTION 12

?Jv~~~lJ.CURITIES EXCHANGE ACT OF 1934, AND THE NUMBER! OF ISSUERS

Total Issuers Status under the Act I Stocks Bonds stocks and involved bonds

Registered pursuant to Sections 12 (b), (c), and (d) ____ 2,958 1,262 4,220 2,578

Temporarily exempted from registratlon by Commls- sion rule _____________________________________________ 12 6 18 10 Admitted to unlisted trading prlvlledges on registered exchanges pursuant to Section 12(0 ___________________ 100 17 II7 85 Listed on exempted exchanges under exemption orders of the Comrmssion ___________________________________ 56 6 62 45 Admitted to unlisted trading prlvlledges on exempted

exchanges under exemption orders of the Oommtssion, 13 0 13 13

TotaL ___________________________________________ 3,139 1,291 4,430 2,731

I Registered' Section 12(b) olthe Act provides that a secunty may be registered on a natronal securities

exchange by the Issuer filing an application WIth the exchange and WIth the Commtssion contaming specified

information. Section 12(c) authorizes the Commrsslon to require the subrrussion of Information of a com.

parable character Ifm its judgment Information specified under Section 12(b) ISmappheable to any specified

class or classes of issuers. Section 12(d) provides that If the exchange authorities certify to the Commission

that the security has been approved by the exchange for listmg and registration, the registration shall become

effective 30 days after the receipt of such oertificatron by the Commission or within such shorter period of time as the Commlssion may dctennlne.

Temporarily exempted' These are stocks of certain banks and other securlties resulting from mergers,

consolidations, etc, which the Commission has by published roles exempted from regtstration under speer- fied conditlons and for stated periods.

Admitted to unlisted trading prtvileges- Section 12(0, as amended, provides, in effect that securities which

were admitted to unlisted trading privileges (i.e., WIthout applications for Iistmg filed by the issuers) before

July I, 1964 may contmue such status. Addtnonet securities may be granted unlisted trading privileges on exchanges only If they are listed and registered on another exchange.

LIsted on exempted exchanges' Certain exchanges were exempted from full registration under Section 6

of the Act because of the lunlted volume of transactions. The Oommisston's exemption order specifies III

each mstance that securitles which were listed on the exchange at the date of such order may continue to be hsted thereon, and that thereafter no additronal securtnes may be hsted except upon compliance WIth Sections 12 (b), (c), and (d).

Unlisted on exempted exchanges: The Oommlsslon's exemption order specifies in each instance that

secunnes wlnch were admitted to unlisted trading privileges on the exchange at the date of such order may

continue such privileges, and that no additional securities may be admrtted to unlisted trading privileges

except upon comphanee with SectIon 12(0.

PART 2.-NUMBER OF STOCK AND BOND ISSUES ON EACH EXCHANGE AS OF JUNE 30,

1966, CLASSIFIED BY TRADING STATUS, AND NUMBER OF ISSUERS INVOLVED

Stocks Bonds

Exchanges Issuers

R X U XL XU Total R X U XL Total

------- ---------------- -- Amerlcan _____________ I, 00i 936 3 II5 ------ -.-....... 1,054 83 2 18 B ------ 103 oston ________________ 458 54 2 4II ------ ------ 467 10 ------ ------ --_ ...-- 10 Chieago B card of Trade _______________ 8 5 ----i- 3 ------ ------ 8 Otncmnatt., --.--ii- ------ ------ 179 32 151 ---ii- .. 184 1 ------ ------ 10 Colorado Springs. II --iiiii- ...._- II .. Detroit ......._-- ------ ------ ------ 288 94 2 ---is- Honolulu. 295 ------ --.... 48 --i34- Mldwest 43 56 ..._---- ---- ...- 6 6 445 347 1 ------ ------ 482 12 ------ ------ ------ 12 Nationa!..

New York 13 14 ~--_..- 14 ------ ------ ------ ____________ 1,450 1,648 8 ------ ------ ------ 1,656 1,161 4 ------ ------ 1,165 PacI1Ic Coast 564 416 4 218 ---_ .. 638 26 1 ---- ... - .. .. 27

Phtladelplne-Baltl- more-Washington ___ 615 182 4 517 ------ 703 50 ------ ------ --.--- 50 Pittsburgh III 35 ------ 82 ------ 117 1 --~--------- ------ 1 Richmond. _________._ 15 ----~-- ----S- Salt Lake 25 25 ------ ------ ------ 62 60 -.---- --.--- ------ 63 ------- ------ ------ ------ ------ San FrancISCO Mmlng_ 29 29 ------ ------ 29 ------- ------ ---- ..- ------ ----- .. Spokane. 25 22 ..... 6 28 .._----- ------ ------ ---- ....

Symbols: R-reglstered; X-temporart!y exempted; U-admltted to unlisted trading privileges; XLlisted on an exempted exchange; XU-admitted to unlisted trading privileges on an exempted exchange. NOTE.-Issues exempted under Section 3(a)(12) of the Act, such as obhgatlons of the United States Government, the States and otnes, are not included in this table .

Exempted exchanges.

__________ - ---- ____ _______________ ------- ------ -- -- ---- ------- ------ ____________ _____ --~-~-------- •__• _____

____________ ------ ------ ------ ------- ------

________• ------ -

____________ ~-----

_____________ ------ ~---~- ------- ------

-~---- ______•______ ---- ------ ------ ------

------ -~

-- _ -

•
THIRTP-SECOND ANNUAL REPORT 161 

TABLE5.-Vdue of stocks on ezchanges (inbillim of dollars) 

New York Amerloan Exclusively 

Dwmber 31 stock 1 1t1Y onotb~ Totdl

ExDhanm Erohmge exchanges 

1836............................................ $59.8 $148 .............. 1747 


1837............................................ 83.8 10.2 .............. 49.1 


1838............................................ 47.5 10.8 .............. W3 


1939............................................ 46.6 10.1 ......:....... M.6 
 1840............................................ 41.8 86 .............. 50.6 


1941............................................ 35.8 7.4 .............. 43.2 


1042............................................ 38.8 7.8 .............. 466 


I043............................................ 47.6 8.8 .............. 57.5 


1644............................................ 55.5 11.2 .............. 66.7 
 194.5............................................ 73.8 14.4 .............. 58.2 


1946............................................ M.6 13.2 .............. 81.8 


1047............................................ 89.3 12.1 .............. 80.4 
 1848............................................ 67. 0 11.9 Od. 0 81.8 


1949............................................ 76.3 12.2 3.1 91.8 


1950............................................ 83.8 13.8 3.3 llL0 


1851............................................ 109.6 16.5 3.2 128.a 
 1952............................................ 120.6 16.9 81 1M.5 


1853............................................ 117.3 15. 3 2.8 la4 


1934............................................ 169.1 22.1 3.6 1W8 
 1953. ........................................... 207.7 27. 1 4.0 ZIg8
 1B58............................................ 219.2 31.0
 3.8 
 2340

1957............................................ 195.6 2b 5 3.1 2242 1958............................................ 278 7 31.7 43 31Z7 

1059............................................ 307.7 26.4 42 3384 1880............................................ 3 W. 0 24 2 41 a5.3 

1881............................................ 837.8 33.0 h3 %2 1W2............................................ 3958 244 4.0 3742 

1861............................................ 411 3 2%1 43 441.7 1884............................................ 474 3 z.2 43 5068 

1885............................................ 537.5 30.0 4= 67X1 

1Total -dues 1EO047incluriware for the New York Stak Exchange and the Amerieau Stoch- Erohangs 

on17. 
162 SECURITIES AND EXCHANGE COMMISSION

TABLE 6.-Dollar volume and share volume of sale8 effected on securities exchanges

in the calendar year 1965 and the 6-month period ended June 30, 1966

[Amounts In thousands]

PART 1.-12 MONTHS ENDED DEC. 31,1965

Bonds Stocks Rights and

warrants Total Exchanges dollar

volume Dollar Principal Dollar Share DoUar Num- volume amount volume volume volume ber of

units

--- Registered exchanges. 93,324,670 3,794,216 3,288,676 89,225,194 2,586,856 305,260 81,690

American .. ______________._ --- 9,025,800 150,925 138,327 8,611,828 582, 212 263,047 19,632 Boston. 381,825 0 0 381,824 7,151 1 10 Chicago Board of Trade. ___ 0 0 0 0 0 0 0 ClncmnatL 72, 481 41 53 72,074 1,24B 366 137 Detroit. ___________________ 630,472 0 0 630,342 14,064 130 160 Midwest _. 3,086,052 5 5 3,085,808 69,605 239 669 N atlona!. _._. ______________ 290 0 0 290 238 0 0 New York_. _______________ 76,877,502 3,643,109 3.150,159 73,199,997 1,809,351 34,396 57,872 Pacific Coast ... 2, 180, 025 102 98 2,172, 958 59,427 6,966 3,014 PhUa.-Balt .•Wash __________ 1,009,257 35 35 1,009,107 21,696 115 196 Pittsburgh 48,407 0 0 48,407 1.155 0 0 Salt Lake .• 4,742 0 0 4,742 8,984 0 0 San Francisco. _____________ 1,653 0 0 1,653 5,180 0 0 Spokane 6,164 0 0 6,164 6,546 0 0

--- Exempted exchanges. 18,683 44 20 18,545 1,853 94 613

--- Colorado Sprlngs ___________ 163 0 0 163 1,172 0 0 Honolulu 15,082 44 20 14,944 598 94 613 Rlchmond . 3,279 0 0 3,279 73 0 0 'VheelIng 159 0 0 159 9 0 0

PART 2 -6 MONTHS ENDED JUNE 30.1966

Bonds Stocks Rights and

warrants

Total Exchanges dollar

volume Dollar Principal Dollar Share Dollar Numvolume amount volume volume volume ber of uruts

--- Registered exchanges. 72,653,073 2,353,307 1,894,662 69,961,349 1,830,588 333,418 63,671

American __________________ --- 9,503,377 85,814 71,490 9,146,705 479,822 270, 858 13,193 Boston, 373,621 0 0 373,614 6,607 6 28 Chicago Board of Trade. ___ 0 0 0 0 0 0 0 Omctnnatr, 46,892 7 10 46,884 801 , , Detroit. . 389,321 0 0 389,192 7,868 129 101 MIdwest. __________________ 2,194,898 1 1 2,194,482 46,297 415 259 National ___________________ 389 0 0 389 169 0 0 New York _________________ 57,591,849 2,272,376 1,823,054 55,263,592 1,218,876 55,880 48,361 Paeiflc C085I-.. ____________ 1,841,001 107 106 1,834,945 43,457 5,590 1,595 PhUa.-Balt.- W ash •. ________ 672,077 2 2 671,895 13,437 180 133 Pittsburgh, 29,444 0 0 29,444 663 0 0 Salt Lake 2,949 0 0 2, 949 3,715 0 0 San Francisco Mining ______ 1,762 0 0 1,762 3,784 0 0 Spokane. 5,494 0 0 5,494 5,092 0 0

--- Exempted exchanges. 8,537 17 7 8,494 1,359 25 117

--- Colorado Springs _________._ 158 0 0 158 1,087 0 0 Honolulu __________________ 7,164 17 7 7,122 245 25 117 Richmond 1,214 0 0 1,214 27 0 0

, The "\Vheellng Stock Exchange dissolved and tenninated Its exemption trom registration as a national

secnritles exchange effective April 30, 1965. NOTE.-Data on the value and volume of securities sales on the registered exchanges are reported In con- nection with fees paid under Section 31 of the Secnrities Exchange Act of 1934. Inclnded are all seeuntres

sales, odd-lot as weU as round-lot transactions, effected on exchanges except sales of bonds of the U.S. Govern.

ment which are not subject to the fee. Comparable data are also supplied by the exempted exchanges.

Reports of most exchanges for a given month cover transactions cleared dunng the calendar month. Clearances generally occur on the 4th business day after that on which the trade was effected. FIgures are

rounded and wlll not necessanly add to the totals as shown.

'Less than 500 units or $500.

_____• ______________

___________• ____

__• _____• ___• ____

_______• ____

_________• __• ____

________• _______

______________• ____

_______________• __

__ ___• ___• ______ ' ______• __________

•__•_____•__________

______•__•______ __ _______• _________

______•_________

________• _________

____•• ____• _______

___ •_______• __• __
THIRTY-SECOND ANNUAL REPORT 163 
164 SECURITIES AND EXCHANGE COMMISSION

TABLE S.-Block distributions of stocks reported by exchanges

[Value In thousands of dollars)

Special offerings Exchange distributions Secondary distributions

Ycar

Num- Shares Value Num- Shares Value Num- Shares Value

ber sold ber sold ber sold

1942 79 812,390 $22,694 116 2,397,454 $82,840 1943 80 1,097,338 31,054 ... 81 4,270,580 127,462 1944 87 1,053,667 32,454 ... ... 94 4, 097, 298 135,760 1945.. 79 947.231 29,878 ... 115 9,457,358 191,961 1946.. ___________ 23 308,134 11,002 -------- ------------ -------- 100 6,481,291 232,398 1947.. ___________ 24 314,270 9,133 ~----------..-------- 73 3,961,572 124,671 1948 21 238,879 5,466 -------- ------------ -------- 95 7,302,420 175,991 1949.. 32 500,211 10,956 .------- 86 3,737,249 104,062 1950 20 150,308 4,940 77 4,280,681 88,743 195L 27 323,013 10,751 88 5,193,756 146,459 1952 22 357,897 9,931 76 4,223,258 149,117 1953_____________ 17 380,630 10,486 -----57- ---'705;781- $24;664- 68 6,906, 017 108,229 1954_____________ 14 189,772 6,670 84 5,738,359 218,490 1955_____________ 9 161,850 7,223 19 258,348 10,211 116 6,756,767 344,871 1956 8 131,755 4,557 17 156,481 4,645 146 11,696,174 520,966 1957_____________ 5 63,408 1,845 33 390,832 15,855 99 9,324,599 339,062 1956_____________ 5 88,152 3,286 38 619,876 29,454 122 9,508,505 361,886 1959_____________ 3 33,500 3,730 28 545,038 26,491 148 17,330,941 822,336 1960_____________ 3 63,663 5,439 20 441,664 11,108 92 11,439,065 424,688 1961. ____________ 2 35,000 1,504 33 1,127,266 58,072 130 19,910,013 926,514 1962_____________ 2 48,200 588 41 2,345,076 65,459 59 12,143,656 658,780 1963_____________ 0 0 0 72 2,892,233 107,498 100 18,937,935 814,984 1964_____________ 0 0 0 68 2,553,237 97,711 110 19,462,343 909,821 1965_____________ 0 0 0 57 2,334,277 86,479 142 31,153,319 1,603,107

NOTE.-The first special offering plan was made effective Feb. 14, 1942, the plan ofexchange distribution was made etfeetrve Aug. 21, 1953, secondary distrrbutions are not made pursuant to any piau but generally exchangesrequire members to obtain approval of the exchange to participate in a secondary distributron

and a report on such dtstnbution IS filed With this Oomnnsston.

TABLE 9.-Unlisted Stocks On Exchanges

P_\RTI-NUMBER OF STOCKS ON THE EXCHANGES AS OF JUNE 30, 19661

Listed end registered on another exchange Unlisted

Exchanges only' Admitted Admitted

prior to since Mar. I,

Mar. 1. 1934 a 1934

Amencen_____________________________________________________96 15 4 Boston________________________________________________________0 117 294 Chicago Board ofTrade 0 3 0 C incmnatr, ___________________________________________ 0 0 151 Detroit, 0 13 186 Honolulu

Midwest. 13 0 0 _____________________________________________________0 0 134 Pacific Coast. ________________________________________________ 1 51 166 Ph iladelphia-Bsltrmore-Washmgton___________________________ 1 192 323 Pittsburgh ____________________________________________ 0 14 68 Salt Lake__________ ... _____________________________________ 2 0 1 Spokane. ________.. _______________ .. ____.. ___________________ 3 1 2

Total ,

_. -.- 116 406 1,329

_____________ -------- ------------ -------- _____________ -------- --- -------- -------- _____________ ---- -- ------------ -------- ___________ ------- ------------ --------

_____________ -------- ___________

_____________ ------------ -------- ___________ -------- ------------ -------- -------- ------------ -------- _____________ -------- ------------ --------

___• _____• ___

_________________________ •_____•_______

•_______ ________________________________________ • •_______ ____•________________________________________________

•_______ •__

---- ----~------------- -------- ---------------

•
THIRTY-SECOND ANNUAL REPORT 165

TAlILE 9.-Unlisted Stocks On EaIChanges-Continued

PART 2-UNLISTED SHARE VOLUME ON THE EXCHANGES-0ALENDAR YEAR 1965

Listed and registered on another exchange

UnlIsted

Exchanges only' Admitted Admitted prior to since Mar. 1, Mar. 1, 1934 • 1934 •

Amenean _____________________________________________________ 23,052,280 11,743,910 3,567,120 Boston ________________________________________________________ 0 2, 574, 350 3,008,301 Chicago Board of Trade ______________________________________ 0 0 0 Otnelnneti, ___________________________________________________ 0 0 1,058,934 Detroit. ______________________________________________________ 0 6n,562 9,865,564 Honolnlu _____________________________________________________

Midwest. 94, 040 0 0 _____________________________________________________ 0 0 21,334, 500 Pacific Coast _________________________________________________ 20,887 6, 055,n6 11,909,728 Pluladelphia-B altunore- Washlngton ___________________________ 0 6, 271, 218 9,079,201 Pittsburgh ____________________________________________________ 0 187,796 391,476 Salt Lake _____________________________________________________ 100 0 0 Spokane ______________________________________________________ 607,870 2,025 33,445

Total' __________________________________________________ 23, tts; 177 27,512,637 60,248, 269

I Refer to text under heading" Unlisted Trading Privileges On Exchanges," in Part V of this Report.

Volumes are as reported by the stock exchanges or other reporting agencies and are exclusive of those m

short-term rights.

2 Includes ISSues admitted under clause 1 of Section 12(0 as in effect prior to the 1964 amendments to the Exchange Act and two stocks on the American Stock Exchange admitted under former Section 12(t) ,

clause 3. 3 These issnes were admitted under former Section 12(t), clause 1. These figures include ISSues admitted under former secnon 12(f), clauses 2 and 3, and under new Section 12(0 (l)(B)

'Duplication of ISsues among exchanges brings the figures to more than the actual number

of issues involved.

TABLE lO.-Summary of cases instituted in the courts by the Commission under the

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

Holding Company Act of 1935, the Investment Company Act of 1940, and the

Investment AdVIsers Act of 1940

Total Total Cases Cases Cases in- Total Cases cases In- cases pending pending stituted cases closed stituted closed at end at end during pending durmg

Types of cases up to end up to end of 1966 of 1965 1966 durmg 1966 of 1966 of 1966 fiscal fiscal fiscal 1966 fiscal fiscal fiscal year year year fiscal year year year year

---- -------- ---- ---- ---- Actions to enjoin violations of the above Acts _______________ 1,487 1,418 69 71 67 138 69 Actions to enforce subpoenas

under the Securities Act and

the Securrties Exchange Ace.; 119 108 11 6 17 23 12 Actions to carry out volun- tary plans to comply With Section 11(b) of the Holding Company Act ________________ 148 148 0 0 0 0 0 MIScellaneous actions __________ 57 57 0 0 0 0 0

TotaL. __________________ ---- ---- ---- ---- ---- -------- 1,811 1,731 80 77 84 161 81

•
166 SECURITIES AND EXCHANGE COMMISSION

TABLE ll.-A 33-year summary oj all inJunction cases instituted by the Commission-1934- to June 30,1966, by calendar year

Calendar year

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

1953

1954 .. . 1955

1956 . ._ 1957 .

1958 . . . . 1959 . . 1960

1961.

1962

1963

1964

1965 . .

1966 (to June 30)

Total.

Number of cases Instituted

by the Commission and

the number of defendants

involved

Cases Defendants

7 24

36 242 42 116

96 240

70 152

57 154

40 100

40 112

21 73 19 81 18 80

21 74

21 45

20 40

19 44

25 59 27 73 22 67

27 103 20 41 22 59

23 54 53 122

58 192

71 408

58 206

99 270

84 368 99 403 91 358

76 276 72 302 33 159

1,487 5,097

Number of cases in which injunctions were granted

and the number of defendants enjoined I

Cases Defendants

2 4 17 56 36 108 91 211

73 153 61 165 42 99 36 90 20 54 18 72 14 35 21 57

15 34

20 47

15 26

24 55 26 71

17 43

18 50 23 68 22 62 19 43

42 89

32 93

51 158 71 179

84 222

85 272

82 229

98 363 88 352 68 271

zr 109

1,358 J 3, 940

SUMMARY

Cases Defendants

Actions mstituted 1,487 5,097

Injunctions obtamed ____________________________________________________ Actions 1,332 3,940 pending _________________________________________________________ 31 J 211 Other dISPOSItiOns 124 946

TotaL _________________________________________________________________ 1,487 5,097

I These columns show disposition of cases by year of disposition and do not necessarily reflect the dlsposl,

tion of the cases shown as having been instituted in the same years.

J Includes 26 cases which were counted twice in this column because injunctions against dillerent defendants in the same cases were granted in different years. J Includes 35 defendants in 11 cases in which injunctions have been obtained as to 34 co-defendants

Includes (a) actions dismlsaed (as to 832 defendants); (b) actions discontinued, abated, abandoned,

stipulated or settled (as to 69 defendants); (c) actions in which judgment was denied (as to 41 defendants);

(d) actions in which prosecution was stayed on stipulation to discontinue misconduct charged (as to 4 defendants).

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TIDRTY-SECOND ANNUAL REPORT 167

TABLE 12.-Summary of cases instituted aqainst the Commission, petuion» for

review of Commission orders, cases in which the Commission particrpated as

intervenor or amicus curiae, and reorganization cases under Chapter X in which

the Commission participated on appeal

3

Total Total Cases Cases Cases in- Total Cases cases In- cases pending pending stituted cases closed stituted closed at end at end durmg pending during

Types of cases up to end up to end or isee of 11165 1966 during 1966 of 1966 of 11166 Iiscal fiscal fiscal 1966 fiscal fiscal fiscal year year year fiscal year year year year

-------- ---- ActIOns to enjoin enforcement

of Seeurrttes Act, Securities Exchange Act or Public

Utility Holding Company

Act with the exception of SUbpoenas ISSued by the Commission 74 69 5 6 2 8 ActIOns to enjoin enforcement

of or compliance with subpoenas issued by the Com- mission 12 12 0 2 0 2 2 Petitions for review of Commlssion's orders by courts of

appeals under the varions

Acts administered by the Comrntssion; 290 280 10 8 10 18 8 MIScellaneous actions against the Oommission or officers

of the Commission and cases

In which the Commission

participated as Intervenor or amicus curiae 291 269 22 18 11 29 7 Appellate proceedings under Chapter X m which the Commission partlclpated 210 204 6 8 6 14 8

Total -------- ------------ 877 834 43 42 29 71 28

---- ----

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0 0 ______________

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168 SECURITIES AND EXCHANGE COMMISSION

TABLE 13.-A S3-year summary of criminal cases developed by the Commission1934- through 1966 by fiscal year 1

[See table 14 for classification of defendants as broker-dealers, etc.]

Number Number ofthese Number of per- Number defend- of eases sons as of such Number ants as Number referred to whom cases in of de- Number Number to whom of these

to De- prosecu .. which fendants of these of these proceed- defend- Fiscal year partment tron was mdiet- mdlCted defend- defend- mgs have ants as of Justice recom- ments in such ants con- ants eo- been dis- to whom

III each mended have been cases 2 victed quitted mISsed cases are year in each obtained on mo. pending 3

year tion of

U.S.attorneys

---------------------------- 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 34 0 1938 _________________ 40 113 33 134 75 13 46 0 1939 _________________ 52 245 47 292 199 33 60 0 1940 _____. ___________ 59 174 51 200 96 38 66 0 1941. M 150 47 145 94 15 36 0 1942 _________________ 50 144 46 194 108 23 63 0 1943 _________________ 31 91 28 108 62 10 36 0 1944. ____. ___________ 27 69 24 79 48 6 25 0 1945 _________________ 19 47 18 61 36 10 15 0 1946_________________ 16 44 14 40 13 8 19 0 1947__. ______________ 20 50 13 34 9 5 20 0 1948___________. ____. 16 32 15 29 20 3 6 0 1949 _________________ 27 44 25 57 19 13 25 0 1950_________________ 18 28 15 27 21 1 5 0 1951. ________________ 29 42 24 48 37 5 6 0 1952 ____________. ____ 14 26 13 24 17 4 3 0 1953 _________________ 18 32 15 33 20 7 6 0 19M _________________ 19 44 19 52 29 10 13 0 1955_________________ 8 12 8 13 7 0 6 0 1956 _________________ 17 43 16 44 28 5 11 0 1957 _________. ______. 26 132 18 80 35 5 15 25 1958 _________________ 15 51 14 37 17 5 11 4 1959 ___. ______. __. ___ 45 217 39 234 117 20 34 63 1960 ___. _____________ 53 281 44 207 113 11 48 35 1961. ________________ 42 240 42 276 132 22 27 95 1962 _______. _________ 60 191 51 152 85 14 50 3 1963 _________________ 48 168 39 117 70 7 29 11 1964. ________________ 48 164 36 172 58 9 13 92 1965 ________________. 49 167 39 138 38 5 17 78 1966 _________________ '44 118 16 89 10 0 0 79

TotaL _________ ---------1- ---------------- 1.085 3,879 '890 3,809 1,956 390 '978 485

I The figures given lor each year reflect actions taken and the status of cases as of the end of the most

recent fiscal year with respect to cases referred to the Department ofJustice during the year specified. For

example, eonvtctions obtained III fiscal 1966 With respect to cases referred during fiscal 1965 are included

under fiscal 1965. WhJ1e the table shows only 10 convictions under 1966, the total number of convtenons

for cases referred dunng that year and prior years was 76, as noted in the text of this report. There were

50 indictments returned III 45 cases durmg fiscal year 1966.

The number of defendants m a case ISsometrmes inereased by the Department of Justice over the number

against whom prosecution was recommended by the CommISSIOn, and more than one mdictment may

result from a single reference . See Table 15 for breakdown of pending cases . Twenty-seven of these references mvolvmg 82 proposed defendants. and 24 prior references involving

95 proposed defendants. were still being processed by the Department of Justice as of the close of the fiscal year .

Eight hundred and fifteen of these cases have been completed as to 1 or more defendants. Convictions

have been obtained III 6M or 80 percent of such cases. Only 200 or 20 percent of such cases have resulted

in acquittals or dismissals as to all defendants; this includes numerous eases in which mdictments were

dismissed Without trial because of the death of defendants or for other administrative reasons. See note 6,

tnfra,

Includes 82 defendants who died after indictment.

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THIRTY-SECOND ANNUAL REPORT 169

TABLE 14.-A 33-year summary classifying all defendants in criminal cases developed

by the Commission-1984 to June 30, 1966

Number as to whom Number as Number Number Number cases were to whom

Indicted convicted acquitted dismissed cases are oumotion pending

of U.S. attorneys

Registered broker-dealers 1 (including prtnclpals of such firms) _________________ 614 345 44 147 78 Employees of such registered broker- dealers __________________________________ 350 143 20 70 117

Persons In general securities business but not as registered broker-dealers (includes principals and employees) _______________ All 852 429 68 304 51 others 0________________________________ 1,993 1,039 258 457 239

Total ________________________________ 3,809 1,956 390 978 485

1 Includes persons registered at or prior to time of Indictment. o The persons referred to inthis column, while not engaged In a general business in sec unties, were almost without exception prosecuted for violatIons of law involvmg seeunnes transactions,

TABLE 15.-Summary of criminal cases developed by the Commission which were pending at June 30, 1966

Number Number of such defendants of such as to whom cases are still Number defendants pending and reasons therefor

Pending, referred to Department Cases of defend- as to whom

of Justice In the fiscal year: antsm cases have

such cases been com- Not yet Awalt- Awalt- pleted appre- mg Ing hended trial appeal 1

------- 1957___________________________________ 1958___________________________________ 1 30 5 0 25 0

1959___________________________________ 1 4 0 0 4 0

1960___________________________________ 7 72 9 17 46 1

1961___________________________________ 5 35 0 7 28 0 13 110 15 32 63 6 1962__________________________________ 1963___________________________________ 5 14 11 1 2 1 6 26 15 0 11 6 1964..__________________________________ 15 119 27 0 92 4 1965___________________________________ 1966___________________________________ 27 135 57 0 78 2 15 89 10 0 79 0

Total ___________________________ -------- 95 634 149 57 428 120

Total cases pending 0_______________________________________________________________________________ SUMMARY 146

Total defendants 0_ _ __ 811

Total defendants as to whom cases are pending 0____________________________________________________ 662

1The figures In this column represent defendants who have been convicted and whose appeals are pend.

Ing. These defendants are also included In the figures In column 3.

oAs of the close of the fiscal year, Indictments had not yet been returned as to 177 proposed defendants In

51 cases referred to the Department of Justice. These are refiected only In the recapitulation of totals at

the bottom of the table. The figure for total cases pending Includes 27 cases In a Suspense Category.

U.S GO/ERNMEHT PRIHTING OFFICE 1966