94th Congress, 2d Session

f) 5, -...';e CUI'I'.f i ~ s .) ;, J.. -";.0'. ,.I .t n'7 ~ ~ nJ IJ7 . '. :- ( ;) ,

. ~~~Sb f\NNUAL

ItJiS REPORT 1-f1p;L/

L\'/' \ of the / .

fEE

for the

fiscal

~~~ed

~~June30,

197~

- - - •
SECURITIES AND EXCHANGE COMMISSION

Headquarters Office

500 North Capitol Street

Washington, D.C. 20549

COMMISSIONERS

RODERICK M HILLS, Chairman

PHILIP A. LOOMIS, JR.

JOHN R. EVANS

A. A. SOMMER, JR

IRVING M. POLLACK

GEORGE A FITZSIMMONS, Secretary

'CommlSSloner Sommer resigned from the Commission, effective April 2, 1976

For sale by the Superintendent of Documents, U S Government Printing Office

Washington, 0 C 20402-Prlce $2 30 (paper cover)

Stock Number 046-000-00106-1

Class Number SE 1 1 975

•
LETTER OF TRANSMITTAL

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

Sirs. On behalf of the Securities and Exchange Commission,

I have the honor to transmit to you the Forty-First Annual

Report of the Commission covering the fiscal year July 1. 1974

to June 30. 1975, In accordance with the provrsrons of Section 23(b)

of the Secunties 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 11(b) of the Inter-Amencan Development Bank Act;

and Section 11 (b) of the ASian Development Bank Act

Respectfully,

RODERICK M HILLS

Chairman

THE PRESIDENT OF THE SENATE

THE SPEAKER OF THE HOUSE OF REPRESENTATIVES,

Washington, D.C.
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IV ~~
COMMISSIONERS AND

PRINCIPAL STAFF OFFICERS

COMMISSIONERS Term expires

June 5

RODERICK M. HILLS of cant., Chairman

PHILIP A. LOOMIS, JR., of Calif.

JOHN R. EVANS, of Utah

A. A. SOMMER, JR., of Ohio

IRVING M. POLLACK of New York

Secretary: GEORGE A. FITZSIMMONS

Executive Assistant to the Chairman: DAVID R. BOYD

ROBERT H. CRAFT JR.

RALPH C. FERRARA

PRINCIPAL STAFF OFFICERS

PETER H. SHIPMAN, Executive Director

RICHARD H. ROWE, Director, Division of Corporation Finance

NEAL S. McCOY, Associate Director

WILLIAM C. WOOD, Associate Director

MARY E.T. BEACH, Associate Director

STANLEY SPORKIN, Director, Drvrsion of Enforcement

IRWIN M. BOROWSKI, Associate Director

WALLACE L. TIMMENY, Associate Director

THEODORE SONDE, Associate Director

LEE A. PICKARD, Director, Dlvrsron of Market Regulation

SHELDON RAPPAPORT, Associate Director

FRANCIS R. SNODGRASS, Associate Director

DANIEL J. PILIERO, II, ASSOCiate Director

ANDREW M. KLEIN, ASSOCiate Director

ANNE P. JONES, Director, DIVISion of Investment Management

Regulation

SYDNEY H. MENDELSOHN, Associate Director

JEAN W. GLEASON, Associate Director

AARON LEVY, Director, Division of Corporate Regulation

GRANT GUTHRIE, ASSOCiate Director

HARVEY PITT, General Counsel

PAUL GONSON, ASSOCiate General Counsel

DAVID FERBER, Solicttor to the Oommlssron

S. JAMES ROSENFELD, Director, Office of Public Information

CHILES T. A. LARSON, ASSistant Director

1977

1979

1978

1976

1980

v
JOHN C. BURTON, Chief Accountant

A. CLARENCE SAMPSON, Associate Chief Accountant

J. RICHARD ZECHER, Director of Economic and Policy Research

GENE L. FINN, Chief Economist, Office of Economic Research

BERNARD WEXLER, Director, Office of Opinions and Review

WILLIAM S. STERN, Associate Director

HERBERT V. EFRON, Associate Director

WARREN E. BLAIR, Chief Administrative Law Judge

FRANK J. DONATY, Comptroller

RICHARD J. KANYAN, Service Officer

ALBERT FONTES, Director, Office of Personnel

JAMES C. FOSTER, Director, Office of Reports and Information

Services

FRANKLIN E. STULTZ, Associate DIrector

RALPH L. BELL, Director, Office of Data Processing

VI
REGIONAL AND BRANCH OFFICES

REGIONAL OFFICES AND ADMINISTRATORS

Region t. New York, New Jersey.-Wlillam D. Moran, 26 Federal

Plaza, New York, New York 10007.

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

Hampshire, Malne.-Floyd H. Gilbert, 150 Causeway St., Boston,

Massachusetts, 02114.

Region 3. Tennessee, Virgin Islands, Puerto RICO, North Carolina,

South Carolina, Georgia, Alabama, MISSISSiPPi, Florida, part of

Loulstana-c-Jule B. Greene, SUite 788, 1375 Peachtree St., N.E.,

Atlanta, Georgia 30309.

Region 4. lllrnors, Indiana, Iowa, Kansas City (Kansas), Kentucky,

Michigan, Minnesota, MISSOUri, Ohro, Wisconsin -William D

Goldsberry, Room 1708, Everett McKinley Dirksen Bldg., 219

S. Dearborn St., Chicago, lllinors 60604.

Region 5 Oklahoma, Arkansas, Texas, part of LOUISiana, Kansas

(except Kansas Clty).-Robert F. Watson, 503 U.S. Court House,

10th & Lamar Sts, Fort Worth, Texas 76102

Region 6. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, New MeXICO, Utah.-Robert H Davenport, Two Park Central,

Room 640, 1515 Arapahoe Street, Denver, Colorado 80202.

Region 7 California, Nevada, Arizona, Hawau, Guam -Gerald E

Boltz, Room 1710, 10960 Wilshire Boulevard, Los Angeles,

California 90024

RegIOn 8. Washington, Oregon, Idaho, Montana, Ataska-s-Jack H

Bookey, 3040 Federal Building, 915 Second Ave, Seattle, Washrnqton 98174

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

District of Columbia.-Paul F Leonard, Room 300, Ballston Center

Tower No.3, 4015 Wilson Boulevard, Arlington, Virginia 22203.

BRANCH OFFICES

Cleveland, Ohio 44199.-Room 899 Federal Office Bldg., 1240 E 9th

at Lakeside.

Detroit, Michigan 48226 -1044 Federal Bldg.

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

515 Rusk Ave.

VII
Miami, Florida 33131.-SUIte 701 DuPont Plaza Center, 300 Biscayne

Boulevard Way.

Philadelphia, Pennsylvania 19106.-Federal Bldg., Room 2204.

600 Arch St.

St. LOUIS,MIssouri 63101 -Room 1452, 210 North Twelfth St.

Salt Lake City, Utah 84111.-Room 6004, Federal Reserve Bank

Bldg .• 120 South State St.

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

VIII
COMMISSIONERS

RODERICK M. HILLS, Chairman

Chairman Hills was born on March 9,1931, In Seattle, Washington

In 1952 he received his BA degree from Stanford Unlversrty and he

received hrs LL.B. In 1955 also from Stanford. In law school he was

named to the Order of the COif. DUring the period 1955-1957, Mr.

Hills served as law clerk to Mr. Justrce Stanley F. Reed, Supreme

Court of the U.S.• and during 1969-1970 he was a vtsrtmq Professor

at the Harvard Law School. Mr. Hills was a foundrng partner of the

law firm of Munger, Tolles, Hills and Hrckershauser, Los Angeles,

California. Between 1971 and 1975 he was on leave from the firm to

serve as Chairman of the Board of RepubliC Corporation. From

April 1, 1975, until berng named Chairman, Mr. Hills served as

Counsel to the Presrdent of the United States. Mr. Hills was cochairman of the Domestic Council Task Force on Regulatory Reform

for the President. Mr. Hills was sworn in as Chairman of the Securities and Exchange Commission on October 28, 1975, for a term

expiring on June 5, 1977.

PHILIP A. LOOMIS, JR.

Commissioner Loomis was born rn Colorado Springs, Colorado,

on June 11, 1915. He received an A.B degree, With highest honors,

from Princeton Unlversity in 1938 and an LL B. degree, cum laude,

from Yale Law School in 1941, where he was a Law Journal editor.

Prior to Joming the staff of the Securities and Exchange Oornrrussron,

Commissioner Loornrs practiced law With the firm of O'Melveny and

Myers rn Los Angeles, California, except for the period from 1942 to

1944, when he served as an attorney with the Office of Price Administration, and the period from 1944 to 1946, when he was Associate Counsel to Northrop Aircraft, Inc Commissioner Loornrs jomed

the Oomrnisaron's staff as a consultant rn 1954, and the totlowmq

year he was appointed ASSOCiate Director and then Director of the

DIVISion of Tradmg and Exchanges. In 1963, Commissioner Loomis

was appointed General Counsel to the Commission and served In

that capacity until hrs apporntment as a member of the Commission.

Commissioner Loomis IS a member of the American Bar ASSOCiation, the American Law Institute, the Federal Bar Association, the

rx
State Bar of California, and the Los Angeles Bar Assocratron. He

received the Career Service Award of the National CIvil Service

League In 1964, the Securities and Exchange Commission DIstmqurshed Service Award In 1966, and the Justice Tom C. Clark

Award of the Federal Bar Association In 1971. He took office as a

member of the Securities and Exchange Commission August 13,

1971, and IS now serving for the term of office expiring June 5, 1979.

JOHN R. EVANS

Cornrrusarorrer Evans was born In Bisbee, Arizona, on June 1,

1932. He received his B S degree In Economics In 1957, and his

M S degree In Economics In 1959 from the University of Utah. He

was a Research Assistant and later a Research Analyst at the

Bureau of Economics and Business Research at the University of

Utah, where he was also an Instructor of Economics durinq 1962

and 1963. He came to Washington In February 1963, as Economics

ASSistant to Senator Wallace F. Bennett of Utah. From july 1964

through June 1971 Commissroner Evans was a member of the Protessronal Staff of the U S Senate Committee on Banking, HOUSing

and Urban Affairs, serving as minority staff director He took office

as a member of the Securities and Exchange Commission on March

3, 1973, for the term expiring June 5, 1978

A. A. SOMMER, JR.

Commissioner Sommer was born In Portsmouth, Ohro on April 7,

1924 He received hrs B A degree from the University of Notre

Dame In 1948 and hiS LL.B. degree from Harvard Law School In 1950.

At the time he was appointed to the Commission, he was a partner

In the Cleveland law firm of Calfee, Halter, Calfee, Griswold & Sommer Mr Sommer was formerly Chairman of the American Bar

ASSOCiation's Federal RegulatIOn of Securities Committee and a

member of the Committee on Corporate Laws and Committee on

Stock Certrtrcates He was also a member of the Board of Governors

of the National ASSOCiatIOn of Securities Dealers, a lecturer on

secunties law at Case-Western Reserve Law School and a lecturer

at various institutes and programs dealing With securities law, corporatron law and accounting matters Oornmrssroner Sommer was

formerly a member and Past-Chairman of the Corporation Law

Committee of the Ohio State Bar ASSOCiatIOn. He has authored

articles dealing With corporate reorganization, conglomerate disclosure and other secunnes and accounting tOPiCS He took office

as a member of the Securities and Exchange Comrnrssron on

August 6, 1973, for the term of office expiring June 5, 1976

IRVING M. POLLACK

Cornrrusstoner Pollack was born In Brooklyn, New York, on

April 8, 1918 He received a B A degree, cum laude, from Brooklyn

College In 1938 and an LL.B degree, magna cum laude, from Brooklyn Law School In 1942 Prior to JOining the Cornrmssron's staff he

engaged In the practice of law In New York City after serving nearly

four years In the United States Army, where he gained the rank of

Captain Mr Pollack JOined the staff of the Cornmrssron's General
Counsel In October 1946 He was promoted from time to trrne to

progressively more responsible positions In that office and In 1956

became an Assistant General Counsel. A career employee, Mr.

Pollack became DIrector of the Drvrsron of Enforcement In August

1972 when the SEC's drvisrons were reorganized. He had been

Director of the Divrston of Trading and Markets since August 1965,

and previously served as Associate DIrector since October 1961

In 1967 Mr. Pollack was awarded the SEC Distinguished ServIce

Award for Outstanding Career Service, and in 1968 he was a corecrprent of the Rockefeller PublIC Service Award In the field of law,

legislation and regulation Mr. Pollack took the oath of office on

February 13, 1974 as a member of the Securities and Exchange

Commission, and is now serving for the term exprrrnq June 5, 1980

XI

TABLE OF CONTENTS

Organizational chart.

Commission and principal staff officers

Regional and branch offices

Biographies of Comrnissroners

Part 1

IMPORTANT DEVELOPMENTS

Market regulation

The Securities Acts Amendments of 1975

The national market system.. ..

RegulatIOn of clearing aqencres and transfer

agents ... . . .

Munclpal secuntres ,

Cornmlssron rates

Brokers and dealers ..

Accounts and records

Commission rates ....

Development of the national market system ...

Consolidated tape .. ..

Composite quotation system

Short sale regulation

Option market regulation ..

Uniform net capital rule.

Development of uniform broker-dealer reporting

system .. .

Key Regulatory report

Proposed Rule 17a-18 ....

Proposed Rule 17a-19 ..

Formation of the report coordinating group

Financial and operational reports.

Assessment forms and procedures

Registration forms

Trading forms

Broker-dealer model compliance gUide

Disclosure related matters .

Beneficial ownership and tender offers.

Annual reports to security holders.

IV

V

VII

IX

3

3

3

3

4

5

6

6

7

7

8

11

13

14

15

17

17

17

17

18

18

18

18

19

19

19

19

19

20

XIII
IMPORTANT DEVELOPMENTS-Continued

Projections

The Rule 140 series

Rule 144

Rule 145

Rule 146

Rule 147

Adoption of Rule 240

Disclosure of 011 and gas reserves

Coordination with the Federal Power Comrnrssion on filings which Include natural

gas esn mates

Gold purchasing and investing

POSSible disclosure of environmental and other

SOCially Significant matters

Investment Companies

Mutual Fund distnbuuon

Improved communication with Investors

Price competition at the underwriter level

Price competition at the retail level

Variable life Insurance

Status of broker-dealers as Investment advrsers

Institutional Disclosure

Sale of Investment adviser

Significant Cases Involving Secunties Acts.

Silver and gold Investments ..

Cornmisston litigation.

Part 2

21

22

22

22

22

23

23

24

24

24

25

26

26

26

27

27

28

28

29

29

29

34

35

THE DISCLOSURE SYSTEM 45

Public offering the 1933 Securities Act 45

Information provided 45

ReVieWing process 46

Time for reqrstratron 46

Financral analysis and examination 46

Office of oil and gas 47

Tax shelters 47

DIVidend reinvestment plans 47

Small Issue exemption 47

RegulatIOn A 48

Regulation B 48

Regulation E 49

Regulation F 49

Continuing disclosure' the 1934 Securities Exchange

Act 49

Heqrstration on exchanges 49

Over-the-counter reqrstration 49

Exemptions 49

Penodrc reports 49

Proxy soucrtanons 49

Takeover bids, large acqursmons 51

Insider Reporting . 52

Accounting 52

XIV
THE DISCLOSURE SYSTEM-Continued

Relations with the accounting profession

Accounting and auditing standards

Other developments

Exemptions for mternatronal banks

Trust Indenture Act of 1939

Freedom of Inforrnatron Act

Freedom of lntorrnatron Act Lrtiqatron

Part 3

REGULATION OF SECURITIES MARKETS

RegulatIOn of exchanges

Reqrstratron

Delrsunq

Exchange disciplinary action

Exchange rules

Exchange mspectrons

New York Stock Exchange specialist inspection

Chicago Board Options Exchange inspection.

Amencan Stock Exchange Options program inspecnon

Preliminary inspection of contemplated

Philadelphia-Baltimore-Washington Stock Exchange Option pilot

Supervrsion of the Natronal Assocranon of Secuntres

Dealers

NASD rules

NASD mspections

NASD drsctplmary actions

Review of NASD drscrpnnary actions

Review of NASD membership actron

NASDAQ Issuer removal

Expenses and operations of self-regulatory orqaruzanons

Financial results of the NASD

NASD budget

Financial results of New York Stock Exchange

Boston Stock Exchange, Chicago Board Options

Exchange and Midwest Stock Exchange

Amencan Stock Exchange, Detroit Stock Exchange, PBW Stock Exchange and Spokane

Stock Exchange

Cincinnati Stock Exchange, Intermountain Stock

Exchange and Pacific Stock Exchange

Broker-dealer regulation

Reqrstrauon

Recordkeepinq

Financial responsibility

Broker-dealer exarrunations

Early warning and surveillance

Training program

RegulatIOn of broker-dealer trading In gold

Regulatory burden on the small broker-dealer

53

54

55

57

59

59

61

65

65

65

66

66

66

67

67

68

69

69

69

70

71

72

72

73

74

74

75

76

76

77

78

78

78

78

79

79

79

80

82

83

84

xv
REGULATION OF SECURITIES MARKET5-Continued

Clearance and settlement 85

Securities Investor Protection Corporation 86

litigation related to SPIC 86

Commission rule changes related to SPIC. 86

SECO broker-dealers 86

Exemptions 87

Other Commission rule changes and developments 88

Mortgage market exemptions 88

RegUlatory problems posed by "going private" 88

Foreign Access to United States Securities Markets 89

Real estate Investment contract secunties . 89

Confirmation Requirements for penodic transactions 89

Short seiling Into secondary offering 89

Part 4

ENFORCEMENT 95

Detection 95

Complaints 95

Market Surveillance 95

tnvesnqanons 96

litigation mvolvmq Commission investigations 96

Enforcement Proceedings 97

Administrative proceedings 98

Applications for relief from drsquauncatrons 101

Trading suspensions 101

Delinquent reports program 102

CIVil proceedings 103

Participation as amicus currae 115

Criminal proceedings 116

Organized Crime program 119

Cooperation With other enforcement agencies. 121

SWISStreaty 122

Foreign restricted list 122

Part 5

INVESTMENT COMPANIES AND ADVISERS 127

Number of registrants. 127

Legislation 128

Rules 128

Amendment to Rule 17d--1 128

Amendment to Rule 17a-7 129

Temporary Rule 6a-2{T) 129

Investment company confirmation requirements 130

Brochure rule 130

Investment adviser record-keeping requirements 130

Regulatory safeguards-the NASD sales load rule 131

Applications 131

Other developments 133

"Money market" funds 133

Sale of partrcipanons In certificates of deposit 133

ASSignments of Investment advisory contracts 133

XVI
INVESTMENT COMPANIES AND ADVISERS-Continued

RegistratIOn of foreign Investment companies 134

NASD ann-reciprocal rule 134

Two-tier real estate companies 135

Variable annuity Illustrations 135

Employee Retirement Income Security 136

Securities depository system 136

Part 6

PUBLIC UTILITY HOLDING COMPANIES

Cornposttron

Proceedings

Financing

Volume

Financing of fuel and gas supplies

Cornpetmve bidding

Part?

CORPORATE REORGANIZATIONS

Chapter X rules

Summary of acnvines ,

Administrative matters

Trustee's rnvestrqanons and statements

Plans of reorganization

Activities with regard to allowances

Intervention In Chapter XI

PartS

SEC MANAGEMENT OPERATIONS

Orqaruzatronal charges

Information handling

Consumer services

Acnvrty under Freedom of Information Act

Personnel management

Hecrurtrnent

Personnel management evaluation

Training and development

Office space

Fmarrcral management

Part 9

141

141

141

143

143

143

143

149

149

150

150

151

153

156

158

167

167

167

168

169

169

169

169

170

170

171

STATISTICS 175

The secunnes Industry 175

Income and expenses 175

Table 1 Broker-dealer Income and expenses 176

Securities Industry dollar 176

Chart. SecurJ!les Industry dollar 1974 177

Assets and habihnes 179

Table 2: Assets and nabruties of broker-dealers 178

Broker-dealers, branch offices, employees 179

Table 3. Location of broker-dealers 180

Chart: Broker-dealers and branch offices 181

XVII
STATISTlCS-Continued

SECD broker-dealer 182

Table 4. Principal business of SECD brokerdealers 182

Table 5. Consolidated Revenues and expenses of

self regulatory agencies 183

Financial institutions.. ... . . . . . . . . 186

Stock transactions.. .. 186

Table 6: Common stock transactions and activity

rates of selected financial msutunons: 1967-

1974 186

Stockholdrnqs 187

Table 7. Market value of stockholdmqs of institutional Investors and others 1967-1974 187

Number and assets of registered Investment companies 188

Table 8: Companies registered under the Investment Company Act of 1940as of June 30,1975 188

Table 9' Number of Investment companies: 1941-

1975 189

Table 10: Investment company reqrstratrons terminated 189

Table 11. New Investment company registrations 190

Private nornsured pension funds: assets 190

Table 12 Assets of private norunsured pension

funds book value: 1967-1974 190

Table 13. Assets of private noninsured pension

funds. market value: 1967-1974 191

Private non Insured pension funds. receipts and

disbursements 191

Table 14 Receipts and disbursements of private

non Insured pension funds: 1967-1974 191

Securities on exchanges. 192

Exchange volume 192

Table 15. Exchange volume 1974 192

NASDAQ volume 194

Table 16 Share volume and dollar volume by exchanges 194

Special block distribution 195

Table 17. Special block distributions reported by

exchanges 195

Value and number of securities listed on exchanges 196

Table 18 Securities listed on exchanges 196

Table 19 Value of stocks listed on exchanges

1936-1974 197

Securities on exchanges 197

Table 20 Unduplicated count of securities on exchanges . 198

Table 21 Securities traded on exchanges. 198

1933Act reg rstratrons 198

Effective registrations statements flied 198

Table 22 Effective registrations 199

Chart. Securities effectively registered with SEC 200

XVIII
STA T1STICS-Continued

Table 23. Effective registratIOns by purpose and

type of security. fiscal 1975 201

Chart Effective reqistratrons cash sale for account of Issuers 202

Regulation A offerings 203

Table 24: Offerings under Regulation A 203

Real estate Investment trusts 203

Cost of flotation of registered Issuers, 1971-1972 204

List of all foreign corporations on foreign restricted list 204

Enforcement 206

Types of proceedings 206

Table 25' Types of proceedings 206

Table 26 Investigations of possible violations of

the acts administered by the Cornrnrssron 208

Table 27: Administrative proceedings 209

Injunctive actions: 1974-1975 209

Table 28: Injunctive actions 209

Criminal proceedings: 1974-1975 210

Table 29: Criminal cases 210

Public nlrty holding companies 211

Assets 211

Table 30. Public utility holding company systems 211

Fmancmq 212

Table 31: Fmancrnq of holding company systems 212

Table 32. Issuers of holding company system

securities fiscal 1975 213

Corporate Reorganizations 214

Comrmsston particrpanon 214

Table 33: ReorganizatIOn proceedings under

Chapter X of the Bankruptcy Act In which the

Commission particrpated 214

SEC Operations. 216

Net cost 216

Chart. Appropriated funds vs. fees collected 217

Table 34' Budget estimates and appropnatrcn 218

XIX

PART 1

POR NT

DEVE~ P ENTS

MARKET REGULATION

During the past year, the Commission

undertook several actions of far-reaching

Importance to the seountres Industry, the

securities markets and the investing public. At the same time, the Congress

passed legislation enhancing and clarifyIng the Commission's authority over the

securities markets and the securities

Industry

Perhaps the most significant action

taken by the Commission was ItS adopnon of Securities Exchange Act Rule

19b-3 on January 23, 1975. That rule

required the elrrrunatron of fixed commission rates on exchange transactions as of

May 1, 1975--endlng a practice which

had existed for over 175 years on the

nation's securities exchanges. The deersron to adopt Rule 19b-3 came after

nearly a decade of study by the Commission, the Congress and many others.

In adopting Rule 19b-3, the Commission

became the first federal requlatory agency

to substitute competitive pricing for a

previously sanctioned system of price

fixing within an Industry.

Among other things, the system of fixed

comrrussron rates was seen as hindering

progress toward the implementation of

a national market system. The Comrrussron has continued ItS efforts toward the

development of such a system, including

progress toward the introduction of a

consolidated tape for reporting securities

transactions and a composite quotation

system.

PART 1

IMPORTANT

DEVELOPMENTS

The Commission and the Congress have

been acting together to take all necessary

and appropriate steps to assure that

secuntres transactions are effected fairly

and efficiently at the best available price,

that competition IS enhanced within the

secunties industry, and that information

with respect to quotations and transactions be made more fully available to

brokers, dealers and Investors. Much of

the Commission's work over the past year

has been directed toward the realization

of those goals.

The Securities Acts Amendments

of 1975

The Securities Acts Amendments of

19751, enacted June 4, 1975, significantly

revise and expand the Securities Exchange Act of 1934 Among other things,

the Commission IS directed to facrtitate

the establishment of a national market

system for securities and a nationwide

system for the clearance and settlement

of securities transactions, clarify and

strengthen the Commission's oversight

role with respect to self-regulatory organizations, and provide for broad regulation of brokers, dealers, and banks

trading In mumcrpal secuntres. The 1975

Amendments further contain new provisrons relating to fixed commrssron rates,

trading on national securities exchanges,

the payment for research services with

brokerage comrmssrons, and registration

and regulation of brokers and dealers 2

The National Market System The Com3
rmssion IS directed to facilitate the establishment of a national market system

for securities In accordance with the

findings and objectives stated In Section

11A(a)(1) The heart of the national market system will be cornrnurucatron systems that dtssimmate last sale and

quotation information for secuntres

qualified for trading In the national market system These communication systems, which will link all markets for

qualified secuntres, are to be designed

to foster ettrcrency, enhance competition,

Increase the information available to

brokers, dealers and Investors, tacrlrtate

the offsetting of Investors' orders and

contribute to best execution of such orders. To acrueve those objectives. the

Commission IS granted junsdrction over

persons who, by direct or indirect use of

the malls or any other instrumentality of

Interstate cornrnerce," are engaged In the

various stages of collecting, processing,

distributing or publishing, on a current

and continuing basis, intorrnatron about

transactions In or quotations for any secunty (other than an exempted security)

Those persons, who are termed securities

information processors, and their acnvrtles

are subject to registratIOn and regulation

by the Commission. The cornmrssron also

may prescribe rules and regulations relating to securities processing activities

by self-regulatory organizations, members

thereof, brokers or dealers which utrhze

any means of Interstate commerce

Certain new provisrons require the

elimination of restrictive rules and practrees which either prevent brokers from

obtaining the best price for their customers or hinder market-making activities

within the national market system. Such

provrsions as Sections 6(b), 11A(c),

15A(b), 19(b), 19(c), 19(e), and 23(a) seek

to prevent any unnecessary or inappropnate regulatory burden on competition

and to balance the anti-competitive

rmplrcanons of any action by any selfregulatory organization or by the Comrnrssron with the purposes and considerations of the Exchange Act. Furthermore,

the 1975 Amendments expand the Commlssron's authority to regulate market

makers, specialists, and other dealers

4

(including the authority to prohibit a firm

from acting both as a dealer and as a

broker In a security) to promote fair

competition among such persons and

equal protection of all markets for qualrned securmes and of all exchange

members, brokers and dealers.

The Commission IS directed to review

any and all rules of natronal secunties

exchanges which hrrut or condrtron the

ability of members to effect transactrons

In securmes otherwise than on such exchanges and to report its conclusions to

Congress. Institution of proceedings IS

required where any such rule Imposes a

burden upon competition not necessary

or appropriate In furtherance of the Exchange Act.

The 1975 Amendments also contain

certain powers which may be exercised

with respect to trading In listed securities

In the over-the-counter markets. Addrtronally, the national secuntres exchanges

are permitted to commence trading in secuntres not otherwise listed by the issuer

on such exchanges after Commission

review and approval

Section 11A(d) requires the establishment of a National Market Advisory Board.

It IS to advise the commrssron on what

steps are appropriate to facilitate establishment of a national market system

and on significant regulatory proposals

made by the Commission or any selfregulatory organization. It IS also directed

to study the possible need for a new selfregulatory body, the National Market

RegUlatory Board, which would administer the national market system, and to

report ItS conclusrons to Congress

Requletion of Clearing Agencies and

Transfer Agents. The 1975 Amendments

(Section 17A) establish a system of regulation extending to all facets of the secunnes handling process, designed to

promote prompt and accurate clearance

and settlement of securities transactrons.

Clearing agencies must register with

and report to the Commission, which Will

review the rules of such clearing agencies to determine whether they comply

with the statute's objectives. The primary

enforcement and inspection responsibilities over clearing aqencres that are
banks IS assigned to whichever bank

regulatory agency is the appropriate regulatory agency. Rulemakmg authority

concern 109 the safeguardmg of funds and

securities by bank clearing agencies IS

shared by the Commission and the appropriate bank regulatory agency.4

The Securities Exchange Act IS further

amended to require transfer agents, other

than banks, to register with the Commlssion. Bank transfer agents must register with the appropriate bank regulatory

agency. The Commission is granted broad

rulemaking power over all the aspects of

a transfer agent's activities. Nevertheless,

as with clearing aqencres, where a transfer agent IS a bank, mspecnon and enforcement responsibilities are vested 10

the appropriate bank regulatory agency

and rulemakmg authority concern 109 the

safeguard 109 of funds and securities by

bank transfer agents IS shared by the

Commission and the appropriate bank

regulatory agency.

Section 17A(e) requires the Commission to eliminate the physical movement of secunties certificates during the

settlement process. In addition, the Comrmssron IS directed, in Section 12(m), to

study the practice of registering securrties

10 "street name," i.e., 10 a name other

than that of the beneficial owner, and to

report to Congress its conclusrons.

MUniCipal Securities. New Section 15B

Initiates a comprehensive pattern for the

registration and regulation of brokers,

dealers and banks that buy, sell, or effect

transacnons 10 municipal securities as

part of their regular business 10 other

than a fidUCiary capacity. Issuers of municipal securities contmue to be exempt

from the registration provrsions of the

federal secuntres acts.

A MuniCIpal Securities Rulemakmg

Board is created to prescnbe rules regulatmg the acnvmes of brokers, dealers

and municipal securities dealers relatmg

to transactions 10 mumclpal secunnes,

Its scope of authority and responsibility

IS defmed in terms of enumerated

purposes and standards. Section

15B(b)(2)(K), for example, sets forth the

requirement that the Board establish the

terms and conditions under which any

rnurucrpal secuntres dealer may sell any

part of a new Issue of municipal securities

to a municipal securities investment portfolio durmg the underwriting period. The

Commission IS required to take affirmative action on rules proposed by the

Board and is authonzed to abrogate,

add to, or delete from any Board rule.

The commrssron may directly regulate

fraudulent, manipulative, and deceptive

acts and practices pursuant to Sections

10(b) and 15(c) of the Exchange Act.

The Board Will be comprised of representatives of broker-dealers, banks and

the public, mcludmg Issuers of and investors 10 muruclpat securities. (Sec.

15B(b)(1).) The procedures to be followed in the nomrnatron and election of

members of the Board are desrqned to

assure fair adrnmrstratron of the Board

and fair representation of all segments of

the municipal securities industry (Sec.

15B(b)(2)(B). The Board IS authorized to

hire appropriate staff and to assess

municipal securities dealers to cover

reasonable expenses (Secs. 15B(b) (2)-

(I) and (J).

The Board's rulemakmg powers are

extensive (Sec. 15B(b)(2)(AHK).) The

purposes for which the Board can exercise its rulemaking authority include:

prevention of fraudulent and manipulative

acts and practices; promotion of just and

equitable principles of trade; establishment of standards for entry mto the

municipal sscuntles business: regulation

of selling and underwntrnq practices;

procedures for arbitration of intra-Industry

disputes; and deterrninatron of the frequency and scope of inspections of

municipal securities dealers by the bank

requlatory authorities With respect to

banks and the NASD with respect to

secunnes firms.

The Board does not have any power to

conduct Inspections or to enforce its rules

Instead, the Securttles Exchange Act assigns these responsjblhtres to the NASD

for securities firms which are members of

the NASD (Secs. 15A(b)(7) and 15B(c)(7).

Similarly, such responsibilities are assigned to the bank regulatory agencies

for municipal securities dealers wmcn

are banks (Secs. 15B(c)(5) and 17(b).

5
As of June 30, 1975, the Commission

had taken Initial steps to Implement the

statutory goals of Section 15B. On June

12, 1975, the Commission announced the

solicitation of recommendations of individuals for appointment to the Municrpal Securities Rulemaklng Board.s The

Commission plans to continue to work

toward the creation of a registration

process for sscunnes firms and banks engaged In the murucipal securities Industry

as well as the establishment of cooperative

efforts with appropriate bank regulatory

agencies

Brokers and dealers that buy, sell, or

effect transactions In municipal securities

and banks that buy and sell such secuntres as a part of a regular business

other than In a fiduciary capacity are

required to register with the Commission

(Sec. 15B(a)(1). If a bank engages in the

business of trading murucipal securities

through a separately Identifiable department or divtsion, that department or division rather than the entire bank can

register with the Commission (Secs

3(a)(30) and 15B(b)(2)(1I). Brokers and

dealers already registered with the Comrnrssron by reason of their general secuntres business are not required to

re-reqrster. No person IS permitted to

engage In the business of trading In

rnumcipat securities unless registered

With the Commission and the Commission

has the authority, In accordance With

specified procedures, to revoke the

registration of any person found to be in

Violation of the Securities Exchange Act,

or any rule of the Commission or the

Board (Sec. 15B(c)(2).

Commission Rates. The 1975 Amendments prohibit the Imposition of any

schedule or fixing of rates of commissions, allowances, discounts, or other

fees by a national securities exchange to

be charged by ItS members for effecting

exchange transactions A temporary

exemption postpones such prohibition

for odd-lot dealers or for a member acting

as broker on the floor of a national secunnes exchange for another member.

The Commission may permit a national

securities exchange to Impose reasonable

fixed commissions (1) prior to November

6

1, 1976, If such fixed rates are found to

be in the publrc Interest, and (2) after

November 1, 1976, if the Commission

institutes a proceeding and makes certain deterrrunatrons, as set forth In Section 6(e). Additional provisions, such as

Section 6(f) and Section 11A(c), grant

authority to the Commission to remedy

problems affecting the orderliness of

trading on exchanges

The elimination of fixed rates raised

questions for Investment managers who

may be required to pay a broker for related research services. To protect an investment manager against a claim of

breach of fiduciary obligation if he paid

more than the lowest available price for

execution and research services, Section

28(e) permits him to pay a cornrrusston

for executing a transaction above the

lowest available price If he determines In

good faith that It was reasonable consrdering the value of the brokerage and

research services provided. The legislative history of that provrsion makes It

clear that Section 28(e) applies only to

payments made by a money manager to

a member of a national securities exchange, broker, or dealer for services

rendered by that particular member,

broker or dealer, and that It has no application whatsoever to a situation In

which payment IS made by an Investment

manager to one broker or dealer for

services rendered by another broker or

dealer."

Brokers and Dealers. A Significant

amendment to Section 11(a) of the Exchange Act prohibits, With certain excepnons, any member of a national

secuntres exchange from effecting any

transaction on such exchange for its own

account, the account of an associated

person, or an account over which It or an

associated person thereof exercises investment discretion For members of a

national securities exchange as of May 1,

1975, the proscriptions do not apply

until May 1, 1978. The Commission IS

authorized to regulate transactions executed off an exchange or otherwise not

prohibited.

The 1975 Amendments expand the

scope of the Commission's authonty un-
der Section 15(a) to Include the registration and regulation of brokers and dealers who trade exclusively on a national

securities exchange. With respect to new

registrations of all brokers and dealers,

the Commission IS required within 45

days either to Issue an order granting

such registration or institute a proceedIng to determine whether registration

should be denied. Among other sections

amended, secnon 15(b) authorizes the

Commission to adopt uniform standards

for persons engaged in the securities

industry.

Accounts and Records. Section 17 of

the Exchange Act has been expanded to

provide for record-keeping and reporting

requrrements of the various new regulated entities and that certified tmancral

financial statements of brokers and dealers be filed with the Oommlssron and

sent to their customers. Section 17(e)(2)

permits the adoption of rules prescribing

the form and content of financial statements filed pursuant to the Exchange Act

and the accounting principles and standards employed in their preparation

Section 17(f) requires, in part, (1) the

Implementation of a system of reporting

information about missing, lost, counterfeit, or stolen sscunnes and (2) the fingerprinting of the partners, directors, officers,

and employees of every member of a

national securities exchange, broker,

dealer, registered transfer agent, and

registered clearing agency.

Commission Rates

As noted above, the Commission, before passage of the 1975 Amendments,

adopted Rule 19b-3,7 eliminating fixed

comrnissrons on exchange transactions

as of May 1,1975. The Commission made

a preliminary announcement on August

27, 1974,8 of ItS plan to eliminate fixed

cornmrssron rates. In September the Commtssron formally requested each national

securmes exchange to effect necessary

changes in ItS constitution, rules and

practices so as to eliminate those elements which required exchange members

to charge any person any fixed rate of

cornmrssron.v Only one national securities exchange indicated that It would

comply With the Commission's request,

other national sscunnes exchanges indicated that they would not comply voluntarily With the Commission's request.

Consequently, the Commission proposed

Rules 19b-3 and 10b-22 under the Exchange Act for comment and held

hearings to receive Views, data and arguments from interested persons on both

the proposed rules and the proposed

effective date of May 1, 1975.

.......As a result of the hearings, the Commission adopted Rule 19b-3 With modifications from the form first published for

comment Specifically, the required elimination of "floor brokerage" rates was

delayed until May 1, 1976. The Commission determined not to adopt proposed

Rule 10b-22, which related to agreements

among exchange members for the setting

of brokerage rates. The Commission's

administrative action has been legislatively affirmed In Section 6(e) of the 1975

Amendments.

V After carefu I consideration of all the

arguments advanced In the hearings on

Rule 19b-3, of the numerous studies made

concerrunq cornmlssron rates, and of the

recent experience of both the Commission and the securities Industry With

fixed rates, the Cornrnisaron set forth as

ItS basic reason for the adoption of Rule

19b--3 the conclusron that, under present

circumstances, the free play of competition can provide a level and structure of

cornmrssion rates which would better

serve the Interests of the Investing public,

the securities markets, the secunnes industry, the natronal economy and the

public interest than any system of price

fixing which can reasonably be devised.lO

In March 1975, the Oornrnlssron announced a program to morutor the Impact

of ItS decision to eliminate fixed rates of

comrrusslon.'! The program IS designed

to determine what effect the absence of

any schedule or fixed rates of commissions may have on the pubuc Interest,

protection of Investors, and maintenance

of fair and orderly markets. The program,

as announced, Included publication for

comment of a proposed rule under the

Exchange Act reqUiring certain broker-
dealers to file with the Commission revenue and expense data and related

financial and other information and notification of changes In membership interests In national securities exchanges

The monitoring program has been

analyzing a sampling of firms to develop

information on effective cornmrssron rates

being paid by mdrvtdual and institutional

customers to different types of brokerdealer firms; reviewing volume reports

from national securities exchanges and

third market firms to determine the drstnbution of trading among the various

market places; compiling additional information about revenue sources and

expenses of national securities exchanges

and registered national securities associations; and studying the Income, expenses, assets and liabilities of specialists

and the activity of certain stocks.

On May 2, 1975, the Oornmrssron announced the adoption of Rule 17a-20

and related Form X-17A-20, the approval

of two plans submitted pursuant to paragraph (a)(3) of Rule 17a-20, and the

Implementation of other aspects of the

program to monitor the Impact of the

ehmmatron of fixed ccmrrussron rates on

exchange transactions 12

For the months of May and June, New

York Stock Exchange (NYSE) brokerdealers Incurred a revenue loss from

cornrrussron rate discounts of approxrmately $42 million. Thrs revenue loss was

approximately 7.6 percent of total secunnes commission revenue and 4 percent of total revenue dunnq thiS period

lndivrdual customers paid slightly more

on small size orders and slightly less on

large orders. The net effect in June was

a decline averaging 1.5 to 2 percent In

the cornrnlssron rate charged on all indivrdual orders. Institutional customers,

on the other hand, received discounts In

all order size categories and received

an average discount of 19 5 percent In the

month of June. The experience With competitive rates for non-NYSE firms durrnq

the May and June period was Similar to

that of NYSE member firms.

Based upon the preliminary and incomplete evidence of two months'

experience (May-june, 1975) With com8

petitrve rates during a period of rising

trading volume, historical trading patterns among exchanges and over-thecounter markets appear not to have

altered Similarly, the tmancral condition

of self-regulatory organizations does not

appear to have been materially affected.

Development of the National

Market System

Advisory Committee on the Implementation of a Central Market System. As

descnbed In last year's Annual Report,13

the Commission established an Advisory

Committee on the Implementation of a

Central Market System to assist It In connection With ItS proposals for a central

market system and to ensure that such a

system would meet the needs of the

nation's capital markets In the future,

consistent With the publrc Interest and the

protection of Investors.

Specrtrcalty, the Committee was asked

to study and to submit recommendations

to the Cornrnissron on such matters as:

a. The appropriate structure for

regulatory supervrsron of the central

market system;

b The nature and scope of the

Oomrmssron's role during the process

of Implementing the central market

system;

c. The ways in which a central market system should be structured In

order effectively to meet the needs of

our capital markets, the public interest,

the protection of investors and the

maintenance of fair and orderly markets

for securities;

d. The needs and perspectives of

users of a central market system, including Issuers of and Investors In

securities, as well as securities protessronats: and

e. The appropriate resolution of

fundamental policy Issues relating to

the central market system's operations.

The Committee, composed of twelve

persons, eight of whom are from the securities Industry, was assisted by members of the Oommlssron's staff The staff

attempted to Identify for the Committee

a number of unresolved Issues which the
Committee might consider, including

(1) the registration requirements and

caprtal standards appropriate for marketmakers granted access to the system,

(2) the responsibthtres of market-makers

when acting as agents in the system;

and (3) the responstbtlrtles of marketmakers acting as dealers In the system

Certain structural questions were also

raised: Whether lrrrut orders for pubuc

customers should be held In a consolidated limit order book and, If so, who

should be permitted access to the book,

whether specialists or market-makers

should be prohrbited from dealing directly

With public customers; and how the role

of transactions between customers would

be effected Without the use of brokers or

specialists In the central market system.

In addition, the staff suggested that the

Committee consider rules on auction

trading and priorities for public customers' orders in the new central market

system.

In a preliminary statement Issued December 11, 1974, 14 the Committee noted

that Its suggestions would be made Without regard to whether It was feasible to

utrhze exrstinq technology to Implement

ItS suggestIOns and that although not

unanimous its preliminary views did

reflect the sense of the Committee as a

whole. Particular emphasis was placed

on auction-market principles in a central

market system, which were considered

the most effective means of encouraging

competition among buyers and sellers.

The preliminary statement of the Committee set forth specific conclusions

with respect to specialists' net capital,

market oontinuity and public preferance

obligations, outlined the manner in which

limit orders entered with specialists

should be treated, and descnbed possible

trading limitations to be imposed on

specialists. Stressing the importance of

preserving the dealer function of brokers,

the Committee recognized the importance

of the role played by over-the-counter

dealers in the markets and the necessity

of providing an adequate opportunity and

Incentive for their continued participation

in a central market system.

On July 15, 1975, the Comrmttee submltted to the Commission, In preliminary

form, a Summary Report of its final

conclusrons The Summary Report reemphasized that the views enunciated

were not unanimous or endorsed by all

members without reservation

The Summary Report defined the objectives of the central market system as

follows:

a To provide all Investors WIth the

maximum opporturnty to buy and sell

securitres at the best possrble price,

b To provide the depth and Irqutdrty

necessary to tacrlrtate the ralsrnq of

capital by issuers; and

c To provide a mechanism for the

consurnrnanon of transactions at a

reasonable cost.

To accomplish these objectrves, the

Summary Report envlsioned that the central market system must include all transacuons In securities listed on exchanges

and permit access to all specrahsts,

qualified market-makers and qualified

broker-dealers

The Committee emphasized that

auction-market principles, including preference for all public orders, would be

essentral to the central market system

The system's rules, according to the

Summary Report, should provide that all

orders entered for the account of persons

other than brokers or dealers would have

preference over orders entered by protesstonals. Among system professionals,

however, the orders of specralrsts and

market-makers would be permitted to

displace orders of other broker-dealers

dealing for their own account

An Important role was recommended

for specialists on the various stock

exchanges. The Cornrruttee also recommended that the system permit participation of all market-makers, including

those now dealing In the third market

(i.e , over-the-counter trading In secunnes listed on exchanges). The report

spelled out In some detau respcnsrbrlrnes

of specialists and market-makers entering quotations in the system, including

their minimum net capital. The Summary

Report indicated that there should be

trading and competition among special9
IStS and market-makers dealing in the

same secuntres.

The Summary Report stated that both

specialists and market-makers should be

required to maintain continuous, fair and

orderly markets In those securities In

which they are registered to deal. The

Committee, however, drew an Important

distinction between the two. specraltsts

would be assigned to deal In particular

secunues, so that at least one specialrst

would be responsible for maintaining a

market in every listed security; registered

market-makers would be permitted to select the secunties In which they dealt

Market-makers would also be permitted

to deal with all types of customers, while

specialrsts would be prohibited from dealIng directly with institutional customers

and with insiders, officers and directors

of the Issuers of the securities In which

they made markets

Thrs restriction on speciausts' dealings

was seen to be directly related to their

role as agents for the limit orders of pubuc customers. The Committee envrsroned

that limit orders would be guaranteed

exposure to all transactions In system

secunues only if they were placed with

specransts. Although market-makers

would be permitted to hold and execute

limit orders, they would guarantee exposure of such orders to all system transactions only by usmq a specialtst. The

Summary Report recognized "best execution" as the primary duty of brokers In the

system, detailing certain aspects of that

duty In the context of an operational

central market system. The Summary

Report also indicated that the system

should maximize the opportunities for

brokers to execute orders for their customers without a specianst or other

qualified market-maker participating In

the transaction.

A central self-regulatory authority, with

the responsibility and authority to Impose

rules and regulations on all specrausts,

market-makers and broker-dealers tradIng In listed securities was deemed Important by the Committee. Early In ItS

consrderatron. the Committee had recommended that such a body be established

as soon as posstble, In view of the opera10

non of the consolidated tape, the diSsemrnatron of quotations In listed secunnes and the unftxrnq of commission

rates. SUbsequently, however, the Committee recognized that creation of such

a board would be inappropriate so long

as the National Market Advisory Board,

called for by the seounnee Acts Amendments of 1975, was assiqned responsrbility to study the governance of the

central market system. Therefore, it urged

that the Board and the Oomrrussron

monitor the events taking place toward

the development of a central market

system to Insure the existence of an appropriate regulatory framework.

The Committee believed the most efticrent and effective structure for governIng the central market system would be

provided by the merger of presently

exrstrnq exchanges dealing In secuntrss

to be Included In the system. The Committee pointed out, however, that while a

true central market system Involves some

form of centralized control, a merger of

the exchanges would not be a prerequisrte

The Committee concluded ItS summary

report With a series of recommendations

for Oornrnlssron action. Included were

recommendations, made early In the

Committee's deliberations, for Imposition

of rules dealing with short-seiling and

minimum capital requirements for specralrsts and market-makers. The Comrmssron has already taken action on these

matters. In addition, the Committee

recommended that all specratlsts and

market-makers be required to maintain

bona fide, continuous and competitive

two-srded quotations for each security

In which they make a market and that

such quotations bear a reasonable relationship to the last sale in those secunnes.

The Committee recognized as particularly important ItS recommendation

that the New York Stock Exchange and

the American Stock Exchange be permitted to retain their present rules causIng members to bring all trades In

securities on those exchanges to the

respective trading floors. The Committee

recognized that such rules pertaining to

specmc market centers Will be map-
propriate in the central market system

but concluded that they should not be

eliminated until such time as a similar

rule can be imposed for the system as a

whole A system-wide rule was thought

to be appropriate when a composite

quotation system was In operation, faCilitating members' efforts to achieve best

execution, and when a consolidated limit

order book was established, making

possible the execution of public orders

in all market places.

The Commission expects to receive a

final report, with dissenting Views, from

the Committee In the fall of 1975. It IS

anticipated that the work of the Committee

Will constitute a beginning POint for

deliberations by the new NatIOnal Market

System Advisory Board called for by the

Securities Acts Amendments of 1975.15

Consolidated Tape

As previously reported.!" a plan for the

consolidated reporting of price and volume data, filed jorntly by the Amerrcan,

Midwest, Pacific, PBW and New York

Stock Exchanges and the National Association of secunues Oealers, Inc.

("NASO"), was declared effective by the

Commission as of May 17, 1974.17 The

joint industry plan (the "Plan") provided

for a tape consisting of two separate

ticker "networks," displayed concurrently. Network A would report transactions In stocks listed on the New York

Stock Exchange ("NYSE") and Network

B, transactions In stocks listed on the

American Stock Exchange ("Amex") and

certain stocks listed only on the participating regional exchanges. Both networks

would report all trades in their respective

stocks, regardless of whether they took

place on an exchange or In the so-called

"third market." In addition, Information

disseminated over Networks A and B

would also be available through interrogation devices, enabling investors

and market professionals to obtain the

most recent last sale price for any stock

covered by the system regardless of the

market of execution. The system was designed to be compatible With equipment

presently found in most brokerage offices.

The Plan contemplated that the consolidated tape would be put Into operation In two phases beglnnrng Within 20

weeks after Commission approval of the

Plan. The pilot phrase was to be a 20-

week period of experimental operation

covering a limited number of stocks, after

which full operation of the consolidated

tape would begin, by reporting and disseminating last sale data of eligible

securities to be Included in Networks A

and B by means of a high-speed line.

Thrs would permit reception of reported

information on a current baSIS, regardless

of any delay In the dissemination of the

information over Networks A and B

caused by the servicrnq of interrogation

devices.

Actual Implementation of the consolidated tape lagged behind the 40-week

time period contemplated by the Plan,

pnncipally because the Original estimate

was overly optimistic and failed to

anticrpate the technical problems inherent In the development of the new

computer system that was required. Also,

both the sponsors and the Commission

believed that certain regUlatory problems should be addressed before the

Implementation of the consolidated tape.

Phase I of the consolidated tape system was Originally scheduled to commence on October 4, 1974. It was deferred

for a two-week period by the Commission,

In response to a request by the NYSE, to

permit resolution of certain mechanical

problems the NYSE believed would have

arisen as a result of the Commission's

amendments to ItS short sale rulesSecurities Exchange Act Rules 3b-3,

10a--1, and 10a--218 The amendments to

the short sale rules had the effect of

prohibrtmq short sales of a security

listed on an exchange at a price below

the last pnor sale (a "minus tick"), or at

the last sale price if the preceeding

different sale price had been at a higher

prrce (a "zero minus tick"), as reported

on the consolidated system. The amendments applied the Commission's short

sale regUlation, for the first time, In a

uniform manner to all markets In which

transactions In listed securities occurred,

and were part of the Oornmrssron's efforts

11
to resolve certain regulatory problems

before the Implementation of the consolidated tape But after reviewing the

problems created by the uniform short

sale rule, the Commission determined to

suspend the operation of the amendments, and the pilot phase of the consolidated system began operation as

rescheduled on October 18,1974

Although full operation of the consolidated tape system was Originally

scheduled for February 21, 1975, It became obVIOUSto all the Plan participants

by mid-January that the February 21

deadline could not be met. On February

19, 1975, the Consolidated Tape Association ("CTA"), the governing body for the

consolidated system, Informed the Commrssion that, because of testing delays and recent problems with the Market

Data System of the NYSE, the CTA expected to be able to Implement only

certain elements on or before June 16,

1975.19 Specrncally, It expected that on

or before June 16, 1975' (1) last sale data

regarding transactions in all eligible secuntres required to be Included In Network A of the consolidated system would

be reported In accordance with the Plan

by all Plan participants (other than the

Amex) and by four other "reporting

parties" (r.e., the Boston Stock Exchange,

the Cincinnati Stock Exchange, the Detroit Stock Exchange, and the Institutional

Network Corporation ("Instinet"» to the

Securities Industry Automation Corporation ("SIAC"), the Plan processor, and

(2) such last reports would be transmitted

by SIAC to vendors of market information

on a low-speed basis. The CTA's letter

indicated that maximum effort was being

expended on making Network A operational as soon as possible, and that SIAC

was continuing to program for the

requirements of Network B and the

high-speed line.

On March 3, 1975, after indicating that

it would not object to the delay, the Commission stated that It was disappointed

by the delay but that It understood that

certain of the reasons for the delay were

beyond the control of the CTA. The Comrnissron also stated that the staff would

be making inquiry of the CTA as to the

12

reasons for the delay and the future plans

of the CTA with respect to the full implementation of the Plan. The CTA response

of March 26, 1975, to staff mqurries regarding the delay, which detailed descnptions of the reasons for testing

delays, was released by the Oomrrussron

on May 1, 1975.20The Oornmlssion issued

an Interpretative release specrtymq the

requirements 'regarding displays on interroqauon systems,21 which helped resolve questions concerning application

of Rule 17a-15 to vendors and problems

Cited by the CTA In Its March 26 letter.22

Between February and June 1975, the

Plan participants conducted an extensive

test program to Insure the accuracy, reliability and integrity of programming for

Network A. Personnel from the various

exchanges, SIAC and the vendors subjected the system to a broad range of

Simulated market condiuons. All the tests

proved successful, and the CTA was able

to fully Implement Network A reporting

on a low-speed baSIS on June 16, 1975.

The CTA IS currently continuing work on

the remaining elements of the consolidated system-Network B and the hlghspeed line. A final date, however, has

not yet been set for full implementation

of all elements of the consolidated system.

Implementation of Network A of the consolidated tape, while not constituting

full Implementation of the Plan, IS a

major step toward the eventual achievement of a central market system. Transactions executed In markets other than

on the floor of the NYSE are now appearIng on moving tickers for the first time.

Such transactions are Indicated on the

tape by an ampersand tollowrnq the

symbol for the NYSE-listed stock The

ampersand, In turn, IS followed by a letter

that Identifies the specrnc market place.

Those letters are' M for Midwest; P

for Pacrnc: X for PBW; C for Cincinnati;

T for NASD (r.e., the third market); and

o for Insllnet. The Boston Stock Exchange

-Identified by the letter B--was added

to the consolidated tape on July 14, 1975,

and the Detroit Stock Exchange--Identifled by the letter D-IS expected to be

added to the system sometime In late

summer or early fall, 1975.
The inclusion of NYSE, regional and

third market transactions on a single

consolidated tape, even on the limited

scale currently In place, enables investors

to make more Informed Judgments regarding which market centers offer the most

advantageous price at a particular time.

Even though the Information presented on

the consolidated tape IS essentially histoncal information, i.e., prices at which

transactions were effected In the past

rather than prices at which future transactions may be effected, such information

should be useful to Investors In indicating

general trends and temporary price disparities between market centers.

In addition to its benefits to Investors,

the consolidated tape represents a significant technological achievement In

the processing of securities information.

The consoltdated tape IS not Just a mechanical merger of exrstinq ticker networks but a completely new computer

system tying together all the nation's

market centers. Sophisticated and complex programs had to be developed to

Insure that the different equipment and

programs of various exchanges and

the NASD could be accommodated, and,

perhaps more important, to Insure that all

last sale reports would be reported on the

consolidated tape in the proper sequence. All the complex programming

changes were accomplished successfully,

and the CTA and the Commission are

presently looking forward to Implementation of the high-speed line, which for the

first time Will provide Investors with last

sale reports on a current baSIS, even In

the event of delays In ticker dissemination

due to mechanical limitations.

Composite Quotation System

When the Commission issued ItS first

proposed rule on composite transaction

reporting in March 1972, it also proposed

a companion rule-e-Secuntles Exchange

Act Rule 17a-14-governlng the development of a composite quotation

system.23 Rule 17a-14, as Originally

proposed, would have required all national securities exchanges to make

quotations of their registered specialists

available on a current and contmumq

baSIS to vendors of market Information.

Similarly, the NASD would have been

required to make available to such vendors on a current and continuing baSIS

quotations of market makers With respect

to over-the-counter quotations In secunties listed or traded on exchanges.

On August 14, 1974, the Commission

released for public comment a substantial revrsion to proposed Rule 17a-1424

as a result of the many comments which

had been received, the recommendations

of the Commission's Advisory Committee

on Market Disclosure regarding a composite quotation system, and the Commission's experience With Implementation

of a consolidated transaction reporting

system under Rule 17a-15.

The major change In Rule 17a-14 from

the original proposal was that the revised

rule required the reporting of quotations

pursuant to a plan Similar to that required

by Rule 17a-15. Accordingly, Rule 17a-14,

as revised, would have required every

national securities exchange and the

NASD to report to the Commission quotations of their market makers or specialists

In listed securities. The quotations were

to be available on a real-time, current

and continuing baSIS.

The Commission received many publiC

comments With respect to ItS August 1974

proposal. After considering all of the public comments, the Commission determined

to adopt a new approach desiqned to increase the availability of quotation information without potentially burdensome

federal requlation. On March 11, 1975,

the Commission announced that It had

requested all national secuntrss exchanges to effect changes in their rules

and practices to be effective on or before

May 1, 1975, to eliminate those which

restricted, or had the effect of restricting,

access to or use of quotation information

disseminated by such exchanges to any

quotation vendor.25 At the same time, the

Commission announced that It was deferring further consrderation of proposed

Rule 17a-14 until It had had an opportunity to observe the effects of eliminating

restrictions on quotation drssemmatron.

In announcing ItS new approach, the

13
Oommrssron reiterated ItS view that quotation information, such as that currently

provided by some exchanges to their

members, IS essential to broker-dealers,

whether members or not, In discharging

their duty of reasonable diligence In the

execution of customers' orders.26 By requesting the elimination of exchange

restrictions on quotation drssernrnanon,

the Commission Intended that as a result

of competitive forces a composite quotation system would develop with a minimum of federal regulation.

On May 7, 1975, the Commission announced that It had received responses

(to ItS March 11, 1975 request) from all

national secuntres exchanges and that all

exchanges either had taken the acllon

requested by the Commission or had

Informed the Commission that they did

not have any rules or practices which

restricted access to, or use of, such Intorrnatrcn.s" In making ItS announcement,

the Commission added that, In ItS View,

the actions taken by the various exchanges would tacrlrtate the establishment

of a central market system, as contemplated by the Market Structure Statement 2H and the PolIcy Statement,29 by

making possible the composite display of

quotation information for multiply traded

securities.

Short Sale Regulation

On March 6, 1974, the Commission

proposed amendments to Securrties Exchange Act Rules 3b-3, 10a-1 and 10a-2

In order to establish uniform short sale

rules, which were considered to be a

necessary element of the consolidated

reporting system.30 After analyzing the

comments received on the proposed

amendments and concluding that no serious objections had been raised, the Commission announced their adoption to be

effective October 4, 1974 (the "October

Amendments")."! In a letter to the Comrrussron, dated October 11,1974, the New

York Stock Exchange asserted that the

October Amendments would create insurmountable technical, operational and

regulatory problems

In view of the problems noted by the

14

NYSE, the Commission temporarily suspended the effectiveness of the October

Amendments to Rules 10a-1 and 10a-2.32

The effect of that suspension was to leave

the regulallon of short sales on exchange

markets as it had existed before adoption

of the October Amendments, while the

Commission continued to study the most

efficient, effective and fair manner to

achieve uniform short sale regulation In

a central market system.

On March 5, 1975, the Commission

published for comment additional proposed amendments to Rule 10a-1, (the

"March Proposals").33 The Commission

noted that many persons believed that

short selling should not be regulated at

all, except to the extent It IS used as a

manipulative devlce.34 Consrderatron of

such arguments, however, had been

hampered by a lack of current statistical

studies of the pattern of short seiling in

today's markets, particularly on regional

securities exchanges and In the third

market. In any event, the Commission

thought It would be premature to consider

elimination of short sale regulation (altogether or for any class of short sellers)

before additional progress was made toward the establishment of a central

market system. Nevertheless, the Commrssron specmcalty encouraged comments on the feasibility and probable

effects of exempting from regulation short

sales by persons other than brokers and

dealers, or of eliminating short sale

regulation entirely.

The Commission acknowtedqed in the

announcement of the March Proposals

that use of the proposed rules In the consolidated system might pose certain

operational problems for those exchange

ma'rkets which regularly experienced a

high volume In reported securities but

had not yet modernized their facilities so

that access to intormanon reported in a

consolidated system was not immediately

available on the floor of the exchange.

For that reason, the March Proposals

provided, as an alternative to the Commrssron's general rule, that any national

securities exchange, by rule, might prohibit short sales of reported sscunnes

In ItS own market (i) below the last sale
price on that exchange, or (ii) at the last

sale price, unless that price was above

the next preceding different sale price.

The March Proposals also provided that

short sa es of reported secuntres effected

on any exchange having such a rule

would have to comply With that exchange's

rule and that such compliance would

constitute compliance With paragraph (a)

of Rule 10a-1, as amended.

Network A of the consolidated system

commenced operation on June 16, 1975.

In order to ensure comparable short sale

regulation of all transactions in reported

secuntres In all markets reporting transactions to that system, the Commission

announced on June 12, 1975, the adoption of amendments to Rules 10a-1 and

10a-2 (effective June 16, 1975), which

were Identical, In all material respects, to

the March Proposals.35

Paragraph (a) of Rule 10a-1 will not

apply to short sales of any reported secunty until last sale information on that

security is made available to vendors of

market information on a real-time basis.

When such information becomes available on a real-time basis, paragraph (a)

of Rule 10a-1 will govern short sales In

all markets (including transactions effected on national secuntres exchanges

and In the over-the-counter market)

Additionally, national securities exchanges will have an option either to

adopt their own short sale rules, subject

to the Commission's power under Section

19 of the Securities Exchange Act, or be

governed by paragraph (b) of Rule 10a-1,

the tradrnonal form of the rule, which

applies only to short sales effected on

national securities exchanges.

Option Market Regulation

By the end of fiscal year 1975, the

Chicago Board Options Exchange, Inc.

("CBOE"), whose option plan were approved by the Commission In the preceding fiscal year, had 1,025 members and

listed call options on 67 stocks.36 The

average dally volume of options traded

on CBOE reached approximately 53,000

contracts, representing 5,300,000 shares

of the underlying stocks."

DUring the past fiscal year, the Commission declared effective option plans

of two other exchanges, the American

Stock Exchange (Amex) and the PBW

Stock Exchange, Inc. ("PBW"). The Comrmssion declared the Amex option plan

effective In December 1974,38 and that

exchange began trading call options on

January 7, 1975. By the end of the fiscal

year, the Amex listed options on 40

stocks, and had an average dally volume

of 17,016 contracts, representing 1,701,600

shares of underlying stock.

In May 1975, the Oomrrussron declared

PBW's option plan effective and that exchange began trading options on June

27,1975.39

In addition to the three exchanges With

effective option plans, the Pacrtrc Stock

Exchange ("PaCifiC") announced ItS intention to initiate options trading and held

several discussions with the Oommrssron's

staff regarding ItS preliminary work on a

plan for such a program.

DUring the fiscal year, the CBOE, With

Commission approval, made numerous

changes In ItS option plan under Rule

9b-1. For example, In response to Commission and CBOE concern about emerging trading patterns in options where the

exercise price had fallen substantrally

below the market price, the CBOE

restricted opening transactions In such

options.w At the same time, the CBOE

prohibited market makers from quoting

spreads In such options greater than Y4

of $1.41 It also adopted provrsions to

tacrlrtate more orderly openings of tradIng and to eliminate market-makers'

ability to gain priority over public orders

The CBOE also strengthened ItS net

capital and margin rules.

The Arnex option plan, like that of the

CBOE, calls for trading In options on

stocks with a substantial number of

shares outstanding, Widely held and actively traded. Members of the Amex, at

the time ItS option plans were declared

effective, automatically obtained option

trading pnvileqes on that exchange. In

general, the Amex applied contract

standardization methods substantially

Identical to those used by the CBOEthat IS, options were made fungible by

15
limiting the contract variables such as

expiration months and the exercise, or

"striking", prices.

The Amex options generally are traded

In a manner very srrmlar to that for other

secuntres traded on that exchange. A rnajor difference between the Amex's program and the CBOE's IS that the Amex

uses, with certain modifications, a single

specralist both to make a market and to

handle agency limit orders In Its options,

while the CBOE splits the specrausts

functions between a market-maker

(dealer) and a board broker, performing

the agency tuncnon.« One modification

Amex made In ItS floor trading procedure

IS that ItS registered floor traders who

trade options are required tp trade In a

way that assists the spscraust In maintaining a fair and orderly market In options, and may be called upon by either

a floor official or floor broker to make

competitive quotations In the market.

The PBW's program IS Similar to that of

Amex and CBOE In such areas as the

characteristics of underlying stocks for

ItS options, clearing principles, and contract term standardization for ItS options.

like the Amex, the PBW utruzes its existIng specialrsts for market making in ItS

options and requires ItS regIstered floor

traders to assist the specralrsts PBW's

plan, however, Involves for the first time

options traded on the same exchange as

the one on which the underlying secuntres

are traded Because of this distinctive

characteristic, the PBW has separated ItS

option floor from the rest of Its trading

floor to prevent VIsual and direct auditory comrnumcatron between the two

trading areas. The PBW also protubrts ItS

floor members who have learned of

certain large transactions about to be

executed In an optron or an underlying

security of an option class traded on the

PBW from initiating orders In the same

option until two minutes after the transaction has been printed on the transaction

tape.43 These measures were desiqned

primarily to bar possrble misuse In PBW's

optron market of mtorrnatron obtained by

floor members relating to activity in an

underlying stock or In a block of options

16

before the information has been publicly

disseminated.

As previously reported,44 on the basis

of conclusrons reached tollowmq the

comrmssron's hearings In early 1974 on

multiple-exchange options trading and

options trading in general, the staff had

suggested SUbject matters to be addressed by all exchanges concerned

before the initiation of multiple-exchange

options trading or the expansion of the

CBOE (which was the only exchange then

trading options). One such recommendation called for a common national clearing system. In declaring the Amex option

plan effective, which authorized the initiation of multiple-exchange option trading,

the Commission noted and approved the

joint establishment by the Amex and the

CBOE of the Options Clearing Corporation ("OCC") to Implement a national

clearing system for all exchange-listed

optlons.ss All exchange-traded options

were thereafter issued, guaranteed and

registered by the OCC in compliance with

federal securities laws. Moreover, the

OCC currently clears and settles all

option transactions effected In exchange

traded options, now also including those

on the PBW, and it will perform the same

tuncnons for those exchanges which

may later initiate options programs and

become partlcipants in OCC.

Another recommended prerequisite to

multiple-exchange trading of options was

the achievement of a common tape for

reporting transactions in all listed options.

In response, the exchanges concerned

set up a policy-making body, the Options

Price Reporting Authority ("OPRA"), to

coordinate the establishment and ongOing administration of a separate common options tape on the floor of

exchanges trading options and after a

trial period, If econormcal, to offer access to the tape to subscnbers, OPRA

also administers orssermnanon of last

sales data concerning options from the

participating exchanges to vendors of

automated interrogation devlces.46 Furthermore, In response to Oornrrussron

staff recommendations, all the parnclpat-
Ing exchanges have agreed to make option quotations available through the

vendors to qualified non-members as well

as to their own members and have

reached general agreement regarding

standardization of terms of exchangetraded options These actions have all

been approved by the Comrmssron.s?

Uniform Net Capital Rule

On June 26, 1975,48 the Commission

announced the adoption of a Uniform net

capital rule, Securities Exchange Act

Rule 15c3-1 , effective September 1,1975,

subject to transitional provisions which

delay the effective date of certain provrsrons until January 1, 1976. The adoption of the rule followed consideration of

comments received In response to a release In. which the proposed rule had

been re-published for comment 49

The new rule discontinues the exemption previously embodied In the net capital rule for members of designated national secuntres exchanges (other than

certain specialists), required to comply

With net capital rules of such exchanges

In order to ease the transition to a uniform net capital rule, the Commission

Incorporated provrsrons from superseded

capital rules of national securities exchanges. These Include the concepts of

secured demand note capital and a

modified flow-through of capital from

subsidiaries.

The rule, as adopted, continues the

basic net capital concept under which the

securities Industry has operated for many

years and, in addition, Introduces an alternative concept to measure the capital

adequacy of broker-dealers. The approaches to capital adequacy and nnanciat responsibility embodied In the rule

are designed to balance the need for

flexible and efficient use of the fmancral

resources of the securities Industry.

Development of a Uniform

Broker-Dealer

Reporting System

Recognizing the need to eliminate

duplicative and otherwise unnecessary

reporting and regulatory requirements for

broker-dealers, the Commission has been

working on the development of a uniform

reporting and regulatory system to achieve

that goal. The Comrnrsston began its

study of the problem in September of

1972, when it created an Advisory Committee on Broker-Dealer Reports and

Registration Requirements to review the

existing reporting and regulatory requirements of the brokerage industry and to

Identify those requirements that were

unnecessary, duplicative or unduly

burdensome.

After a Commission Staff Task Force

reviewed the recommendations of the

Advisory Committee, the Commission

Issued a release In January 1974 announcmq a program to Implement Virtually

all the proposals contained In the Advisory Committee's Report.5o

The Commission's program, as announced by the January 1974 release,

Included the totlowmq measures:

Key Regulatory Report. The Comrnlsston undertook to devise a key

regulatory report, a Uniform reporting

form Unifying and Simplifying the reporting requirements. The Oomrmsston

anticipated that the report would be

the foundation of the reporting system

and would Incorporate the concept of

layering, whereby greater Increments

of detail are required as the scope and

complexity of a broker-dealer's operations Increase

Proposed Rule 17a-18. In order to

formulate methods of Simplifying the

reporting requirements and to develop

the key regulatory report, the Commission thought It essential to have In

its possession and subject to ItS review

all reports, forms, questionnaires and

Similar reporting documents required

of broker-dealers. The self-regulatory

organizations agreed to supply all reports, forms and questionnaires then In

use, many of which had already been

supplied to the Commission. In order

to provide a formal structure for the

submission of new forms, reports and

questionnaires or substantive mooui17
cations of exisnnq ones thereafter

proposed, the Commission published

proposed Rule 17a-18. Proposed Rule

17a-18 would require every national

securities exchange and every registered national secuntres association to

fIle with the Oornrrnsston each proposed

new form, report, questionnaire, or

similar document or any substantive

amendment to or substantive modification of an exrstinq form which It

requires of ItS members or any class of

members, whether on a regular, onetime, or "for-cause" basis.

Rule 17a-19. The Commission has

proposed Securities Exchange Act

Rule 17a-19 and related Form X-17A19 In order to eliminate duplicative

exarnlnanon of and reporting by brokerdealers about their financial responsibility and related record keeping where

they change their membership status

thereby affecting the relationship with

their desrqnated examining authonty

or any other self-regulatory orqarnzanon The proposed rule would require

each national securities exchange and

each registered national secunnes

assocranon promptly upon the happening of certain changes in the membership status of any of ItS members or

upon learning that such changes would

occur to file Form X-17A-19 With the

Commission and the Securities Investor

Protection Oorporatron ("SIPC").

Formation of the Report Coordinating

Group. The Commission Intended to

submit the filings received pursuant to

Rule 17a-18, If adopted, and other

forms and reports to a Report Coordinating Group organized under the

Federal Advisory Committee AcP' The

Report Coordinating Group, formed In

May 1974,52 divrdeo their responsibilities Into four work areas. uniform

tmancral/operatronar forms, uniform

trading forms, urutorrn assessment

forms and uniform reqrstranon forms

The function of this Group was to review such forms, reports and questionnaires, and to provide expert advice to

the Oomrmssron on such matters as

uruformrty of definitions and reporting

formats, the extent of the anticipated

18

administrative burden to be caused by

any new form, and such other matters as

might be appropriate to a program designed to streamline, unify and improve

the quality of the reporting system. The

Group was to advise the Commission as

to areas where unnecessary or duplicative reports could appropriately be

eliminated. In additron, the Group was to

advise the Cornmlssron on the development of a uniform state, federal, and

Industry form for the reqrstratlon of

broker-dealers and a uniform registration

form for pnncipals and agents. The Group

was also to be asked at a later date to

assist In development of the proposed

key regulatory report.

In August 1974, the Commission announced ItS approval of a preliminary

outline of a Ftnanctal and Operational

Combined Urutorrn Single Report (FOCUS

Report) and issued it for public comment.

It also announced the adoption of Rule

17a-18, Rule 17a-19 and Form X-17A19.53

The Group Issued for publrc comment a

DISCUSSIonPaper In October 1974, containing the pnncrples and an outline of

the contents of a FOCUS Report.54 In

December, the Group presented to the

Comnussron ItS Interim Report, containIng several interim recommendations

from each of the four working subcornmlttees.55 PubliC comments were received on the December Report and were

reviewed by the Group. The Group's

First Annual Report to the Ccmmtssron

In June, 197556 was Issued for public

comment 57 Several recommendations of

the Group, set forth In ItS First Annual

Report, were summarized in the June

1975 release as follows:

Financial and Operational Reports. The

Report made specific recornrnendatrons

for the adoption of a FOCUS Report of

financial and operational information.

Assessment Forms and Procedures. In

the area of assessment forms, the Group

recommended, among other things, that

each regulatory organization study the

posarbrlrty of eliminating assessment

forms based on net cornmrssron revenue

and consider collecting assessments

based on data captured at the source
through the clearing mechanism of each

respective exchange. An Assessments

Form Task Force has been created.

RegistratIon Forms. The Group's recommendation that Form lJ-3, the uniform

broker-dealer registration form, and

Form lJ-4, the uniform agent registration

form, be adopted has been largely implemented. Forty-five states, the Commission, and the NASD have adopted the

recommended uniform broker-dealer

registration form; and forty-eight states,

the Commission, all registered national

securities exchanges, the NASD, and

certain commodity exchanges have

adopted the recommended uniform agent

registration form.

Trading Forms. The Group has ascertained that there are 104 exrstrnq trading

forms which could be reduced to 29 such

forms.

The Commission believes that significant progress has been made In developIng a Uniform, ettlcient, streamlined and

thorough reporting system.

Broker-Dealer Model

Compliance Guide

In October 1972 the Commission established the Broker-Dealer Model Compliance Program Advisory Committee to

advise the Commission concerning the

development of a model compliance

program to serve as an Industry gUide for

the broker-dealer cornrnuruty.w

The Committee completed the first

draft of ItS report In the form of a GUide

to Broker-Dealer Compliance In January

1974. Approximately 2,500 copies of the

draft were distributed to the publrc and

comments were sollcrted The Committee

reviewed all comments received, consrdered the recommendations contained

therein and completed the final revised

draft In October 1974.

The Committee submitted the final draft

of the Guide to the Commission In

November 1974.59 The Commission distributed over 1,400 copies of trus draft

for the purpose of solrcrtlnq public comment. The Committee's charter expired

on December 31, 1974.

In ItS recommendations to the Commission, the Committee ernphasrzed the

benefits of the Industry-regulator dialogue

which took place In the development of

the Guide. The Committee supported and

urged the continuation and expansion of

ItS cooperative efforts In order to provide

the Industry With a better understanding

of the Commission's views and the Commrssron with a better understanding of

the Industry's problems. The Committee

also stressed the need for the GUide to

be updated on a fairly frequent basis In

order for It to retain Its usefulness. To

that end, the Committee recommended

that the Commission appoint a standing

committee which would be responsible

for regular and periodic updating of the

Guide 60

In response to the Commission's directive that the aim of the Committee's

recommendations should be "to educate

broker-dealers as to existmq requirements and how they may comply With

them," the GUide has been designed to

Inform management and supervisory

personnel In the secuntres Industry of

applicable requtatory requirements. to

Identify special compliance problems,

and to suggest procedures for acruevmq

compliance.

The public comments, on balance,

concluded that the GUide fulfills ItS general purpose Favorable comments have

also been received from members of the

Congress. In other subrnlssrons, one accounting firm and two law firms wrote to

express their opinion that the GUide IS

an extremely useful tool for the brokerage

community.

DISCLOSURE RELATED

MATTERS

Beneficial Ownership

and Tender Offers

V'On September 9,1974, the Commission

announced that it had ordered public

hearings to ascertain facts, conditions,

practices and other matters relating to

benencrat ownership, takeovers and

acqursmons by foreign and domestic

persons in light of the statutory purposes

underlying the Securities Act and the Ex19
change Act, particularly certain amendments to the Exchange Act which were

enacted In 1968 and 1970 ("the Williams

Act"). The purpose of the inquiry was to

develop a factual basis for determining

whether It was necessary or appropnate

In the public Interest or for the protection

of Investors to adopt or amend rules or

to recommend further legislation to the

Congress with respect to these areas.

./ The Drvrsron of Corporation Finance

conducted the month-long hearings dur109 whIch testimony was received from

49 witnesses, Includmg representatives

from the securities Industry, the academic

community, the legal profession and

publicly held corporations. In addition,

letters of comment from approxirnatety

75 Interested persons were received and

made part of the public record.

The following specrnc tOPICS, among

others, were examined dUrIng the course

of the proceeding scope of the term

"beneficial owner" for purposes of the

reporting and disclosure requirements

of the Securities Act and the Exchange

Act (except for purposes of Section 16 of

the Exchange Act), scope of the terms

"tender offer" "group" and "acqursmon"

for purposes of Sections 13(d) and 14(d)

of the Exchange Act; adequacy of the

disclosure requirements of Schedules

13D and 140, necessity for disclosure

requirements when Issuers make tender

offers for their own secuntres, including

when Issuers attempt to "go private",

adequacy of the publication, notice and

drssemrnanon requirements WIth respect

to tender offers, necessity for rules facrutaunq communications between Issuers

and the benencral owners of their secannes: and the necessity for addinonat

legislation relating to any of the above.

As a result of this proceeding, the staff

of the DIVISIOnof Corporation Finance IS

currently preparing rule and form changes

which wIll be published for comment.

Annual Reports to Security

Holders

Based In part on the Industrial Issuers

Advisory Report,"2 the Cornrmssron pro20

posed amendments to ItS proxy rules In

1974 in order to Improve the disclosure

10, and disserrunanon of, annual reports

to security holders and to Improve the

dissemination of annual reports filed with

the Oomrnrssron on Forms 1D-K or 12-K.63

The Commission received 165 letters of

comment from Interested persons

regarding these proposals

On October 31, 1974, the Cornmrssron

amended Rules 14~3 and 140-3 under

the Securines Exchange Act of 193464 to

requrre that annual reports to security

holders con tam at least the followmg intormatron: certrfred financial statements

for the last two fiscal years, a summary

of operations for the last five fiscal years

and management's analysts of the summary With specrat attention to Significant

changes occurring during the most recent three years, a brief descnptlon of

the company's busmess WhICh, In the

opinion of management, indicates the

general nature and scope of the company's business: a nne of busmess

breakdown of total revenues and of

Income (or loss) before mcome taxes and

extraordinary Items for the last nve fiscal

years; the name and prmcrpal occupation

or employment of each director and

executive officer of the company, and the

market price ranges and drvidends paid

for each quarterly period during the last

two fiscal years With respect to each

class of equity secuntres entitled to vote

at the company's annual meetmg.

In addrtron, the new rules require that

annual reports to security holders, or the

proxy statement, must contam an undertakrng that the company will provide,

without charge, to any security holder

as of the record date, upon written request, a copy of the company's Form

1D-K or 12-K annual report, except for

the exrubrts thereto, as filed wllh the

Cornmrssron. Companies must also undertake to make copies of the exhibits to

their Form 1D-K or 12-K available, but

companies may Impose a fee limited to

their reasonable expenses for providmq

such copies. Fmally, these companies

wIll be required. to contact known record

holders. such as brokers, banks and their

nommees, who may be reasonably ex-
pected to hold secunnes on behalf of

beneficial owners; to inquire of them as

to the number of sets of material needed

for distribution to beneficial owners for

whom they hold securities; to furnish

the material to them; and to pay the

reasonable expenses of the record holders for distributing the material to the

beneficial owners

Projections

On April 28, 1975 the Commission

pubhshed for comment a series of rule

and form proposals Intended to Implement

the "Statement by the Commission on the

Disclosure of Projections of Future Economic Peformance" .65 The proposals

would require the filing of Form 8-K to

disclose changes in control of a registrant and certain projections within 10

days of such events.66 The proposed rules

would define a "prolectron" under both

Acts to be a statement made by an Issuer

regarding material future revenues, sales,

net income or earnings per share of such

Issuer, expressed as a specrtic amount,

range of amounts or percentage variation

from a specific amount, or a confirmation

by an Issuer of any such statement made

by another person. Proposed rules would

require a filing of a report on Form 8-K

within 10 days of the time a registrant

has furnished a projection to any person,

with certain exceptions including private

financing, preliminary negotiations with

underwriters, business combinations and

government agencies which have afforded non-public treatment to the projections. A report on Form 8-K would

also be required when the registrant has

reason to believe Its publrc projections

no longer have a reasonable basts, or the

registrant has ceased drsclosrnq or revisIng projections A report on Form 8-K

could also be filed, at the registrant's

option, If the registrant disassociated

Itself from another person's projections

However, the registrant would not be

required by any of the proposals to disassociate Itself from a projection made

by another person.

Proposed amendments to Form 1o-K

under the Exchange Act and Forms &-1,

&-7, &-8, &-9 and &-14 under the Secunties Act would require the registrant

to furnish in the report or registration

statement those projecllons previously

filed or required to be filed with the Comrrussron covering the year-end results

for the registrant's last fiscal year, together with comparisons with correspondIng hrstoncal results. The registration

statements would also Include any projections for the registrant's current fiscal

year and/or future periods If they had

been filed or were required to have been

filed. Any registrant that had made projections for ItS last or current fiscal year

or for any future period, which were filed

or were required to be filed, would be

required to Include In lis annual report

on Form 1o-K projections for at least

the first six months of the current fiscal

year, or for the full fiscal year, or to explain why It had determined to cease

drsctosmq projections. The proposals

would permit a registrant to commence

disclosmq projections In the annual report or registration statement only If

(1) the registrant had a history of filing

under the Exchange Act and budgeting

experience for at least three years, and

(2) the projections and related disclosures

met certain standards.

To alleviate the concerns of registrants

over the possrble liability for dlsclosmq

projections, proposals under both Acts

would define the criteria under which a

projection shall be deemed not to be an

untrue or misleading statement of a material fact or a manipulative, deceptive or

fraudulent device, contrivance, act or

practice as those terms are used in the

various liability provrsrons of the federal

securities laws. In general, these proposed rules would establish certain

criteria for the Issuer of secunties to

which the prolecnon pertains and to the

projection rtselt The Issuer criteria relate

to reporting and budgeting experience

and the projection Criteria relate generally to ItS preparation, form and manner

of disclosure, and possible review by

persons other than officers, directors or

employees of the Issuer

Proposed amendments to Rules 14a-3

and 14cr3 under the Exchange Act would

21
require that all projection information,

other than exhibits, contained 10 the

registrant's report on Form lO-K be 10-

eluded 10 the registrant's annual report

to security holders. Ftnally, a proposed

amendment to the note to Rule 14a-9

under the Exchange Act would delete the

word "earn rnqs" from paragraph (a) of

the note which presently refers to predictions of earnings as possibly rrusleadrnq

In certain situations.

The Rule 140 Series

In the Commission's 1969 Disclosure

Policy Study 67 a number of recommendalions were made to Improve the overall

disclosure process and promote objectivity 10 the operation, adrnmistration

and enforcement of certain provrsrons of

the Securities Act. The princrpal recommendatrons of the Study are embodied 10

a series of Commission rules known as

the "Rule 140 Series", comprised of

Rules 144, 145, 146 and 147, adopted

pursuant to the Securrtles Act. Rules 144

and 145 were adopted 10 1972 and 1973,

respectively; 6" and Rules 146 and 147

were adopted 10 1974.69

Rule 144

Rule 144, "Persons Deemed Not to be

Engaged 10 a Distribution and Therefore

Not Underwriters," provides a method

of resale of securilles acquired 10 private

placements and for secuntres held by

affiliates During the fiscal year, the Commission's staff has monitored the application of the rule. Also, an amendment

to Rule 144 was adopted to specify that

secuntres sold pursuant to new Rule 240

would be deemed to be "restricted secunties" for the purpose of Rule 144

and COUld, therefore, be resold pursuant

to Its provisions 70 Rule 240 provides

exemptions from reqrstratron of secunnes

rnvolvmq certain limited offers and sales

by closely held Issuers

Rule 145

Rule 145, generally, provides that an

"offer" or "sale" of secuntres is deemed

22

to be involved when there IS submitted

for the vote or consent of security holders a plan or agreement for (1) reclassifications other than stock splits and

changes 10 par value; (2) mergers,

consolidations and similar plans of acquisltron except where the sole purpose

of such a transacllon IS to change an

Issuer's dcrrucrle: and (3) certain transfers of assets for securities where there

IS a subsequent distribution of such

securities to those voting on the transfer

of assets. On July 2, 1974, the Commission published a second mterprettve release reqardrnq the registration procedures applicable to open-end rnvestrnent

companies issuing securities 10 business

cornbinanon transactions subject to

Rule 134.71

Rule 146

The so-called "private ottennq" exemption from registration under the Secunnes Act, Section 4(2), provides that

offers and sales by an Issuer not 10-

volvrnq any public offering will be exempt

from registration. The section has long

been a source of uncertainty for Issuers

wantmq to sell their secunnes in private

placements. In April 1974, the Commissron adopted Rule 146 under the Securities Act, "Transactrons by an Issuer

Deemed Not to Involve Any Public Offer109," which IS desrqned to protect 10-

vestors while at the same time provldrnq

more objective standards to curtail uncertainty as to the meaning of Section

4(2) to the extent feaslble.72

In general, the rule provides that transactions by an Issuer rneetrnq all the condmons of the rule do not rnvolve "any

public offering." Major conditions to be

met are essenllally that (1) there must be

no general advertising or sotlcrtatron 10

connection with the offering; (2) offers

can be made only to persons the Issuer

reasonably beheves have the raquisrte

knowledge and experience in nnancrat

and business matters, or can bear the

economic risk; (3) sales can be made

only to persons the Issuer reasonably believes have the reqursrte knowledge and

experience, or who can bear the economic
risk and have an advisor (meeting certain standards) who can provide the

raqursrta knowledge and experience;

(4) all offerees either must have access

to or must be furnished with the type of

information that registration would disclose; (5) there can be no more than 35

purchasers of securities in the offering;

and (6) reasonable care must be taken to

prevent resale of the secuntres In Violation of the registration provisrons of the

Securities Act

Rule 146 does not provide the exclusive means for offering and seiling securities In reliance on Section 4(2). Issuers

may continue to rely on the Section 4(2)

exemption by complying With relevant

administrative and judicral criteria at the

time of a transaction. The staff of the

Commission will Issue interpretative

letters to assist persons in complying

With the rule, but will issue no-action

letters relating to Section 4(2) only In the

most compelling circumstances

In June 1975, the Commission amended

Rule 146 to clarify, and in some Instances

to modify, paragraph (c) of the rule,

"limitations on Manner of Offering;"

paragraph (e) of the rule, "Access to or

Furnishing of Information" for nonreporting companies; paragraph (f) of the

rule, "Business Combinations," and

paragraph (g) of the rule, "Number of

Purchasers." The purpose of the amendments IS to decrease burdens on issuers

In complying with the rule, consistent

with Section 4(2) of the Act and the protection of Investors.

Rule 147

Section 3(a)(11) of the Secunties Act,

the Intrastate offering exemption, which

exempts from registration secunnes that

are part of an issue offered and sold only

to persons resident In a specrnc state by

an Issuer that is also resident and doing

business In that state, has been widely

relied upon, but has also been the source

of inquiry, misunderstanding, and uncertainty over the years On January 7, 1974,

the Commission adopted Rule 147 under

the Securities Act which defines certain

terms In, and clarifies certain conditions

of, the Intrastate offering exemptlOn.73

The rule provides some objective standards for determining when a person IS

considered a resident Within a state and

whether an issuer IS "doing business

within" a state for purposes of the exemption The rule does not define which offers

and sales constitute "part of an Issue"

but relies instead on the traditional

understanding of when offers and sales

Will be Integrated, It does, however, proVide a "safe harbor" as to certain offers

and sales. The rule benefits only Issuers

Since the adoption of Rule 147, the staff

of the Commission has ceased respondIng to requests for no-action letters under

Section 3(a)(11) except In the most compelling circumstances; but the staff does

provrde Interpretative guidance as to the

use of the Rule.

Adoption of Rule 240

On January 24, 1975, the Commission

adopted Rule 240 (and related Form 240),

"Exemption of Certain Limited Offers and

Sales by Closely Held Issuers," which

exempts from registration under the

Securities Act limited offers and sales of

small dollar amounts of securities by an

Issuer, that, after the transactions pursuant to the rule, would continue to have

a small number of benencral owners of ItS

securities 74 The rule was adopted pursuant to Section 3(b) of the Act. The

Rule ISnot available for resales.

In general, the rule exempts transactions by an Issuer (other than an investment company) where (a) there IS no

general advertising or solrcrtanon: (b) no

cornrrussron or Similar remuneration IS

paid for soncrtlnq prospective buyers or

In connection With the sales; (c) the aggregate sales price of unregistered securities of the Issuer sold by the issuer IS

not more than $100,000 In the preceding

twelve months; (d) the securities of the

Issuer are beneficially owned, before and

after the transaction, by 100 or fewer

persons, and (e) the Issuer Informs the

purchasers of restrictions on resale In

addition, the Issuer IS required to file a

notice of sales on Form 240. However,

the exemption provided by the rule would

23
be available for up to $100,000 of securities sold In transacnons complying with

all the conditions of the rule other than

the notice requirement, In connection

with the rule, the Commission adopted an

amendment to Rule 144 that makes that

rule available for securities acquired In a

Rule 240 transaction

Disclosure of Oil and Gas

Reserves

On May 30, 1975, the Oornrmssron pubhshed for comment proposed amendments to Forms &-1 and &-7 under the

Securities Act and to Forms 10 and 1o-K

under the Exchange Act to require the

disclosure of 011 and gas reserves and to

provide definitions and classifications of

the term "reserves." 70 In general, these

proposals would make explrcrt the dISclosures WIth respect to 011 and gas reserves already required under Forms

&-1, &-7 and 10 and, for the first nrne,

require such disclosures to be made on

an annual baSIS In a report on Form 1o-K.

In connection With the proposed amendment to Form 1o-K, GUide 2 under the

Exchange Act which relates to disclosure

of natural gas reserves would also be

amended to make It applicable to reserves disclosed In a report on Form

1o-K. The staff is now considering the

comments received on these proposals.

Coordination with the Federal

Power Commission on Filings

Which Include Natural Gas

Reserve Estimates

In early 1974, the Oornrrusston announced that It will request registrants to

explain differences between natural gas

reserve estimates contained In filings

With trus Commission and estimates reported to any other regulatory authority

Within one year prior to the filing. In addrnon, copies of prospectuses filed by registrants SUbject to the Federal Power

Commission would be submitted to that

agency for comments and, generally,

appropriate technical personnel from the

FPC would be invited to attend conferences where supplemental natural gas

24

reserve mtorrnatron submitted by a regIstrant ISrevlewed!6

The Commission refined the above

procedures In announcing new steps to

be taken for coordmation by the DIVISion

of Corporation Finance With the FPC In

connection With the review of fIlings

which Include natural gas reserve estimates. The Oornrrussron stated that the

DIVISion had been authonzed to provide

copies of letters of comments on filings,

which Include natural gas reserve estimates, and any written responses and

communications In connection therewitn

to the FPC, with the understanding that

they Will remain non-publrc unless the

Commlssron determines otherwise!7

Gold Purchasing and Investing

On December 31, 1974, the restrictions

on the purchase, sale and ownership of

gold by American Citizens Imposed In

1933 by the Federal government were

lifted In response thereto, the comrmssion took two steps desiqned to gUide the

acnvines of both purchasers and sellers

of gold and gold-related securities In this

new Investment area. First, because investment In and the purchase of gold IS a

potentially fertile area for unscrupulous

promoters and fraudulent schemes, the

Cornrrussron together With the President's

Special ASSistant for Consumer Affairs,

the Department of Justice, the Federal

Trade Commission and the U.S. Postal

Inspection Service suggested certain

gUidelines to be followed In purchasmq

or investing In gold!" These gUidelines

stressed caution In purchasrnq gold and

care In selection of seller, and advised

potential investors of the information they

should seek concerning the program

through which the gold was being offered

In order to assure themselves of all facts

necessary to make a reasoned investment decrsion

Secondly, the Commission announced

the adoption by the DIVISion of Corporanon Finance of a no-action position with

respect to the appucaburty of the registration provisions of the Securities Act of

1933 to gold Investment programs meetIng certain cntena.?v
It was Indicated that the Divisron would

take a no-action positron where (1) It did

not appear that the economic benefits to

the purchaser were derived from the

managerial efforts of the seller, promoter

or a third party, and (2) where those

services being offered in connection

with the gold program did not appear to

rise to the level of being the essential

managerial efforts upon which the purchaser must rely in order to make a profit

from his purchase. The release indicated

that among the facts considered In concluding that the services provided did not

rise to the level of being the essential

managerial efforts were that the purchaser pay full value In cash and not

purchase on margin; that any depository

arrangement be limited to the storage of

the gold with a reputable facility, insurance against loss or theft from the storage facility, and the Issuance of a document which would evidence the right of

the purchaser or his successors and assigns to take possession of the gold; and

that the seller have no obliqatron to repurchase the gold or ownership documents from the purchaser, nor to sell

such gold or ownership for the purchaser's account.

Possible Disclosure of

Environmental and Other Socially

Significant Matters

V""0n February 11, 1975, the Commission

announced a public proceeding, rncludIng public hearings, concerning possible

disclosure In registration statements and

other documents filed with the Commission or furnished to Investors of information bearing on corporate environmental

practices or other matters of primarily

social rather than financial concern.w The

primary objective of this proceeding was

to permit the Commission to determine,

with the benefit of comment from interested persons, what, If any, rnodrflcations

In the Commission's disclosure requirements are appropriate in light of the

provisions of the National Environmental

Policy Act (NEPA) 81 In addition, the Commission sought to determine the desirability of amending ItS disclosure requirements with regard to corporate equal

employment practices and any other

matters of social significance.

Thrs proceeding was initiated pursuant

to the order and opinion of Judge Charles

R. Richey In Natural Resources Defense

Council, Inc. v. Securtttes and Exchange

Commtseion r? That action arose from the

Commission's denial of a rulernakrnq

petition submitted by Natural Resources

Defense Councrl (NRDC) which would

have required reporting companies to file

with the Oomrnlssron information concerning the effects of corporate actrvmes

on the environment, and statlstrcs reflecting equal employment practices. The

Commission subsequently proposed 83

and Issued 84 more limited environmental

disclosure rules wrnch, NRDC alleged,

failed to fulfill the Commission's responsrbrlrtres under NEPA. Plaintiffs also

alleged that the Commission, In denying

the petition and promulgating ItS own

disclosure requirements, had not compiled with the requirements of the Adminrstratrve Procedure Act (APA)

The court held that the Commission

had Inadequately Informed the public that

ItS proposed requlattons were Intended to

satisfy fully the Commission's mandate

under NEPA and that It had not provided

a proper statement of the basis and purpose for ItS rulernakmq action. Further,

the court held that the Commission failed

to articulate adequately the reasons for

denial of the equal employment portion

of the NRDC petitron. Accordingly, Judge

Richey remanded the matter to the Commission for further rulernakinq action,

and expressly ordered the Commission

to determine the extent of "ethical investor" Interest In environmental and equal

employment information, and the avenues

of action which such Investors may pursue to eliminate corporate practices

Inimical to the environment and equal

ernployrnent.w

While the Commission did not agree

with Judge Richey that It had failed to

satisfy the procedural requrrernents of

the APA, It has attempted to comply tully

With hrs order In response to the notice

announcmq the proceeding, the Commission received over 350 written comments

25
In addition, at the public heanngs conducted dunng Apnl and May, 1975, testimony was received from 54 witnesses.

The documents compiled In the proceedIng exceed 10,000 pages. The particrpants included public corporations,

mstrtutional and individual Investors,

special Interest groups, state and federal

legislators, representatives of the accounting and legal professions, and

others. The public proceeding closed on

May 14, 1975, and the Commission subsequently proposed rules regarding disclosure of environmental matters and

declining to promulgate rules requiring

specific disclosure of other social matters Hb

MUTUAL FUND DISTRIBUTION

In November 1974, the Commission

announced a comprehensive program to

revise the laws and regulations affecting

mutual fund drstnbutron.r'? Its program

was based upon a report of the DIvision

of Investment Management Regulation on

"Mutual Fund Dtstnbution and Section

22(d) of the Investment Company Act of

1940" ("Staff Report") In transmitting the

Staff Report, the Commission stated that

ItS program was "Intended to reduce or

eliminate many of the inequities and mettrcrencies of the present fund drstnbutron

system while, at the same time, avordrnp

the dangers of a sudden abolition of retail price maintenance." The Commission

added that ItS plan was to "Iay the

groundwork for the gradual and orderly

introduction of retail pnce competition

Into the mutual fund distribution system" MM

The Commission's three-fold program

Involved: (1) Increased use of Its exrstrnq

administrative powers to permit greater

pnce fleXibility and Improved communication with Investors; (2) a recommendation

that Congress enact legislation to expand

the Commission's authority to select from

a broad vanety of long-range options to

remove mhrbrnons on competition In the

future; and (3) the adoption of proposed

rules by the NASD to prevent excessive

sales loads, as a regulatory safeguard

The Commission's program utilizes ItS

26

exrstlnq administrative authority to encourage (a) Improved communication

With investors through expanded fund

advertrsrnq and more Informative portrayal of fund Investment results and (b)

voluntary pnce competition by permitting greater opportunities for massmerchandising and more pnce vanatrons

In the current sales load structure.

1. Improved commumceuon With Investors

The Commission adopted amendments

to Rule 134 under the Securities Act of

1933,M9 which expand the scope of matenal permitted in Investment company

advertisements and which also emphasize

the Importance of the prospectus to potential Investors. As amended, Rule 134

permits registered Investment companies

to Include In their advertisements a

descnption of their Investment objectives,

pohcies, services, and method of operation, pictorial illustrations which are

appropnate for Inclusion In the company's

prospectus and not Involving performance

figures; and descnptive matenal relating

to economic conditions, or to retirement

plans, or other goals to which an investment In the company could be directed,

but not directly or indirectly relating to

past performance or implying achievement of investment objectives. However, a

legend calling attention to the company's

prospectus must be Included In advertisements containing such newly permitted

information The liberalized rule should

foster more interesting and informative

fund advertisements and may encourage

Investment companies to devote more of

their promotional budgets to mass media

These amendments are the fourth in a

senes of Commission efforts designed to

allow a Wider degree of advertising by investment companies which Issue redeemable secunties. Rule 134 adopted In

195590 was amended In 197291 to permit

a general dsscnptron of an Investment

company. At the same time the Commrssion adopted Rule 135A 92 expanding investment company genenc advertising

and Rule 434(a) to permit investment

companies to use a summary prospectus

The Commission also published for
comment a proposed amendment to the

Statement of Policy under the Securities

Act of 193393 wruch, If adopted, would

permit use of four new types of performance charts thereby giving mutual funds

and variable annuities the opportunity to

portray past Investment results in terms of

compound rates of total return (assuming

dividends and capital gains are reinvested). These charts would also incorporate such features as standard

compansons with the Standard & Poor's

500, serrn-loqanthrruc presentations, and

the Illustration of the Investment results

from market highs to market lows. The

proposed charts are designed to help

Investors to understand better the returns, nsks and expenses of mutual fund

and vanable annuity Investments and to

make comparisons among the vanous

funds and annuities offered. At year end,

the comments on the proposal were being

analyzed by the staff.

2. Price Competition at the Underwriter

Level

The Comrnlssron adopted amendments

to Rule 22d-1 94 which permit funds, at

their option, to provide the benefit of

sales load discounts to certain additional

groups of persons. To be eligible under

one of the amendments, a group must

have been In existence for at least SIX

months, have a purpose other than purchasing mutual fund shares at a discount,

and must satisfy other cntena selected

by the fund relating to the realization by

the fund of economies of scale In sales

effort and sales related expense. These

amendments enable funds and their

underwnters to Introduce mass-marketing

techniques and to pass on to Investors

economies of scale and cost savings

from group sales.

As part of the program, the Oommrssion

published for comment proposed Rule

22d-4, an exemptive rule which would

permit a fund and ItS underwnter to

utilize "open seasons" dunng which persons who have held shares of the fund

for a specified penod of time could purchase specified amounts of additional

shares at a reduced sales load or at no

load.95 Thrs was designed to enable cost

savings to be passed on to qualifying

fund shareholders who make additional

Investments.

The Commission also encouraged applications for exemption from Section

22(d) to permit sales load reductions to

persons who have previously or contemporaneously purchased another investment product or an Insurance product,

distributed by the same underwnter. Such

exemptions would permit funds to pass

on to Investors the cost savings from

marketing several financial products

dunng one sales effort, and would also

permit underwnters to expenment With

vaned financial packages.

Shortly after the close of the fiscal

year, the Commission adopted Rule

22d-3,96 which provides a conditional

exemption from Section 22(d) to permit

variations of the sales load and certain

other deductions from purchase payments

for variable annuities, based upon differences In costs or services. Such pnce

vanatrons would be subject to the conditions that the prospectus disclose the

amount of the vanations and the circumstances in which such variations are

available, or describe the basis for such

variations and the manner In which entitlement shall be determined, and that

any vanations reflect differences In costs

or services and do not unfairly discnrnrnate against any person.

3. Price Competition at the Retail Level

The Commission has also authorized

its staff, on an expenmental basis, to view

favorably interpretive requests With respect to proposals that brokers which act

Independently of funds and their underwnters be permitted, under certain circumstances, to charge reasonable fees

for services rendered in connection with

the purchase of shares of "no-load"

funds. The staff has taken a "no-action"

POSition based upon the tollowrnq safeguards being met In connection With the

Imposition of such a service fee'

(1) the broker must not be an affiliated

person of the fund, Its Investment

advrser or prrncipal underwnter

and have no formal or Informal

agreement With the fund, its In27
vestment adviser or principal 

underwriter to distribute its 

shares; 

(2) the fund 	must not enoourage brokers to make such a charge or 

give any special treatment to 

orders received through brokers: 

(3) the fact that such a charge may be 

made must be disclosed in the 

fund's prospectus; 

(4) 	the prospectus must make clear 

that it the shares are purchased 

directly from the fund without the 

intervention of a broker, there will 

be no charge; and 

(5) any 	 broker who makes such a 

charge must inform his customer. 

In writing, that the shares could 

be purchased directly from the 

fund at no load. 

interpretations are being issued as re1 quests are received. 

i Though the restrictions of Section 22(d) 

do not apply to sales of fund shares by 

one person to another through a broker, 

no secondary brokerage market in mutual 

funds has developed. Provisions contained in uniform sales agreements between underwriters and broker-dealers 

effectively prohibit such activity. 

The Commission has asked the NASD 

to;amend its Rules of Fair Practice to 

prohibit contractual restrictions which 

would prevent broker-dealers from engaging in brokered transactions in fund 

shares."' If necessary, the Commission 

will alSv consider the adoption of its own 

rules pursuant to Section 22(f) under the 

lnvestment Company Act to prevent funds 

from restricting the transferability of their 

shares in a secondary brokered market. 

Broker-dealers would not be required to 

set up special procedures to match 

orders for fund shares, and it is not 

anticipated that such a market will become so significant as to disrupt the 

primary distribution system. However, it 

will introduce some retail price variations 

in the industry and provide some insight 

into whether a secondary dealer market 

could function effectively. 

1 Variable Life Insurance 

t In February 1975, the Comm~ss~on anI SF 28 

nounced withdrawal of its proposed 

amendments to Rule 3d under the Invwtment Company Act and Rule 202-1 

under the Advisers Act both of which 

concerned regulation of variable life 

insurance. The Commission also announced its intention to propose a rule 

under Section 6(e) of the lnvestment 

Company Act" which would conditionally 

exempt certain variable life insurance 

Separate accounts from particular sections of the lnvestment Company Act and 

the rules thereunder while requiring full 

compliance with all other provisions of 

this Act and rules. A short time thereafter 

the Commission rescinded Rules 30-1 

and 202-1, effective July 30. 1975.'0° The 

rescission of these exemptive rules will 

result in the application of the lnvestment 

Company Act and lnvestment Advisers 

Act to variable life insurance contracts, 

their issuers and related persons until a 

new rule is adopted or other relief is 

granted. 

Status of Broker-Dealers 

as lnvestment Advisers 

AS a result of the elimination of fixed 

commission rates on exchange transactions on May 1, 1975, some brokerdealers may elect to charge separately 

for investment advisory services which 

they had previously provided solely incidentally to their business and without 

special compensation. The change to 

charging separately for investment advice 

would cause such broker-dealers to b* 

come "investment advisers" within the 

meaning of the lnvestment Advisers Act. 

Temporary Rule ZO6A-l(T), adopted by 

the Commission prior to May 1, temporarily exempted broker-dealers registered 

under the Securities Exchange Act of 

1934 (except broker-dealers already 

registered as investment advisers on May 

1, 1975) from the provisions of the Advisers Act and the rules and regulations 

thereunder from May 1, 1975, until August 

31, 1975."" The exemption provided by 

the Rule was intended toenable brokerdealers to furnish research and other investment advice for a separate fee for a 

period of four months without the need to 
I

i

j

I

comply with the provisions of the Advisers Act.

A result of charging separately for investment advice was that such brokers

and dealers would be subject to Section

206(3) of the Advisers Act, which makes it

unlawful for an Investment adviser, if he

is acting as such In relation to a particular transaction, to effect the transaction

with or for his client under circumstances

where the adviser acts either as principal,

or as broker for a person other than his

client, unless the adviser furnishes his

client with prior written disclosure of the

capacity in which the adviser is acting

and obtams the client's consent to the

transaction.

On March 31, 1975, the Commission

proposed the adoption of new Rule

206(3r--1 under the Act 102 to exempt investment advrssrs who are also registered

With the Commission as broker-dealers

from the disclosure and consent requirements of Section 206(3) of the Act With

respect to certain Investment advisory

services If such advisers comply With the

conditions set forth In the proposed rule.

ThiS rule was adopted substantially unchanged after the close of the fiscal year.

Institutional Disclosure

Under the Securities Acts Amendments

of 1975, a new Section 13(f) was added to

the Exchange Act, which provides the

Cornrnissron with authonty to require

disclosure and reporting of securities

holdings and transactions from all types

of msntunonat Investors. As such, the

amendment Implements a recommendation which the Commission had made In

ItS letter transmitting the Institutional

Investor Study to the Congress In 1971.103

The new section gives the Commission

broad rulernakrnq authonty to determine,

inter alia, the size of the Institutions which

will be required to file reports, the format

and frequency of the reporting requirements, and the Information to be disclosed In each report. The Commission is

also directed to provide for publtc dissemination of the information collected,

subject to confidential treatment In appropriate cases, and IS empowered to

exempt any instrtunonal investment manager or security from any or all of the

provrsrons of the section

The reports will provide the Commission with a continual flow of Information,

thereby creating a uniform, centralized

data base With respect to the Investment

activity of large institutions. Among other

things, the Commission and the public

can consider "parallel" institutional trading and related price impacts, block tradIng and direct trading between mstitunons, the Impact of institutional trading

on brokerage services and functions,

different techniques of valuation of large

secunnes holdings, and managers' practice In the allocation of Investment

opportunities among their different types

of accounts.

Investment Companies--Sale of

Investment Adviser

The Securities Acts Amendments of

1975 amended the Investment Company

Act, In part, to clarify the ambiguity created by the decrsion of the Court of Appeals for the Second Olrcuit in Rosenfeld

v. Black.104 In that case, the court held

that the general principle that a fiduciary

cannot sell his office for personal gain IS

Impliedly Incorporated Into Section 15(a)

of the Act, which requires shareholder approval of any new Investment advisory

contract Consequently, a retiring investment adviser of an Investment company

violates the Act by receiving compensation which reflects either (1) a payment

contingent upon the use of Influence to

secure approval of a new adviser or (2) an

assurance of profits for the successor

adviser under a new advisory contract

and renewals. The sweep of the court's

language cast doubt, however, on whether

an Investment adviser, Without incurring

liability to the company or its shareholders, could profit when It sold its

business by sellmg ItS assets.

SIGNIFICANT CASES INVOLVING

SECURITIES ACTS

Gordon v. New York Stock Exchange 105

In this case the Supreme Court affirmed

29
a decision of the Court of Appeals for the

Second Circuit which had upheld the dismissal of a private antitrust damage action challenging the fixed commission

rate structures of the New York Stock Exchange (NYSE) and the American Stock

Exchange (AM EX) as violative of the

Sherman Act The Court of Appeals had

concluded that exchange rules and practices which prescribe fixed rates fell

within the exclusive supervisory JUrisdiction of the Commission, and were thus

Immune from antitrust attack 106

The Commission filed a brief amicus

cunee with the Supreme Court In which

It expressed the view that It would be

Impossible for the Commission to exercrse the broad discretionary Jurisdiction

granted to It under the Securities Exchange Act to regulate rules and practices

of national securities exchanges In the

public Interest, If ItS decisions, and exchange activities within its JUrisdiction,

could be subjected to simultaneous antitrust attack In federal district courts. The

Commission emphasized that It must and

does consider competitive factors, together with other purposes and potrcres

of the Act, In exercising ItS authority under the Act. In ttus context, the Commission pomted to its regulation of the

exchanges' comrrnssron rate structure as

an example of the complex and technical

matters which Congress saw fit to entrust

to ItS expertise under the Act

Untted Housmg Pcuntietron v Forman 107

The Supreme Court, In a 6-3 decrsion,

reversed the decrsion of the Court of Appeals for the Second Orrcurt In Forman v

Communny Services, Inc. 10K which had

held that shares of stock In a non-profit,

state-supported, cooperative housmq

corporation were secuntres within the

meaning of the federal secuntres laws.

The Oomrrussion first participated

amicus curtee In trus case In the Supreme

Court The Court summarily rejected the

argument that the shares were securities

by virtue of their denomination as "stock"

since, In the Court's View, they lacked

certain of the common features of stock,

such as the right to receive drvidends

contingent upon an apportionment of

profits and the ability to be negotiated,

30

pledged or hypothecated. The Court, thus,

reaffirmed the doctrine that whether a

"security" exists Will not turn upon the

label that an Instrument IS given, but on

the economic realities of the situation.

Regarding the economic reality of the

Situation, the Court was heavily Influenced

by what It believed to be the sole motivation of shareholders In purchasmq their

shares; namely, the prospect of acquiring

a place to live and not the tlnancrat returns on their Investment. In this connection, the Court concluded that the

various ways by which Investors might

save on their expenses were not the

kinds of profits traditionally associated

With securities. According to the Court,

those types of profits which would be

relevant to determine whether a security

exists would Include profit "derived from

the income Yielded by an Investment as

well as from capital appreciation." Since

the shares of stock could not be resold

at a price higher than that which they

were bought, there could be no capital

appreciation. Although the commercial

tenants generated Income to the corporation, that Income was found to be too

speculative and insubstantial to bring the

entire transaction Within the federal

secunties laws.

In Blue Chip Stamps v, Manor Drug

Stores,109 the Supreme Court, three JUstices dissenting, upheld the so-called

BIrnbaum rule 110 that a person who

neither purchased nor sold securities has

no standing to seek damages for injuries

caused by a violation of Section 10(b) of

the Securities Exchange Act and Rule

10b-5. The Commission, amicus curiae,

had urged that the rule was arbitrary,

since a Victim of a Violation should be

able to recover damages, whether he

was Induced to purchase shares or induced not to Pursuant to an antitrust

decree, plaintiffs in tms case had been

offered stock allegedly at a bargain price

but failed to purchase It because of an

allegedly misleading prospectus overstating the risks Involved

Untted States v National Assocteuon of

Securnies Dealers, Inc. III

In thrs Civil injunctive action, the Justice

Department challenged, as Violative of
the antitrust laws, the activities of various

mutual funds, fund underwriters and

broker-dealer distributors of the funds'

shares, which allegedly inhibited the development of a secondary brokerage market In the funds' shares. Specifically,

the Department of Justice alleged (1) that

the funds, underwnters, and dealers contracted among themselves to prohibit the

dealers and underwrrters from engaging

In secondary brokerage transactions in

the funds' shares at other than the public

offering price of those shares prevailing

In the primary market, and (2) that the

funds, underwrrters, dealers, and the National Association of Securities Dealers

(NASD) engaged In a conspiracy to restrain the development of a secondary

brokerage market In fund shares. The

district court granted defendants' motions

for summary judgment and dismissed the

complaint. The Department of Justice

then appealed to the Supreme Court

under the Expediting Act.

While the Commission did not partrcipate in the district court proceeding, It

filed a brief, emtcus curiae, In the Supreme Court. In that brief, the Commission

urged that the contractual restrictions

challenged by the Department of Justice,

although not mandated by Section 22(d)

of the Investment Company Act, were

shielded from anti-trust attack because of

the Jurisdiction granted the Commission

In Section 22(f) of that Act to supervise

industry imposed restrictions on the

transferability and negotiability of their

shares. The Ocmmisston took no position

with respect to the alleged conspiratorial

activities of the funds, underwriters,

dealers, and NASD.

In affirming the district court's dismissal

of the complaints, the Supreme Court, In

accord with the Commission's position,

held that the contractual provrsion challenged in the complaint was Immune from

antitrust attack, since It was subject to

the supervisory JUrisdiction granted the

Commission In Section 22(f). The Court

also held that the alleged conspiratorial

activity In the complaint was in fact

legitimate conduct aimed at the furtherance of the policies underlying Sections

22(d) and 22(f) of the Investment Company Act and subject to the pervasive

exercise of Commission requlanon under

the Investment Company Act and the

Securities Exchange Act.

In Securtues Investor Protection Corp.

v Barbour, et al.,112 the Supreme Court

reversed a lower court ruling and agreed

with the Commission and SIPC that the

Commission's statutory right to bring an

action under the Securities Investor Protection Act of 1970, to require SIPC to

discharge ItS duties IS exclusive and that

customers have no Similar Implied right

of action The Court also recognized, but

left open, the Commissron's suggestion

that ItS dscrsron not to institute proceedmqs against SIPC In a particular matter

might be reviewable for abuse of

discretion.

The case Involved an attempt by the

receiver for a broker-dealer, who was appointed In a Cornmlssion enforcement

proceeding, to compel SIPC to assume

and complete the liqurdatron of the brokerdealer and thereby to make available to

ItS customers the protections of the Act

As previously described, the Court of

Appeals for the Sixth Oircurt had held

that the protections of the Act were available where a broker-dealer, although

Insolvent prior to the effective date of the

Act, continued to transact a substantial

busmess in secuntres after the Act had

become effective, and that the receiver

had standing to bring an action on behalf of customers of the broker-dealer to

compel SIPC to initiate Irqurdatron

proceedings under the Act,l13

Securittes and Exchange Commission v.

FIrst Secunttes Co. of Chicago I H

The Commission instituted thrs equity

receivership action Immediately after It

learned of a suicrde note left by the

president of the defendant broker-dealer,

First Securities Co. of Chicago, In which

he stated, among other things, that he

had misappropriated the funds of those

First Securities customers whom he had

Induced to Invest In a special "escrow

account" that he operated as a personal

venture apart from the firm. The Court of

Appeals had held In an earlier opinion

(463 F.2d at 985-988) that First Securities

was liable to the escrow Investors for the

31
president's fraud both because, as the

firm's president, he had acted with apparent authority of First Securities in

advismq the Investors to lrqurdate their

accounts at the firm and Invest In the

escrow, and because the firm aided and

abetted the president's Violation of Rule

10b-5. Accordingly, the escrow Investors

had a valid claim against the estate of

First Securities.

In this latest appeal, the Court of Appeals held, in accordance With the POSItion urged by the Commission, that

Section 60(e) of the Bankruptcy Act,

which governs the distribution of a brokerdealer's assets In a bankruptcy proceeding, was properly applied by the district

court by analogy In this receivership

proceeding because "the same reasons

for the Section 60(e) treatment exist In

the instant stockbroker Irqurdation as

Congress must have consrdered in choosIng to provide specially for stockbroker

bankruptcies." Section 60(e), the Court

observed, "was Intended to protect, and

secure equality of treatment for, 'the

public customer who has entrusted securmes to a broker-dealer for some

purpose connected With participation In

the secuntres markets,''' and the Court

noted that "a considerable portion of the

IFirst Securities] assets on hand represents cash or the proceeds of securities

entrusted to First Securities by customers"

for such a purpose. In support of the

application of Section 60(e), the Court

also relied upon the "Interest in UOltorrmty of treatment of Insolvent brokerage

houses," the Court noting that the Securities Investor Protection Act of 1970,

enacted after First Securities' failure,

adopted to a large degree the provisrons

of Section 60(e).

In affirming the lower court's ruling

that the escrow Investors fell Into the

category of general creditors rather than

the higher category of "customers," who

are defined In Section 60(e) to include

persons who have claims on account of

secuntres received, acquired or held by

the stockbroker for the account of such

persons, the Court of Appeals noted that

the Investors' transactions with respect

to the escrow account were "on their

32

face directly with Nay [the president],

personally, and were neither In fact nor

understood to be a deposit of funds

With First Securities."

EqUity Funding Corporation of America

During 1975, Criminal proceedings

against those Involved in the fraud at

Equity Funding Corporation of America

(Equrty Funding) were successfully completed With the conviction and sentencing

of all 22 persons Indlcted.'15 EqUity

Funding, which has been termed by commentators as the largest financial fraud in

history, pioneered and sold a package

Investment Involving life Insurance and

mutual funds. Over the years it had sold

hundreds of millions of dollars of its secuntles to the publrc and had expanded

through life insurance company and other

acquisrtlons In exchange for ItS securities

The government alleged a colossal secunnes fraud which lasted and expanded

throughout almost the entire ten-year

history of the company. In early 1973,

investigation by the staff led to a trading

suspension by the S E.C. and a S.E.C.

complaint seeking an injunction and receiver. Shortly thereafter, the company

went Into Chapter X proceedings.

Further Investigation revealed that the

company Inflated its earnings by recording non-existent receivables. ThiS continued on an increasing scale until the

fraud was discovered. The company also

borrowed millions of dollars without recording the amounts borrowed as liabilities on Its books. The company repaid

these obligations by further undisclosed

borrowings. The company structured

complicated, sham, foreign transactions

to record bogus income and assets.

Beginning in 1969, the company began

the Insurance phase of the fraud by reinsuring Insurance polrcres of questionable

value with other Insurance cornparues.

Thrs generated badly needed cash for

the company and helped It Increase its

reported sales and insurance-in-force

figures. In 1970, the company started the

outright creation of bogus Insurance

polrcres and the reinsurance of these

pollcres ThiS practice continued and increased until the company collapsed.

Under the company's reinsurance agree-
ments, the company received a significant

cash payment from Its reinsurers at the

time the policies were reinsured. In succeeding years. however. the company was

required to pay to reinsurers the renewal

premiums It received from policyholders.

In the case of the bogus policies. there

were no policyholders and the company

had to pay these renewal premiums Itself.

The company paid these renewal premiums by reinsuring more bogus policies.

Thus, the company's cash flow and liabilities problems increased In geometric

proportions. In 1972, the company recorded at least $14.667.000 in fictitious

premrurn income. The company's last

annual report was for ItS year ended

December 31, 1972. The company's

balance sheet at that time reported

$737.511,000 in assets of which approximately one-third was fictitious.

In November 1973. as a result of a

coordinated investigation by the United

States Attorney in Los Angeles, the

S.E.C., the United States Postal Service,

the Federal Bureau of Investigation, the

Federal Reserve Board, and the Insurance

departments of the States of California

and ltlmors, 19 former Equity Funding

officers and employees and three members of the auditing firm that certified

these false tlnancrals were indicted on

charges of conspiracy. secunnes fraud,

making false filings with the S E.C. and

the New York Stock Exchange, mail fraud.

bank fraud. and other charges. Eighteen

Equity Funding conspirators pleaded

guilty before trial. Stanley Goldblum.

Chairman of the Board, and President of

Equity Funding, entered a gUilty plea

after five days of his trial.

The three members of the auditing firm

that certified these false financial statements were convicted by a jury after a

four-month trial of various charges of secuntres fraud. The court instructed the

Jury that reckless. deliberate, indifference to, or disregard for, truth or talsrty

on the part of the auditors. when considered In the light of all other evidence

relating to Intent, might lead to an inference that the auditors acted Willfully

and knowingly. The Jury also was instructed that the auditors could be found

to have acted In such fashion If they

deliberately closed their eyes to the obVIOUS, or to facts that certainly would

have been observed in the course of their

accounting work, or. If they recklessly

stated as facts matters of which they

knew they were ignorant.

Stanley Goldblum was sentenced to

eight years imprisonment and fined

$20.000. The other Equrty Funding conspirators received various prison terms.

Each of the auditors received two-year

sentences suspended on the condition

they serve three months Imprisonment,

four years probation, and perform 2.000

hours of community service work The

auditors have filed notices of appeal.

Securities and Exchange Commissum v.

Emanuel Fields. 116

Emanuel Fields, an attorney, was enJOined by the United States District Court

for the Southern District of New York

from further Violation of the Cornmlsston's

Rule 2(e), which provides for disqualification of an attorney from appearing or

practicing before the Commission. The

Commission had disqualified Fields by

order Issued June 18,1973

In consenting to the Final Judgment,

Fields admitted that he had appeared and

practiced before the Commission In

contravention of Rule 2(e) and the Commission's order, but he asserted that, at

the time he engaged in the conduct alleged, he did not believe the acts alleged

to be In Violation of either Rule 2(e) or the

Oomrnrssron order.

The Final Judgment prohibits Fields

(1) from representing or adVising any

person In any Cornmlssron proceeding,

whether investigatory or administrative,

In any informal rnqurry conducted by the

staff, In any conference. drscussron or

communication With the Commission or

Its staff. and In any proceeding, investigation or hearing conducted by a national

secunties exchange or a national securities assccranon: (2) from preparing on

behalf of any person, or adVISing any

person In connection with the preparation of, any document to be filed With the

Comrmssron under the federal secunnes

laws; and (3) from representing or adVISing, in connection With any matter

33
arising under or relating to the federal

securities laws.

Exceptions are provided With respect

to all of the foregoing, however, to permit

Fields to represent persons, including the

regulated entities enumerated above, In

court litigation or In proceedings before

other government agencies.

In addition, the Final JUdgment orders

dlsgorgement of any and all fees, compensatron or other consrderatron Fields

may have received, or as to which he may

have a claim, not only for the servrces

alleged In the complaint, but also for all

services rendered by him since June 18,

1973, that are encompassed Within the

conduct descnbed In the preceding paragraph The Final JUdgment also directs

Fields to Inform any Issuer or other person who seeks to, or In fact does, employ

him In connection With any matter arising

under or relating to the federal securities

laws of the fact that he has been permanently disqualified from appearing or

practicing before the Oomrrusston and

further requires him to provide such ISsuer or other person With a copy of the

Commission's order of June 18, 1973

that permanently disqualified him from

appearing or practicing before the

Commission.

Silver and Gold Investments

DUring the year the Cornrnisston filed

several injunctive cases concerning the

sale of Investments In COinS, silver and

silver futures.

On December 12, 1974 the Cornrmsston

filed a lawsurt against Monex International

Ltd., d/b/a Pacific Coast COin Exchange

based upon alleged Violations of the

securities registration and anti-fraud provrsrons of the Federal secuntres laws In

connection With margin sales of bulk

snver COinS. The Oomrrussron alleged

that the defendants had made false and

misleading statements concerning nonexistent purchases, fees for non-existent

services, Investments prospects, and the

firm's comparability With other exchanges.

The defendants have consented to a

Temporary Restraining Order.

In ItS first major lawsuit mvolvmq gold

sales the Comrmssron obtained a tem34

porary restraining order against Brent

Fields, Daniels & Martin, Ltd (an Atlantabased firm Incorporated In England) and

United States BUllion, a wholly-owned

subsrdrary, based upon violations of the

securities registration and anti-fraud

provrsrons of the Federal securities laws.

The defendants had offered for sale 6,000

ounces of gold worth more than one million dollars when In fact they only had

200 ounces.

With respect to rare COinS, a preliminary injunction against Federal COin

Reserve was Issued on February 10, 1975,

based on Violations of the securities

registration provisions In connection With

the sale of rare COin portfohos.t!? The

court noted that, although the portfolios

were advertised by the defendants as

Investments In publications of a general

(vs. numismatic) nature, the defendants

offered a number of servtces, the most

Significant of which was the selection of

the COinS by the sellers, which gave rise

to an Investment contract, under the

meaning of Section 2(1) of the Securities

Act of 1933. The opinion states that "the

dependence of the Investor on the expertise of the seller to produce the expected profit" was suftrcrent to meet the

Howey tests for Investment contracts. The

court rejected the notion that possession

of the COin portfolios reconverted an investment contract into a commodity. The

fact that Investors were not required to

avail themselves of the proffered services

was declared irrelevant inasmuch as

the terms of the offer, not the acceptance,

determine whether any particular investment vehicle IS a security within the

meaning of the Federal securities laws.

Defendant's proposition that none of

its services affected the value of the

COinS and therefore secunnes were not

Involved, was also rejected by the court.

On April 21, 1975 the Commodity Futures Trading Commission came Into

existence. The new Cornmtsston, In addition to regulating commodity futures,

has exclusive junsdrctron over margin

and leveraged sales of Silver and gold,

however, Congress specrncally mandated

that pending proceedings Will be unaffected by the new Commodity Act.

On November 20, 1974, the United
States Attorney for the Middle District of

Florida filed a one-count criminal mtormatron against James E. Tolleson and ExertIng Life, lnc., charging them With wilfully,

and without just cause, failing and refusIng to attend and testify and produce

certain records in obedience to a subpoena duces tecum issued by a Comrrussron officer In the course of an

investigation. liB This IS only the second

such action instituted in recent years, and

only the third such case in Commission

history Upon convicnon, the defendants

are subject to a maximum fine of $1,000.00

and up to one year imprisonment.

On March 26, 1975, EXCiting Life, Inc.,

pleaded guilty to the violation as charged

In the information and was fined

$1,000.00. On March 11, 1975, the Court

entered an order drsmrssrnj; the Information as to James E Tolleson for lack of

proper service. That order has been appealed by the Government to the Court of

Appeals for the Fifth crrcun and a decrslon on the appeal IS expected dunnq

fiscal year 1976.

Commission Litigation

SEC v. Stirling Homex Oorporetton-rthe Cornrnlssron filed a Complaint In the

United States District Court for the DIStrict of Columbia 119 seeking an injunction

and certain ancillary relief against

Stirling Homex Corp., SIX of ItS officers

and directors and Merrill Lynch, Pierce,

Fenner & Smith, Inc. ("Merrill Lynch"),

a New York broker-dealer The Comrrussron's complaint alleged that from

1970 through 1972, the financial statements of Stirling Homex Corp, a company which was engaged In the manufacturing and installing of multi-family

modular Units ready for occupancy, were

materially talsrtred by the fradulent recording and reporting of fabricated or

nctrtious sales and application of inappropriate accounting principles. In

addition, It was alleged that as part of the

fraudulent scheme In which some of the

defendants participated, Illegal political

contributions were made, Illegal electroruc

Surveillance equipment was used, and

corporate funds were used for the

personal benefit of some of the management of Stirling Homex.

With respect to defendant Merrill

Lynch, It was alleged that they were involved, directly and indirectly, In the filing

With the Ccmrrussron and the dissemination to the public of a false Stirling

Homex reqrstratron statement and they

knew or should have known of material

facts which were not disclosed In the

registration statement and that the inqurry made by Merrill Lynch With respect

to the registration statement was inadequate. Also alleged were violations of

the Federal securities laws In the dissemination by Merrill Lynch to ItS

customers of Inaccurate or misleading

research reports, wire flashes and opinIons, earnings and price predictions and

statements concerning Stirling Homex

and ItSsecurities.

Simultaneously With the filing of the

complaint, the SIX officers and directors

of Stirling Homex, Without admitting or

denying the allegations, consented to

permanent injunctions enjoining them

from Violations of the reporting and antifraud provrsrons of the Federal securities

laws With respect to the securities of

Stirling Homex or any other Issuer. In

addition to the Injunction the court ordered three of the officers and directors

not to be associated With any corporation

whose securities are publicly held Without

prior Commission approval and to forebear from receiving any assets, properties

or monies of Stirling Homex in any dIStnbution which they would be entitled to

participate In as a security holder or

creditor of Stirling Homex. Further the

court ordered the former Comptroller and

Vice President of Stirling Homex not to

be associated With any corporation whose

securities are publicly owned as a chief

tmancral officer for two years Without

prior Oornrmsston approval. In addition,

the former Director, General Counsel and

Executive Vice President undertook not

to practice before the Cornrnissron as

defined by Rule 2(e) of the Commission's

Rules of Practice Without prior Oommrssron

approval.

Also, Merrill Lynch consented, Without

admitting or denying the alleqanons, to

35
a permanent injunction enjornmq them

from violations of the anti-fraud provisions

of the Federal secunties laws and to an

order of the court requiring them to adopt

within 60 days, Implement and maintain

policies and procedures relating to its

underwriting, research and retailing activities, which are reasonably calculated

to prevent the recurrence of the matters

alleged In the Complaint.

After the final disposition of the civil

actions now pending with respect to the

securities of Stirling Homex In which

Merrill Lynch IS a defendant, the Commission may apply to the court for a determination of the profits earned by

Merrill Lynch as a result of the activities

complained of In the Commission's complaint. Upon a determination by the court

of such profits, Merrill Lynch shall disgorge such profits pursuant to an order

and plan to be determined by the court

plus Interest thereon at 6% per annum

from the date of entry of said order and

plan, provided however, that the court

limit the amount of such drsqorqernent or

not require any disgorgement based on a

consideration of the findings In such Civil

actions With respect to the matters complained of In the Commission's complaint, including actions wherein determinations favorable to Merrill Lynch

have been rendered, and after giVing

effect to all settlements and money

Judgments which may have been entered

and satisfied by Mernll Lynch.

The Commission also issued a Report

of Investigation relating to the activities

of the Board of Directors of Stirling

Homex Corporation ("Report") which

dealt In particular With the role of Stirling

Homex's two outside directors, Theodore

W. Kheel and John W. Castelluccl.120

The Report was issued pursuant to Section 21(a) of the Securities Exchange Act

of 1934 which allows the Commission to

publish at its discretion information gathered dUring an Investigation concerning

"any facts, conditions, practices or matters which It may deem necessary or

proper" In fUlfilling ItS responsibilities.

Solely for the purpose of the Report,

Kheel and CastellUCCI consented to ItS

Issuance, Without admitting or denying

36

the findings set forth therein.

The Report outlines the background of

Stirling Homex, details the composition

and functions of its Board of Directors

and comments on the role of Kheel and

Castellucct as outside directors.

SEC v United Brands Company--0n

April 9, 1975, the CommiSSion filed a

Complaint In the United States District

Court for the District of Columbia seeking

an injunction and other relief against

Unrted Brands Company alleging violations of Sections 10(b) and 13(a) of the

Securities Exchange Act of 1934 and

Rule 10b-5, 12b-20, 13a-1, 13a-11 and

13a-13 thereunder In connection With

United Brands failure to disclose substantial payments to officials of foreign

governments in order to secure favorable

treatment In connection with its business

operations in those oountrles.is! Unrted

Brands contested the Commission's right

to proceed With trus action during the

pendency of a criminal investigation beIng conducted by the United States Attorney for the Southern District of New

York and on July 18, 1975, the United

States Court for the District of Columbia

held that the criminal investlqatron was

no bar to the Commission's CIVil suit.

The Commission IS now pursuing pretrial discovery In this matter.

S.E.C. v. Phi/ltps Petroleum CompanyOn March 6, 1975 the Commission filed a

complaint against Phillips Petroleum Company, William F. Martin, ItS present chairman, W. W. Keeler, a former chairman,

John M. Houchin, one of Its directors,

and Carstens Slack, the vice-president In

charge of ItS Washington, DC offlce.122

The Commission's complaint alleged

that the defendants violated Section 13(a)

and 14(a) of the secunnes Exchange Act

and certain rules prornulqated thereunder by filing With the Commission annual reports and sotrcmnq proxies from

shareholders of Phillips Petroleum Company which failed to disclose that the

defendants and others had created a

secret fund of corporate monies which

was used for unlawful political contrtbutions and other purposes, and,

addrtionally, that Phillips Petroleum Company tmancrat statements filed With the
Commission falsely stated the income

and expenses of the Company and

understated its assets.

The complaint further alleged that the

defendants and others, by means of false

entries on the books and records of

Phillips Petroleum Company had caused

to be disbursed In excess of $2.8 million

In corporation funds into two Swiss

bearer-stock repository corporations and

that, after this sum was converted Into

cash, in excess of $1 3 million of this

fund was returned to the United States

with approximately $600,000 being expended on political contributions and

related expenses, a substantial portion

of which were unlawful. The complaint

also alleged that the balance of the funds

channelled into the SWISS corporations

was distributed overseas In cash.

The order of permanent injunction enJoins Phillips Petroleum Company from

further Violations of Sections 13(a) and

14(a) of the Exchange Act. The order also

restrains Phillips Petroleum Company

from use of corporate funds for unlawful

political contributions or similar unlawful

purposes, from making false or nctmous

entries In its books and records and from

establishing or maintaining any secret or

unrecorded fund or corporation morues or

assets or making payments of disbursements therefrom.

The orders entered against the individual defendants restrain them from

Identical practices with respect to Phillips

Petroleum Company or any other

company.

As part of the order entered against It,

Phillips Petroleum Company undertook to

prepare promptly and file, With the Comrnissron and with the court, a report

describing the investigations it has made

of this matter, the results thereof and the

actions taken with respect thereto. Phillips Petroleum Company also undertook

to make appropriate disclosure to ItS

shareholders of the matters involved In

the report and that the Company's Board

of Directors shall independently review

the report and take such further action as

It deems necessary and proper based on

the report

The Oommlssron reserved the right to

seek such further relief as may be necessary or appropriate If It IS not fully satisfied that Phillips Petroleum Company has

complied With and implemented its

undertaking.

S.E.C. v. Allegheny Beverage Corporation-Qn January 8, 1975, Chief U.S.

District Judge for the District of Columbia,

George L. Hart, Jr., entered a consent

order granting rnjuncnve, mandatory and

ancillary relief against Allegheny, Valu

Vend, Inc. ("VV"), Valu Vend Credit

Corporatlon ("VVCC"), and Morton M.

Lapides, chief executive officer of the

defendant corporations for Violations of

the anti-fraud, reporting, registration and

proxy provislons of the Federal secunties

laws Besides enjomlnq future misconduct, the order (1) directed Lapides to

disgorge $70,000 in unlawful gains resulting from insrder sales and personal use

of corporate funds, (2) provided for the

appointment of a special agent to con-

. firm the return to Allegheny by Lapides of

$540,000 of corporate funds, (3) provided

for the appointment of a specral audit

committee to select an Independent certified public accountant for and morutor

relations between the accountant and

Allegheny management, and (4) directed

Allegheny to file amended reports rn accordance with the allegations of the

amended complaint. The amended

complaint included charges of misappropriation of corporate funds, the Issuance

of false tmancral reports, and the perpetration of a fraudulent publrc offering of

debentures in 1971 and 1972.

As previously reported, the Commission

Instituted an injunctive action against

Allegheny and 24 other defendants In

1973 alleging violations of reporting, antifraud and registratIOn provlsrons of the

secunties acts.123 The complaint was

amended in January 1975 to charge

proxy violations and a rrusappropnatron

of corporate funds by the chief executive

officer of Allegheny. In addition to Allegheny, the defendants Included two of

ItS SUbsidiaries, four officers, the company's auditors, the underwriter of a

subSidiary's public offering, counsel for

the underwriter, counsel for the Issuer,

the escrow agent for the public offering

37
and several others

On July 1, 1975, the Commission went

to trial against defendants C Gordon

Haines, Wright, Robertson & Dowell

("WRD"), A. Jeffry Robinson and McLaughlin & Stern, Ballen and Miller

("MSBM"). After the trial began, settlement was reached with these four defendants, bringing to a successful

conclusion all litigation instituted against

the 25 defendants. As a result of the settlements, WRD, which represented the

Issuer In the public offering of debentures, and Haines, the partner responsible

for that firm's representation of the ISsuer, were ordered to make adequate

inquiry to Insure full and accurate disclosure in securities offerings In the

future, were required to adopt new procedures to prevent the recurrence of

fraud, and were required to refrain from

taking any new business involving

practice before the Commission for 60

days.

MSBM, which represented the underwriter for the offering, consented to an

order pursuant to Rule 2(e) of the Commission's rules of practice directing It to

undertake Internal procedures to prevent

the recurrence of fraud, and censuring It

for ItS failure to supervise an associate

adequately and for the failure of the associate to make adequate inquiry concerning the facts of a closing with respect

to the offering. The amended complaint

charged that the terms of the offering

required the Issuer, VVCC, to sell $10

million In debentures within a specified

time, or return the proceeds to Investors

and terminate the offering It alleged that

at a closing on January 3, 1972, the defendants engaged In a series of sham

sales transactions designed to create the

appearance that $10 million In debentures

had been sold, when In fact only $525,000

In debentures had been sold, In order to

continue the offering and retain the

proceeds.

The following additional defendants

settled prior to trial: Allegheny officers

Harry J. Conn, Anthony Joseph Hering,

and William Kane, First Duso Securities

Corporation, Miles Bahl, Benjamin Botwrruck & Company, Alvrn L. Mlr1des, David

38

S. Klein, Barry L. Dahne, Klein & Dahne,

Southern Capital Corporation, Claude

Leroy Dixon, Paken Enterprises, lnc.,

Kenneth Denson, W.F.S., Inc., Walter F.

Sparks, and Suburban Trust Company

SEC v. Penn Central Co., et al.124 On

May 2, 1974, the Commission filed a civil

Injunctive complaint alleging vrolations

of the federal securrnes laws In connection with events relating to the financial

collapse of the Penn Central railroad In

1970. The actron named Penn Central

Company, Penn Central Transportation

Co., two subsldlarles, several officers of

the companies, three non-officer directors, several other individuals and the

Independent auditing firm for these companies. The complaint was based on an

investigation which was previously the

subject of a report entitled "The Financial

Collapse of the Penn Central CO.-Staff

Report of the SEC to the Special Subcommittee on Investigations of the House

Committee on Interstate and Foreign

Commerce."125

The complaint alleged that the antifraud provtsrons and periodic filing requrrements were violated In that during

the period prior to the filing of a petition

for reorganization under the bankruptcy

laws in June 1970 by Penn Central Transportatron Co., the financial results and

condition of the companies were misrepresented and the extent of the deterioration In the affairs of the companies was

not disclosed. It was also alleged that

as a part of the fraudulent conduct some

of the officers of a subsidiary Improperly

received payments based on the Inflated

earnings of the subsidiary and that an

officer of the Transportation Co. sold

Penn Central stock on inside information.

It was also alleged that certain railroad

funds had been Improperly diverted to a

small European country. In its complaint,

the Commission sought miuncnons

against further violations and the disgorgement of monies Improperly received.

Since the filing of the action, one officer, the two subsidiary companies and

the Independent auditing firm have consented to permanent rnjunctrons without

admitting or denying the allegatIOns. The

settlement with the Independent auditing
firm, Peat, Marwick, Mitchell & Co., was

part of a combined settlement arrangement involving other actions and related

remedies which is described elsewhere

In this report

In SEC v. Goldman, Sachs & CO.,126

an action related to the Penn Central action, the Comrnissron alleged In a complaint filed In the Southern District of

New York on May 2, 1974 that Goldman,

Sachs & Co, Penn Central's commercial

paper dealer, violated the anti-fraud

provisions In connection with the sale of

Penn Central Transportation Co. commercial paper prior to the filing of the

petition for reorganization. Simultaneously with the filing of the action, Goldman Sachs consented to a injunction

without admitting or denying the allegations of the complaint and undertook, as

part of th.e relief, to Implement certain

procedures relating to the collection of

information about issuers of commercial

paper and the dissemination of such information to its customers who purchase

the commercial paper.

SEC v. National Student Marketmg Corporation, Cortes W. Randell, the former

president of National Student Marketing

Corporation, Bernard J. Kurek, its former

chief financial officer, John G. Davies, ItS

former general counsel and Robert C.

Bushnell and Dennis M. Kelly former

sales executives of National were convicted of conspiracy to violate mail fraud

statutes and filing provlsrons of the Securities Exchange Act In connection with

the issuance in 1968 of false and misleading financial statements and reports concerning the assets and earnings of

National.

Also convicted were Anthony M. Nateln,

then a partner In the firm of Peat, Marwick, Mitchell & Co., outside auditors for

National, and Joseph Scansarolr, a former

employee of that firm, Randell, Bushnell,

Kelly and Kurek with making false and

misleading statements With the Commission In mld-1969.

NOTES TO PART 1

1 Pub. L. No. 94-29 (1975) [hereinafter

referred to as the "1975 Amendments"].

2 Not discussed In ttns section of the

Annual Report are the provisrons of the

1975 Amendments concerning uniform

criminal penalties under the federal securities laws, Commission enforcement

and investigative powers, the alteration

of Commission administrative powers With

respect to those who are not securities

professionals, judicial review of orders

and rules of the Commission, consolidation of Commission actions for equitable

relief pursuant to Section 1407(a) of Title

28, United States Code, the cessation of

Comrrussron authonty to suspend trading

In the securities of bank holding companies, annual reports to Congress, transaction fees paid by national securities

exchanges, arbitration proceedings between self-regulatory organizations and

their participants, members, or persons

dealing with members or participants,

institutional disclosure, and amendments

to the Securities Act of 1933, Securities

Investor Protection Act of 1970, Investment Company Act of 1940, Investment

Advisers Act of 1940, Act of August 20,

1962, PubliC Utility Holding Company Act

of 1935, and Trust Indenture Act of 1939.

3 The 1975 Amendments changed the

detinltron of "interstate commerce" In

Section 3(a)(17) of the Securities Exchange Act to include intrastate use of

(A) any tacrhty of a national securities

exchange or of a telephone or other interstate means of communication and

(B) any other Interstate instrumentality.

4 The 1975 Amendments allocate certain rulemakrnq, enforcement and other

responsibilities between the Oornrrussron

and bank regulatory agencies Thrs IS

accomplished by Introducing a new term,

"appropriate regulatory agency," whose

definition delineates which agency has

authorrty over which persons or transactions. Other provisions seek to promote

cooperation between and ettrciency

among the several regulatory agencies

concerned With rnurucrpal secunnes dealers and the activities of transfer agents

and clearing agencies.

5 Secunties Exchange Act Release No.

11469 (June 12,1975),7 SEC Docket 157

6 Securities Acts Amendments of 1975,

Conference Report to Accompany S.249,

Joint Explanatory Statement of the Comm.

of Conference, H.R. Rep. No. 229, 94th

Cong., tst Sess. 108 (1975).

7 Securities Exchange Act Release No.

11203 (January 23, 1975), 6 SEC Docket

147. See also, 40th Annual Report, p 5.

8 Secunties Exchange Act Release No.

10986 (August 27,1974),5 SEC Docket 64

9 Securities Exchange Act Release No.

11019 (September 19, 1974), 5 SEC

Docket 156.

10 When the Commission commenced

its Inquiry Into the commission rate structures at the time of the Special Study,

39
fixed comrrusston rates were assumed by

everyone, including the Commission, to

be a normal and necessary feature of the

exchange markets It only became clear

in light of later experience and thorough

study that this was not the case. While

the virtues of the traditional system were

at first staunchly defended, by the time

of the hearings on Rule 191>-3 the existing system had few defenders. Those who

opposed Rule 19b-3 largely confined

themselves to either asking for delay, or

suggesting that the initiation of competitive cornmtssron rates should await

a more prosperous period, or be deferred

pending the taking of certain further

steps toward a central market system, or

the adoption of certain proposed safeguards for the auction market process.

A few witnesses suggested that some

vaguely outlined better system of fixed

comrmssron rates should be developed.

No one who testified at the hearings on

Rule 19b-3 supported any extended

continuation of the status quo, at least

With respect to public rates.

II Securities Exchange Act Release No.

11293 (March 13, 1975), 6 SEC Docket

431.

12Securities Exchange Act Release No.

11395 (May 2, 1975), 6 SEC Docket 841.

1340th Annual Report, p.4.

14Securities Exchange Act Release No

11131 (December 11,1974) 5 SEC Docket

672.

15Securities Exchange Act Release No.

11505 (June 30,1975),7 SEC Docket 287.

1640th Annual Report, p. 7; 39th Annual Report, p. 9.

17Securities Exchange Act Release No.

10787 (May 10,1974),4 SEC Docket 271.

18Securities Exchange Act Release No.

11036 (October 3, 1974), 5 SEC Docket

213. Amendments to the short sale rules

were announced In Securities Exchange

Act Release No. 11030 (September 27,

1974),5 SEC Docket 189.

19Securities Exchange Act Release No

11273 (March 3, 1975), 6 SEC Docket 375.

20Securities Exchange Act Release No.

11389 (May 1, 1975),6 SEC Docket 787.

21Securities Exchange Act Release No

11317 (March 28, 1975), 6 SEC Docket

544.

22DUring the year, the Commission

adopted an amendment to Securities Exchange Act Rule 17a-15 (See 39th Annual Report, p 9) to establish procedures

for appeal to the Commission from certain actions which may be taken pursuant

to the Joint Industry plan, (Securities Exchange Act Release No. 11097 (November

13, 1974) 5 SEC Docket 471) declared

effective plans filed under the Rule by the

Boston, Cmcmnati, and Detroit Stock Exchanges and Instrnet, and granted an

exemption to the Intermountain Stock

40

Exchange from the reporting requirements

of the Rule (Securities Exchange Act Release No. 11385 (April 30, 1975) 6 SEC

Docket 782) The Intermountain Stock

Exchange is required, by the terms of its

exemption, to report to the Commission

on a weekly basis details of its transactions (if any) in securities which would

otherwise be required to be reported

pursuant to Rule 17a-15.

23Securities Exchange Act Release No.

9529 (March 8,1972).

24Securities Exchange Act Release No.

10969 (August 14, 1974), 5 SEC Docket

735.

25Securities Exchange Act Release No.

11288 (March 11, 1975), 6 SEC Docket

425.

261d. at 2.

27Securities Exchange Act Release No.

11406 (May 7,1975),6 SEC Docket 859.

28Secunties and Exchange Commission, Statement on the Future Structure

of the Securities Markets (February 2,

1972),37 Fed. Reg. 5286 (1972).

29Securities and Exchange Commission, Policy Statement on the Structure

of a Central Market System (March 29,

1973).

30Securities Exchange Act Release No.

10668 (March 6, 1974),3 SEC Docket 650.

31Securities Exchange Act Release No.

11030 (September 27, 1974), 5 SEC

Docket 189.

32Securities Exchange Act Release No.

11056 (October 7, 1974), 5 SEC Docket

286.

33Securities Exchange Act Release No.

11276 (March 5,1975),6 SEC Docket 378.

34 See, Lorie, Public Policy for Amerteen Capital Markets 10 (Department of

the Treasury, Feb. 7, 1974); Letter from

Weeden and Co. to Lee A. Pickard, Director of Division of Market Regulation,

Securities and Exchange Commission,

November 15,1974 (File No. S7-515).

35Securities Exchange Act Release No.

11468 (June 12,1975),7 SEC Docket 150

36Securities Exchange Act Rule 9b-1

provides that a national securities exchange whose tacilrnes are to be used to

effect transactions In options must first

file with the Commission a plan which

contains those rules or requirements of

the exchange that relate solely or significantly to transactions in options on the

exchange. Under that rule, the plan must

be declared effective by the Commission

before any transaction in options can

take place on that exchange. At the end

of fiscal year 1975, the Commission's

staff was working on a proposal for a

new rule under Section 19 of the Act, as

amended by the 1975 Amendments, which,

If adopted would result In resclssron in

ItS entirety of Rule 9b-1. Amended Section 19 and the new rule would provide
procedures for submission for Oomrrussron approval of proposed exchange rules

generally, and since these would be essentially the same as those of Rule 9b-1,

that rule would be rescinded.

37 See 40th Annual Report, P. 8.

38 Securities Exchange Act Release No.

11144 (December 19,1974),5 SEC Docket

734.

39 Securities Exchange Act Release No.

11423 (May 15, 1975), 6 SEC Docket 894.

40 As defined by CBOE, these options

are those seiling for below $.50 where

the underlymg security IS 5 points or

more below the exercise price (CBOE

Rule 4.17). There was evidence of increased uncovered writing activity in such

options which raised regulatory questions

of surtabrlity, financial responsibility and

excessive speculation. The Amex and

PBW have adopted Similar restrictions as

part of their option plans (Amex Rule

910 and PBW Rule 1052).

41 The PBW and the Amex subsequently adopted similar restrictions.

42 See 40th Annual Report, p, 8; n. 40,

p.21.

43 PBW Rule 1016.

44 See 40th Annual Report, p. 9.

45 Securities Exchange Act Release No.

11144 (December 19,1974),5 SEC Docket

734.

46/d.

47 See Securities Exchange Act Release

No. 10981 (August 22, 1974), 5 SEC

Docket 224.

48 Securities Exchange Act Release No.

11497 (June 26,1975),7 SEC Docket 241.

49 Securities Exchange Act Release No.

11094 (November 11,1974),5 SEC Docket

448. The rule had previously been published for comment in Securities Exchange Act Release No. 9891 (December

5, 1972) and Securities Exchange Act

Release No. 10525 (November 29, 1973),

3 SEC Docket 103.

50 Securities Exchange Act Release No.

10612 (January 24, 1974), 3 SEC Docket

423.

51 5 U.S.C. App. I. 52 See Securities Exchange Act Release No. 10808 (May 16, 1974), 4 SEC

Docket 304.

53 See Securities Exchange Act Release No. 10959 (August 9, 1974), 4 SEC

Docket 304.

54 FOCUS Report (prepared by Staff

Work Group of the Informal FOCUS Report Subcommittee of the Report Coordinating Group (October 15,1974).

55 Interim Report of the Report Coordinating Group to the Securities and Exchange Commission (December 16, 1974).

56 Report Coordinating Group First Annual Report to the Securities and Exchange Commission (June 16, 1975).

57 See Securities Exchange Act Release

No. 11499 (June 26, 1975), 7 SEC Docket

282.

58 Securities Exchange Act Release No.

9835 (October 25,1972).

59 Securities Exchange Act Release No.

11098 (November 13, 1974),5 SEC Docket

472.

60 The necessity to update the GUide

was repeated in many letters from the

public and the Congress. Both Congressman John E. Moss and Congressman

Lionel Van Deerlin wrote to the Chairman

expresslnq the necessity to keep the

GUide current. In a letter dated May 22,

1975 to the Chairman, Congressman Van

Deerlin wrote:

The House and Senate have approved

the conference report on S.249, the

Securities Acts Amendments of 1975,

and we anticipate that the President

will sign it promptly. The changes in

the law made by that bill makes inaccurate certain parts of the BrokerDealer Compliance Guide ....

There has been considerable discussion between thiS Subcommittee and

the Commission concerning the need

to keep that Compliance GUide up-todate. I trust that you will take the occasion of the passage of this legislation

to arrange to maintain the Compliance

GUide current.

61 Securities Act Release No. 5526

(September 9,1974),5 SEC Docket 115.

62 See 39th Annual Report, pp. 16-17

63 Securities Exchange Act Release No.

10591 (January 10, 1974),3 SEC Docket

359. See 40th Annual Report, pp. 15-16.

64 Securities Exchange Act Release No.

11079 (October 31, 1974), 5 SEC Docket

356.

65 Securities Act Release No. 5362,

February 2, 1973.

66 Securities Act Release No. 5581,

April 28, 1975.

67 See 35th Annual Report, p. 21.

68 See 38th Annual Report, p. 12; 39th

Annual Report, p. 15.

69 See 40th Annual Report, p. 13.

70 Securities Act Release No. 5560

(January 24,1975),6 SEC Docket 132.

71 Securities Act Release No. 5510

(JUly 3,1974),4 SEC Docket 524.

72 Securities Act Release No. 5487

(April 23,1974),4 SEC Docket 154.

73 Securities Act Release No. 5450

(January 7,1974),3 SEC Docket 349.

74 Securities Act Release No. 5560

(January 24,1975),6 SEC Docket 132.

75 Securities Act Release No. 5588

(May 30, 1975), 7 SEC Docket 62.

76 Securities Act Release No 5504

(June 14, 1974), 4 SEC Docket 417; See

40th Annual Report, p. 15.

77 Securities Act Release No. 5564

(January 31, 1975),6 SEC Docket 210.

78 Securities Exchange Act Release No.

41
11125 (December 9, 1974), 5 SEC Docket

667

79Securities Act Release No 5552 (December 26,1974),6 SEC Docket 2.

80Secunties Act Release No. 5569

(February 11, 1975), 6 SEC Docket 257.

HI 42 U.S.C. 4321 et seq.

H2389 F. Supp. 689 (D. D.C., 1974)

83Secunties Act Release No. 5235

(February 16,1972)

H4Securrtres Act Release No. 5386

(Apnl 20, 1973), 1 SEC Docket No. 12, p. 1.

H5389 F. Supp. at 701

H6Secunties Act Release No 5627

(October 14,1975),8 SEC Docket 41

H7Investment Company Act ReI. No

8570 (November 4, 1974), 5 SEC Docket

423.

HHLetter transmitting Staff Report to the

U.S. Senate Committee on Banking, HousIng and Urban Affairs, November 4, 1974.

89Investment Company Act ReI. No

8568, (November 4, 1974) 5 SEC Docket

388, Investment Company Act ReI. No

8824, (June 16, 1975) 7 SEC Docket 187

90Secuntres Act ReI. No 3568, (August

29,1955).

91Secunties Act ReI. No 5248, (May 9,

1972)

921d.

93 Investment Company Act ReI. No

8571 (November 4, 1974), 5 SEC Docket

390

44 Investment Company Act ReI. No.

8569 (November 4, 1974),5 SEC 420.

95 Investment Company Act Rei No.

8894 (August 19, 1975), 7 SEC Docket 639.

96 Investment Company Act Rei No

8878, (August 7, 1975) 7 SEC 528.

97 Letter to Gordon Macklin, President,

NASD, November 22, 1974. 74-75 DecIsrons, CCH Fed. Sec. L.R para 80,019.

9HInvestment Company Act ReI. No

8690, Investment Advisers Act ReI. No.

439 (February 27, 1975), 6 SEC Docket

362

99 Investment Company Act Rei No

8826, Investment Advisers Act ReI. No.

463 (June 18, 1975), 7 SEC Docket 221.

100Investment Company Act ReI. No.

8691, Investment Advisers Act Rei No.

440 (February 27, 1975), 6 SEC Docket

364

42

101Investment Advisers Act ReI. No.

455 (Apnl 23,1975),6 SEC Docket 726.

102Investment Advisers Act ReI. No.

448 (April 2, 1975), 6 SEC Docket 549.

103SEC, Institutional Investor Study

Report, H.R. Doc. 64, 92d Cong., tst Sess.

Vol. 1 at X, XI (March 10,1971). 104445 F. 2d 1337 (1971) 10595 S.Ct. 1598 (1975).

106 Gordon v. New York Stock Exchange, Inc., 498 F.2d 1303 (C.A. 2, 1974).

107Sup. Ct. Nos 74-157 and 74-647

(June 16,1975). 108500 F.2d 1246 (C.A 2,1974).

109Supreme Court, October Term, 1974,

No. 74-124.

110Based on Birnbaum v. Newport

Steel Corp., 193 F. 2d 461 (C.A.2, 1952).

11195 S Ct. 2427 (1975).

112421 U.S. 412 (1975).

11340th Annual Report, p. 65.

114507 F.2d 417 (C.A 7,1974).

115U.S. v Stanley Goldblum, et et

U.S.D C. (C D. Calif) Cnm 70 13390; see

also SEC v Equity Funding Corp. of

Amence, US D.C (C.D. Calif), CIvil Action 73-714.

116S.D.N.Y., No 75 Civ. 1299 (LPG).

117SEC v. Bflgadoon Scotch Distributors, Ltd., Docket No. 74-5422, SDNY.

IIH U.S. v James E. Tolleson, litigation

Release No 6598 (November 22, 1974),

5 SEC Docket 686

119See litigation Release No. 6960

(July 2,1975),7 SEC Docket 370.

120Secunties Exchange Act Release

No. 11516 (July 2, 1975), 7 SEC Docket

298.

121See litigation Release No. 6827

(Apnl 9, 1975), 6 SEC Docket 635.

122litigation Release No. 6770 (March

6,1975),6 SEC Docket 419.

12339th Annual Report, p. 76. See also

40th Annual Report, p. 84.

124litigation Release No 6349 (May 2

1974), E.D. Pa. CIvil Action No. 74-1125.

125U.S. Government Printing Office

Washington, 1972

126litigatIOn Release No. 6349 (May 2

1974), S.D N.Y. 74 Civ. 1916.

'

'

'
PART 2

THE DISCLOSURE SYSTEM

PART 2

THE DISCLOSURE SYSTEM

A basic purpose of the Federal secunties laws IS to provide disclosure of material, financial and other information on

companies seeking to raise capital

through the public offering of their secunties, as well as companies whose

securities are already publicly held.

This aims at enabling investors to evaluate the securities of these companies

on an informed and realistic basis.

The Securities Act of 1933 generally

requires that before securities may be

offered to the public a registration statement must be filed with the Commission

disclosmg prescribed categories of information. Before the sale of securities

can begin, the registration statement must

become "effective." In the sales, investors must be furnished a prospectus

containing the most significant mtormatron

m the registration statement.

The Securities Exchange Act of 1934

deals m large part with securities already outstandmg and requires the

registration of securities listed on a national securities exchange, as well as

over-the-counter securities rn which there

is a substantial public Interest. Issuers of

registered securities must file annual

and other periodic reports designed to

provide a public file of current material

information. The Exchange Act also requires disclosure of material Information

to holders of registered securities In

solicitations of proxies for the election of

directors or approval of corporate action

at a stockholders' meeting, or In attempts

to acquire control of a company through

a tender offer or other planned stock

acquisltion. It provides that Insiders of

companies whose equity securities are

registered must report their holdings and

transactions in all equity secuntres of

their companies.

PUBLIC OFFERING: THE 1933

SECURITIES ACT

The basic concept underlying the Secunties Act's registration requrrernents

is full disclosure The Commission has no

authority to pass on the merits of the

securities to be offered or on the fairness

of the terms of distribution. If adequate

and accurate disclosure is made, it cannot

deny registration. The Act makes It unlawful to represent to Investors that the

Commission has approved or otherwise

passed on the merits of registered

securities.

Information Provided

While the Securities Act specifies the

information to be Included In registration

statements, the Commission has the

authority to prescribe appropriate forms

and to vary the particular Items of information required to be disclosed. To facrlltate the registration of securities by

different types of Issuers, the Commission

has adopted special registration forms

which vary in their disclosure requirements so as to provide maximum dis45
closure of the essential facts pertinent In

a given type of offering while at the same

time minimizing the burden and expense

of compliance with the law. In recent

years, It has adopted certain short forms,

notably Forms &-7 and &-16, which do

not require disclosure of matters already

covered In reports and proxy material

filed or distributed under provisions of

the Securities Exchange Act.

Another short form for registration under the Securities Act IS Form &-8 for

the registration of securities to be offered

to employees of the Issuer and ItS subsidranes. The Commission has proposed

amendments to thrs form designed to reduce the cost and burden of registration

to Issuers consistent with the protection

of Investors by increasing the availability

of the form to more types of employee

plans, particularly certain option plans

which may not receive specral tax treatment under the Internal Revenue Code.

The relaxed standards may be used by

Issuers pending final action on the proposals.' Comments on the proposals are

presently being reviewed by the staff.

Reviewing Process

Registration statements filed with the

Commiseron are examined by ItS DIVISion

of Corporation Finance for compliance

with the standards of adequate and accurate disclosure Various degrees of

review procedures are employed by the

Dlvlslon." While most deficiencies are

corrected through an Informal letter of

comment procedure, where the Commission finds that material representations In

a registration statement are misleading,

Inaccurate, or Incomplete, It may, after

notice and opproturuty for hearing, Issue

a "stop-order," suspending the effectiveness of the statement.

Time for Registration

The Oornrnissron's staff tries to complete examination of registration statements as quickly as possible. The Secuntres Act provides that a registration

statement shall become effective on the

20th day after It is filed (or on the 20th

46

day after the filing of any amendment).

Most registration statements require one

or more amendments and do not become

effective until some time after the statutory 2D-day period. The period between

the filing and effective date IS Intended

to give 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

to shorten the 2D-day waiting perlodtaking Into account, among other things,

the adequacy of the information on the

Issuer already available to the public

and the ease With which facts about the

offering can be understood.

During the 1975 fiscal year, 2,781

registration statements became effective.

Of these, 266 were amendments 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. For the

remaining 2,515 statements, the median

number of calendar days between the

date of the Original filing and the effective

date was 33.

Financial Analysis

and Examination

During the fiscal year, the Office of the

Chief Financial Analyst of the DIVISion

of Corporation Finance reviewed electric

and gas utilities; the bank holding companies Industry; and the fire and casualty

Insurance Industry.

Three new dirnensrons were added durIng the fiscal year to the penodic reviews of specrnc industries. First, the

Input was enlarged by incorporating views

of federal and state agencies and regulatory cornmrssrons, academicians, trade

assocratrons, research analysts and industry speciansts. Secondly, the Office

of the Chief Financial Analyst provided

the DIVISion's examining staff With ratios,

averages and standards for each industry

under review Thirdly, certain statistical

disclosure formats were redesiqned to
reflect the Impact on financial reporting

of dynamic changes In the current

economic climate

Office of Oil and Gas

The DIvision's Office of all and Gas

has processing responsibility for all 011

and gas drilling program filings, as well

as filings covering fractional undivided

interests In oil and gas rights. Seventytwo registration statements were filed

during fiscal 1975 for oil and gas drilling

programs, totaling $638,282,035 And

fifteen registration statements covering

fractional undivided Interests in 011 and

gas rights were filed aggregating

$9.098,000.

In addrtron to the direct processing of

those filings, the Office of all and Gas IS

responsible for reviewing the disclosure

relating to 011 and gas busmess and

properties, including data on production

and reserves, contained In other filings

directly processed by the several branches

of the Division. In fiscal 1975, such other

filings consisted of 198 registration statements under the Securities Act and 17

offering circulars pursuant to the Regulation A exemption thereunder, as well as

registration statements and proxy statements under the Exchange Act.

Additional information regarding offerIngs of fractional undivided interests IS

contained under Regulation B In this

Part.

Tax Shelters

DUring the year, a significant number of

registration statements relating to real

estate limited partnerships and other tax

shelter offerings were filed With the Commtssron, All registration statements relatIng to real estate limited partnerships

were processed by one branch within the

Division of Corporation Finance, while

registration statements relating to other

non-oil and gas types of tax shelters,

such as cattle feeding and breeding,

agri-business and leasmq, as well as

condominium offerings, were processed

In a separate branch. A third branch, the

Office of all and Gas, has processing

responsibility for tax shelters relating to

011 and gas.

In all of these types of offerings, the

disclosure generally emphastzed has included the compensation paid to the

program sponsors, the conflicts of Interest

Inherent in many such offerings, the

record In prior offerings of the sponsors

of the offering, and the tax ramifications

of the offering.

Dividend Reinvestment Plans

In recent years, an increasing number

of Issuers provide a means by which

security holders might automatically reInvest drvidends In additional secunties

of the issuer. In response to this Increased

Interest In divrdend reinvestment plans,

the Oomrnlssron In August 1974, announced a revised interpretative posmon

of ItS Drvisron of Corporation Finance

concerning secuntres offered and sold

Without registration under the Securities

Act pursuant to drvidend reinvestment

and similar plans 3 The release states that

until further notice, the DIVISion Will take

the position that the issuer or ItS affiliates

may perform bookkeeping and Similar

administrative functions In operating such

plans and that these activities, in and of

themselves, will not cause the participation of the issuer or its affiliates to exceed the limitations set forth In Securities

Act Release No. 4790. The revised interpretation requires that the agent not

be affiliated With the Issuer, and that

secunties acquired on behalf of the plan

be acquired through such agent.

SMALL ISSUE EXEMPTION

The Commission is authorized under

Section 3(b) of the Securities Act to

exempt secunties from registration If It

finds that registration for these securrtres

IS not necessary to the publrc mterest

because of the small offering amount or

limited character of the public offering.

The law Imposes a maximum limitation

of $500,000 upon the size of the Issues

which may be exempted by the

Commission.

The Commissron has adopted the fol47
lowing exemptive rules and requlatrcns:

Regulation A: General exemption

for U.S. and Canadian Issues up to

$500,000.

Regulation B: Exemption for fractional undivided Interests In 011 or

gas rights up to $250,000.

Regulation E. Exemption for secunties of a small business investment company up to $500,000.

Regulation F: Exemption for assessments on assessable stock and for

assessable stock offered or sold to

realize the amount of assessment

up to $300,000.

Rules 234-237; 240: Exemptions of

first lien notes, secuntres of cooperative housmq corporations,

shares offered In connection with

certain transactions, certain securities owned for five years and certain limited offers and sales of

small dollar amounts of securities

by closely-held Issuers.

Regulation A

Regulation A permits a company to

obtain needed capital not In excess of

$500,000 (including underwriting commissions) In anyone year from a public

offering of ItS secuntres without registration, provided specified condrtrons are

met. Among other things, a notrfrcanon

and offering circular supplying basic information about the company and the

secuntres offered must be filed with the

Commission, and the offering Circular

must be used In the offering. In addition,

Regulation A permits seiling shareholders

not In a control relationship with the ISsuer to offer In the aggregate up to

$300,000 of securmes which would not be

Included In computing the Issuer's

$500,000 ceiling.

DUring the 1975 fiscal year, 265 notifications were filed under Regulation A,

covering proposed offerings of $91,287,-

296, compared with 438 noutrcanons covering proposed offerings of $147 rmllion

In the prior year. A total of 675 reports of

sales were filed reporting aggregate

sales of $49,369,171 Such reports must

be filed every SIX months while an offer48

Ing IS In progress and upon ItS termination. Sales reported dunnq 1974 had

totaled $69 million. Various features of

Regulation A offerings over the past three

years are presented In the statistical

section of this report.

In fiscal 1975, the Commission temporarily suspended 9 exemptions where

It had reason to believe there had been

noncompliance with the conditions of the

regulation or with disclosure standards,

or where the exemption was not available

for the securities. Added to 17 cases

pending at the beginning of the fiscal

year, trus resulted In a total of 26 cases

for drspositron Of these, the temporary

suspension order became permanent In

18 cases: In 7 by lapse of time, In 2 cases

after hearings, and In 8 by acceptance of

an offer of settlement. One temporary

suspension order was vacated Eight

cases were pending at the end of the

fiscal year.

Regulation B

Regulation B provides an exemption

from registration under the Securities

Act for public offerings of fractional undrvrded interests In 011 and gas rights

where the initial amount to be raised does

not exceed $250,000, provided certain

conditions are met. An offering sheet

disclosing certain baSIC material information of such offering must be filed wrth

the Cornmissron. Copies of the final offering sheet must be furnished to

prospective purchasers at least 48 hours

In advance of sale of these securities.

Form &-10 IS available for the registration of fractional undivided Interests in

011 and gas rights where the Initial amount

to be raised exceeds $250,000 or where

the exemption IS unavailable for any

other reason.

During the 1975 fiscal year, 625 offerIng sheets and 672 amendments thereto

were filed pursuant to Regulation Band

were examined by the Office of Oil and

Gas of the DIVIsion of Corporation Finance. Sales during 1975 under these

offerings aggregated $354 million. DUring

the 1974 fiscal year, 625 offering sheets

and 751 amendments were filed covering
aggregate sales of $29.1 million. For the

fiscal year 1973, 725 offering sheets were

filed with 1,020 amendments thereto,

covering aggregate sales of $199 million.

In fiscal 1975, the Commission temporarily suspended the Regulation B

exemption for one offeror where It had

evidence that the offeror had failed to

comply with certain requirements. At year

end, the suspension had not yet become

permanent. In the prior fiscal year, there

was one temporary suspension of the

Regulation B exemption which became

permanent when the offeror Withdrew ItS

request for a heanng.

Regulation E

Under Section 3(c) of the Securities

Act, the Commission IS authonzed to

adopt rules and regulations exempting

securities Issued by a small business investment company under the Small Bustness Investment Act. Pursuant to that

section, the Commission has adopted

Regulation E, which conditionally exempts

such securities Issued by companies

registered under the Investment Company

Act of 1940 up to a maximum offering

price of $500,000. The regulation is substantially similar to Regulation A, descnbed above. No notifications were filed

under Regulation E for the two preceding

fiscal years.

Regulation F

Regulation F provides exemptions from

registration for two types of transactions

concerning assessable stock. First, an

assessment levied upon an existinq secunty holder may be exempted under the

regulation, provided the assessable stock

IS Issued by a corporation incorporated

under the laws of and having ItS principal

business operations in any State, Terntory or the District of Columbia. Regulation F provides an exemption also when

assessable stock of any such corporation

IS sold publicly to realize the amount of

an assessment levied thereon, or when

such stock is publicly reoffered by an

underwriter or dealer. The exemption is

available for amounts not exceeding

$300,000 per year The Regulation requires the filing of a notification and

other rnatenals describing the offering.

During the 1975 fiscal year, 15 notifications were filed under Regulation F,

covering assessments of stock of

$380,318, compared With 12 notifications

covering assessments of $408,652 In 1974.

CONTINUING DISCLOSURE: THE

SECURITIES EXCHANGE ACT

The Securities Exchange Act of 1934

contains significant disclosure provislons

designed to provide a fund of current

material Information on companies in

whose securities there IS a substantial

public Interest. The Act also seeks to assure that secunty holders who are solicited to exercise their voting nghts, or

to sell their securrtres In response to a

tender offer, are furnished pertinent

information.

Registration on Exchanges

Generally speaking, a security cannot

be traded on a national secunties exchange until It is registered under Section

12(b) of the Exchange Act. If it meets the

listing requirements of the particular

exchange, an Issuer may register a class

of secunties on the exchange by filing

With the Commission and the exchange

an application which discloses pertinent

information concerning the Issuer and

ItS affairs. During fiscal year 1975, a

total of 114 Issuers listed and registered

securities on a national securities exchange for the first time and a total of

575 registration applicatrons were filed

The registrations of all securities of 192

Issuers were terminated. Detailed stattstrcs regarding secunties traded on

exchanges may be found In the statistical

section of this report.

Over-the-Counter Registration

Section 12(g) of the Exchange Act requires a company With total assets exceeding $1 million and a class of equity

secunties held of record by 500 or more

persons to register those secuntres with

49
the Commission, unless one of the exemptions set forth In that section IS available, or the Oornmrsston Issues an exemptive order under Section 12(h) Upon

reqrstratron, the reporting and other

disclosure requirements and the insider

trading provrsrons of the Act apply to

these companies to the same extent as

to those with securities registered on

exchanges

DUring the fiscal year, 372 registration

statements were filed under Section 12(g)

Of these, 144 were filed by Issuers already subject to the reporting requirements, either because they had another

security registered on an exchange or

they had registered securities under the

Securities Act Included are companies

which succeeded to the businesses of

reporting companies, and thereby became

subject to the reporting requirements

Exemptions

Section 12(h) of the Act authorizes the

Commission to grant a complete or partial

exernptron from the registratIOn provrsions

of Section 12(g) or from other disclosure

and msider trading provrsions of the Act

where It IS not contrary to the public

Interest or the protection of Investors

At the beginning of the year, 10 exemption applrcattons were pending, and

44 apphcatrons were filed dUring the

year. Of these 54 applications, 15 were

Withdrawn, 18 were granted, and 4 denied.

The remaining 17 applications were

pending at the end of the fiscal year

Periodic Reports

Section 13 of the Securities Exchange

Act requires Issuers of secuntres registered pursuant to Sections 12(b) and 12(g)

to file penodic reports, keeping current

the information contained In the registratron applrcanon or statement Similar

reports are required pursuant to Section

15(d) of certain Issuers which have filed

reqrstratron statements under the Secunties Act which have become effective.

In 1975, 54,640 reports-annual, quarterly and current-were flied.

In December 1974, the Oornrrusston

50

rescinded the requirement that registrants

furnish an EDP attachment as an exhibit 4

The EDP attachment, which was required

In certain reports on Forms 1Q-K and

10-0, had been used by the Commission

to gather Information generally reflected

In the report to which It was an exhibit

The Commrsston determined the functional justification for the attachment did

not warrant ItS continued use and accordIngly rescrnded any requirement that it

be furnished

Proxy Solicitations

Where proxies are solicited from holders of securities registered under Section

12 or from security holders of registered

public-utility holding companies, subsidiaries of holding companies, or registered Investment companies, the Commission's proxy regulation requires that

disclosure be made of all material facts

concerning the matters on which the security holders were asked to vote, and

that they be afforded an opportunity to

vote "yes" or "no" on any matter other

than the election of directors Where

management IS soucmno proxies, a secunty holder desrrmq to communicate

With the other security holders may require management to furnish him With a

list of all security holders or to mall his

communication for him A security holder

may also, subject to certain limitations,

require the management to Include In

proxy material an appropriate proposal

which he wants to submit to a vote of

security holders, or he may make an

Independent proxy sohcrtatron.

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 prsscnbed drsclosure standards, the management or

other group responsrbte for ItS preparanon 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.

Issuers of secunties registered under

Section 12 must transmit an Information
statement comparable to proxy material

to security holders from whom proxies

are not solicited with respect to a

stockholders' meeting.

DUring the 1975 fiscal year, 6,826

proxy statements In definitive form were

filed, 6,801 by management and 25 by

non management groups or individual

stockholders. In addition, 127 information

statements were filed. The proxy and information statements related to 6,762

companies, and pertained to 6,685 meetIngs for the election of directors, 216

special meetings not involving the elecnon of directors, and 27 assents and

authorizations.

Aside from the election of directors,

the votes of security holders were solicrted with respect to a variety of matters,

Including merger, consolidations, acqutsrtions. sales of assets and dissolution

of companies (191); authorizations of new

or additional securities, modifications of

exrsnnq secuntres, and recaprtalrzatton

plans (474); employee pension and retirement plans (65); bonus or profrtsharing plans and deferred compensation

arrangements (217), stock option plans

(705); approval of selection by management of Independent auditors (3,366) and

miscellaneous amendments to charters

and by-laws, and other matters (1,868)

DUring the 1975 fiscal year, 370 proposals submitted by 68 stockholders for

action at stockholders' meetings were

Included In the proxy statements of 198

companies. Typical of such proposals

submitted to a vote of security holders

were resolutions on amendments to charters or by-laws to provide for cumulative

voting for the election of directors, preemptive rights, 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 Irrnttatrons on charitable

contributions.

A total of 185 proposals submitted by

87 stockholders were omitted from the

proxy statements of 90 companies In

accordance with the provisrons of the

rule governing such proposals. The most

common grounds for omission were that

proposals were not submitted on time

or were not proper SUbjects for stockholders' action under the applicable state

law

In fiscal 1975, 25 companies were involved In proxy contests for the election

of directors which bring special requirements Into play. In these contests, 303

persons, lncludrnq both management

and non management, filed detailed statements required of partrcipants under the

applicable rule. Control of the board of

directors was Involved In 20 Instances. In

10 of these, management retained control. Of the remainder, three were settled

by negotiation, one was won by nonmanagement persons, and six were pendIng at year end. In the other five cases,

representation on the board of directors

was Involved. Management retained all

places on the board In three contests,

opposttion candidates won places on the

board In two cases.

Takeover Bids, Large

Acquisitions

Sections 13(d) and (e), and 14(d), (e)

and (f) of the Securities Exchange Act,

enacted In 1968 and amended In 1970,

provide for full disclosure In cash tender

offers and other stock acqu ismons involvmq changes In ownerstup or control These provrsions were desiqned

to close gaps In the full disclosure provisrons of the secuntres laws and to

safeguard the interest of persons who

tender their secunties In response to a

tender offer.

During the 1975 fiscal year, 1,165

Schedule 13D reports were filed by persons or groups which had made acqursinons resulting In their ownership of more

than five percent of a class of securities.

One hundred thirteen Schedule 13D reports were filed by persons or groups

making tender offers (including 24 tender

offers filed With the Commission by foreign nationals), which. If successful,

would result In more than five percent

ownership. In addition, 73 Schedule 14D

reports were filed on solrcttatrons or

recomrnendatrons In a tender offer by a

person other than the maker of the offer

Twelve statements were filed for the re51
placement of a majority of the board of

directors otherwise than by stockholder

vote. SIX statements were filed under a

rule on corporate reacqursmons of secunnes while an Issuer IS the target of a

cash tender offer.

Rule 14d-2 under the Exchange Act

exempts certain communications Involved

In a tender offer from the provisrons of

Regulation 140. Among such communications are those from an Issuer to ItS security holders which do no more than

Identify the tender offer, state that management IS studying the proposal and

request the security holders to defer rnakIng a decrsron on the tender offer until

they receive management's recommendation Such recommendations must be

made no later than 10 days before expiration of the tender offer, unless the Comrmssron authorizes a shorter period.

DUring the fiscal year, the Commission

delegated to the Director of the Division

of Corporation Finance authority to permit

management recommendations to be

made within less than the ten-day period

of Rule 14d-2(f).5 rms procedure was

adopted to expedite the Commission's

handling such requests because they

usually need prompt action

Insider Reporting

Section 16 of the Securities Exchange

Act and corresponding provrsrons In the

Public Utility Holding Company Act of

1935 and the Investment Company Act of

1940 are designed to provide other stockholders and Investors generally with

information on Insider securities transactions and holdings, and to prevent unfair use of confidential information by

insiders to profit from short-term trading

In a company's securities.

secnon 16(a) of the Exchange Act 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, or

who IS a director or an officer of the ISsuer of any such security, to file statements with the Commission disclosing

the amount of all equity securities of the

Issuer of which he IS the beneficial owner

52

and changes In such ownership. Copies

of such statements must be filed with exchanges on which the securities are

listed Similar provisions applicable to

insiders of registered public-utility holdIng companies and registered closed-end

Investment companies are contained In

the Holding Company and Investment

Company Acts.

In fiscal 1975, 91,298 ownership reports were filed. These Included 11,953

initial statements of ownership on Form

3, 74,303 statements of changes in ownership on Form 4, and 5,042 amendments

to previously filed reports.

All ownership reports are made available for public inspection when 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

Office to about 11,500 subscribers.

ACCOUNTING

The securities acts reflect a recoqrunon by Congress that dependable financial statements of a company are

indispensable to informed Investment

decrsrons regarding its securities. A major objective of the Commission has been

to Improve accounting, reporting and

auditing standards applicable to the financial statements and to assure that

high standards of professional conduct

are maintained by the public accountants

who examine the statements. The primary

responsibility for thrs program rests with

the Chief Accountant of the Commission

Under the Commission's broad rulemaking power, it has adopted a basic

accounting regulation (Regulation S-X)

which, together with interpretations and

gUidelines on accounting and reporting

procedures published as "Accounting

Series Releases," governs the form and

content of financial statements filed In

compliance with the securities laws.

The Oommrssron has also formulated

rules on accounting for and auditing of
broker-dealers and prescribed uniform

systems of accounts for mutual and subsidiary service companies related to

holding companies subject to the Public

Utility Holding Company Act of 1935.

The accounting rules and opinions of the

Commission, and its decrsions in particular cases, have contributed to clarification and wider acceptance of the

accounting principles and practices and

auditing standards developed by the

protessron and generally followed In the

preparation of financial statements.

However, the accounting and fmancral

reporting rules and regulatlons--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

tmancial reporting not covered by ItS

rules, the Commission's principal means

of protecting investors from inadequate

or Improper financial reporting IS by

requiring a report of an Independent

publro accountant, based on an audit

performed in accordance with generally

accepted auditing standards, which expresses an opinion whether the financial

statements are presented fairly In conformity With accounting pnnciples and

practices that are recognized as sound

and have attained general acceptance.

The requirement that the opinion be

rendered by an independent accountant,

which was initially established under the

Securities Act of 1933, is desrqned to

secure for the benefit of public Investors

the detached objectrvity and the skill of

a knowledgeable professional person not

connected With management.

The accounting staff reviews the nnancral statements filed with the Commission to insure that the required

standards are observed and that the

accounting and auditing procedures do

not remain static in the face of changes

and new developments in financial and

economic conditions. New methods of

doing busmess, new types of busmess,

the combining of old bustnesses, the use

of more sophisticated securities, and

other innovations create accounting problems which require a constant reappraisal

of the procedures

Relations With the Accounting

Profession

In order to keep abreast of changing

conditions, and In recognition of the need

for a continuous exchange of views and

Information between the Commission's

accounting staff and outside accountants

regarding appropriate accounting and

auditing polrcras. procedures and practices, the staff maintains continuing contact With individual accountants and various protesstonal organizations. The latter

include the American Institute of Certified

Public Accountants (AI CPA) and the FInanciat Accounting Standards Board

(FASS), the pnncrpal professional organizations concerned With the development and Improvement of accounting and

audrtlnq standards and practices. The

Chief Accountant also meets regularly

With his counterparts In other regulatory

agencies to Improve coordination on

pollcres and actions among the agencies.

Because of ItS many foreign registrants

and the vast and Increasing foreign operations of American companies, the Commission has an Interest In the Improvement of accounting and auditing principles and procedures on an lnternatronal

basis To promote such Improvement, the

Chief Accountant corresponds with foreign accountants, lntervisws many who

vlsrt this country and, on occasion,

particrpates In foreign and International

accounting conferences.

Protessronal efforts are being made to

Improve and harmonize accounting standards among countries through vanous

international accounting conferences and

committees. One committee, comprised of

representatives of accountancy groups

from twenty-seven countries, was established to promulgate international accounting standards. This committee has

adopted one standard, has proposed a

number of other standards and ISdevelopIng additional proposals. The Oommrssron

will cooperate closely with these committees and groups which have as their

long-term objective the development of

a coordinated worldwide accounting

protessron with Uniform standards.

53
Accounting and Auditing

Standards

The FASB supplanted the Accounting

Principles Board of the AICPA, which

ceased operations on June 30, 1973, as

the orqaruzatron which establishes standards of financial accounting and presentation for the gUidance of Issuers and

public accountants. The new orqaruzatron

was established on the basis of recommendations by a cornrmttee appointed

by the AICPA rn early 1971 to explore

ways of rrnprovrnq this function. A financial accountrng foundation, sponsored by

the AICPA and consrstrnq of representatives of leadrng professional organizations, appornts the seven members of the

FASB who serve on a salaned, full-time

basts, and the members of an advisory

council to the Board who serve on a

voluntary basts The Commission endorsed h the FASB, which It believes will

provide operational efficiencies and Insure an Impartial viewpornt m the development of accounting standards on a

timely basts, and stated that the FASB's

statements and rnterpretanons would be

considered as berng substantial authorrtatrve support for an accountrng practice

or procedure

As of June 30, 1975, the FASB had ISsued seven Statements of Financial

Accounting Standards and SIX Interpretations relatrng to accounting oprrnons or

standards. In addition, It had under active

consideration a heavy agenda of technical projects which Included. nnancral

reportrng for segments of a business

enterprise, accountrng for leases; cntena

for determrnrng rnatenalrty, conceptual

framework for accountrng and reportrng;

accountrng for translation of foreign currency transactions and foreign currency

tmanciat statements; nnancral reportrng

in units of general purchasrng power;

business combinations and purchased

intangibles, accountrng for mterest costs;

accounting and reportrng for employee

benefrt plans; accounting for the cost of

pension plans, and accountrng for rncome

taxes-s-ou and gas producing companres.

It had held public hearings on five of the

54

projects and had issued exposure drafts

of three proposed statements of standards.

The FASB recently appointed a permanent screening committee to assist It In

identifying emerging practice problems,

evaluating their magnitude and urgency,

and assessrng pnontres for their resolution. The Chief Accountant and the FASB

maintain liaison procedures for consultation on projects of either the Board or the

SEC which are of mutual rnterest. When

the FASB Issues improved standards of

accountrng and financial reporting, the

Commission updates its rules and regulations to conform to the Improved standards, rn accordance with ItS stated

policy Such amendments have been

proposed 7 to effect conformity with the

standards established in FASB Statement

Nos. 2 and 7, "Accountrng for Research

and Development Costs" and "Accountrng and Reporting by Development Stage

Enterprrses."

The AICPA appointed another committee rn early 1971 to study and refine the

objectives of financial statements. It

studied the baSIC questions of who needs

tmancral statements, what information

should be provided, how It should be

communicated, and how much of It can

be provided through the accounting

process. The committee's report on the

objectives of financial statements, which

was published rn October 1973, IS berng

utilized by the FASB as the baSIS of ItS

study of the conceptual framework for

accountrng and reporting

More recently the AICPA established a

Commission on Auditors' ResponsibilitIes

charred by former SEC Charrman Manuel

Cohen which will determine whether a

gap exists between what the public expects of auditors and what auditors can

reasonably be expected to accomplish.

Specific questions to which this Commission seeks answers mclude: Should

auditors monitor all financial mtorrnatron

released to the public and, If so, what

should be the extent of their responsibilities? Should the auditor's standard report, particularly the phrase "present

fairly," be changed to express better the
responsibilities of auditors? Is the

rnacharusrn for developing auditing standards adequate?

The Chief Accountant also maintains

liaison with other senior committees of

the AICPA on projects of mutual Interest,

principally, proposed audit guides and

standards of the Auditing Standards

Executive Committee and the proposed

statements of position of the Accounting

Standards Executive Committee. Regular

meetings are held with the Committee on

SEC Regulations to provide information

and gUidance to the protessron concerning the Interpretation of and compliance

with the Commission's accounting and

auditing requirements applicable to registrants and their Independent accountants.

Other Developments

The Commission has developed a new

publication series entitled "Staff AccountIng Bulletins" to provide information to

the public regarding informal and adrnmrstratrve practices and gUidelines developed by the accounting staff with respect

to specific accounting and auditing

problems considered In the review of

tmancral data flled.s

During the fiscal year, the Commission

issued 16 Accounting Series Releases to

provide interpretations or guidelines on

matters of accounting principles and

auditing standards, to require Improved

disclosure of financial information by

amendment of reporting forms or Regulation S-X, or to announce decisrons In

disciplinary proceedings under Rule 2(e)

of the Commission's Rules of Practice

concerning accountants appearing before

It.

Four interpretative or advisory releases

dealt with requirements for financial

statements of limited partnerships In

annual reports filed with the Commisslon,9 disclosure of unusual risks and

uncertainties In financial reportmq.!v

financial disclosure problems relating to

the adoption of the LIFO Inventory

metnod,n and amendments of guidelines

pertaining to classification of short-term

obligations expected to be refinanced.I

Three releases were Issued In which

amendments to Regulation S-X were

adopted to effect improved disclosures In

specific areas of financial statements.

one release 13 dealt With the capitalization of Interest by non-utility companies,

including Imposition of a moratorium on

capitalization by such companies which

had not previously followed that policy:

another release 14 dealt With the components of accounts receivable and

inventories relating to defense and other

long-term contract activities, and a third

release 15 With the relationships between

registrants and their Independent accountants Thrs latter release also contained amendments to a report form and

rules under the Exchange Act regarding

those relationshtps.

In conjunction With the DIVISion of

Corporation Finance, a release was ISsued adopting gUides for the textual

analysis of the summary of earnings or

operations In the preparation of registration statements and reports under the

Securities Act and the Exchange Act. In

conjunction With the Drvlsion of Corporate

Regulation, a release 17 was Issued reSCinding the uniform system of accounts

for registered holding companies under

the Holding Company Act, In order to

tacurtate adjustment of their accounts to

generally accepted accounting standards.

In lieu of the uniform system of accounts,

the requirements of Regulation S-X for

the form and content of tmancral statements were made applicable.

Shortly after the end of the fiscal year,

an amendment to Article 4 of Regulation

S-X was adopted 18 relating to the requrrernents for consolidated and combined tmancrat statements In filings with

the Commisston Also after the end of the

fiscal year, amendments to Regulation

S-X and filing forms were adopted 19

which require Increased disclosure of

interim tmancral data. Condensed frnancial statements and a narrative analysis

of the results of operations are to be

included In quarterly reports filed and

summary data regarding the quarterly

results In a fiscal year are to be Included

in a note to the tmancial statements filed

55

'
for a fiscal year. These requirements

were adopted after public constderatron

of proposals 20 and subsequent alternative proposals 21 and public hearings regarding increased disclosure of Interim

results by registrants and review of such

data by independent accountants. In connection with the adoption of these requirements, the Commission Issued 23 for

public comment revised proposed standards and procedures to be applicable to

the review of the interim financial data by

the Independent accountants In the

absence of adequate standards and

procedures promulgated by the accountIng profession.

Dunng the fiscal year, other proposals

were Issued for public comment, one 24

of which would effect a general revision

of Article 7 of Regulation S-X, pertaining

to the form and content of financial statements of title Insurance and mortgage

guarantee Insurance companies, to reflect

developments In accounting practice, including the requirements that the financial statements be prepared In accordance with generally accepted accounting

pnnciples. Another proposal 25 would

effect minor amendments In vanous sections of Regulation S-X regarding disclosures of leases, compensating balances

and short-term borrowing arrangements,

and Income tax expense.

The Commission Issued opinions In

seven proceedings under Rule 2(e) of its

Rules of Practice during the fiscal year.

Under that rule, the Commission may

disqualify an attorney or accountant from

practicing before It, either temporarily

or permanently, or It may censure him on

grounds specified In the rule. In one proceeding 26 an accounting firm was censured for failing fully to disclose to the

Commission and the public the facts

relating to a settlement negotiated between the firm and a client regarding an

audit of certain Inventories that were misstated In the tmancral statements of the

client filed with the Comrmssron.

In three proceedings 27, accountants

were permanently suspended from appeanng or practicing before the Comrrussron. In each case the accountant had

been permanently enjoined by a Federal

56

court In a Cornmissron injunctive action

from violating antifraud provlsrons of the

Federal securities laws. In one instance

the accountant was given the nght to

apply for reinstatement after September

20,1976.

In another proceedlng,28 an accountIng firm, which had been permanently

enjoined by a Federal court from Violating

antifraud provrsrons of the Federal securities laws, was censured and remedial

sanctions were imposed. The firm was

required to employ a consultant for one

year, who will be available for special

consulting requests, will review approximately 15 percent of the firm's audits

dunng the year of publicly held companies, report to the Oommrssron regarding

the adequacy of the audit work performed

In such audits, and require the firm to

adopt auditing procedures to determine

whether its clients have entered Into

matenal transactions With related parties.

In the event the firm should merge with

another firm at least twice as large the

above requirements would terminate and

the combined firm would be required to

apply its quality control standards to the

audits of the financial statements of the

publicly held former clients of the original

firm and to render progress reports on

such application to the CommiSSion.

In a proceeding 29 pertaining to an accounting firm which had failed to comply

With generally accepted auditing standards and the Oommrssron's Instructions

In Form X-17A-5 In the audit of a brokerdealer's tmanciat statement, the firm and

a partner of the firm were suspended

from appeanng or practicing before the

Oornmrssron for 18 months. They were

required to request a review of their

auditlnq procedures under the quality

review program of the Amencan Institute

of Certified Public Accountants and to

correct any deficiencies reported. The

firm was also required to give notice In

wntlng of these findings to any client who

requests auditing services for the purpose

of registratIOn With or reporting to the

Cornrmssron.

In another proceeding sanctions were

Imposed 30 against an accounting firm

and a partner of the firm on the basis of a
consent injunction involving violations of

the antifraud provisrons of the Exchange

Act. The firm was required to request the

AICPA to designate persons satisfactory

to the Commission's Chief Accountant to

review audit work papers, personnel and

other records of the firm to determine

whether audit and professional procedures are adequate. The firm was prohibited from accepting engagements for a

period of 10 months with new clients

involving auditing or accounting services

In connection with filing of financial statements with, or submissions or certifications to, the Commission. In addition, the

firm was ordered to require, for a nveyear period, each of its partners to attend

courses or seminars In subjects relating

to public accounting or auditing to the

extent of at least 40 hours per year. The

enjoined partner was prohibited from

practicing' before the Commission for a

period of 10 months as an accountant

other than as an employee or consultant

under supervision, and in no case to act

as or be a partner of the accounting firm.

He was also required to complete a program of continuing professional education by attending at least 100 hours of

acceptable courses or seminars in public

accounting and auditing subjects within

a period of 10 months.

Shortly after the close of the fiscal

year, three opinions were Issued In proceedings Instituted against accounting

firms pursuant to Rule 2(e). One proceeding involved a major accounting firm,

against which the Commission had filed

four crvn injunctive complaints concerning the firm's examinations of financial

statements of four companies and questions raised in an investigation regarding

the firm's audit of the financial statements

of another company."! The firm was required to have an investigation made of

its audit practices with respect to the

financial statements of client-registrants

of the Commission and to promptly adopt

and Implement any recommended corrective actions. The firm was also required

to conduct a study of the percentage of

completion method of accounting and

establish guidelines to be applied In the

conduct of future audits. For a period of

six months, the firm was not permitted to

accept engagements from new clients

(with certain exceptions) to examine

financial statements to be filed with the

Commission. In addition the firm is required to have reviews conducted in 1976

and 1977 In conformity with the AICPA's

program for the review of quality control

procedures of multi-office firms to determine whether the firm has adopted and

Implemented procedures agreed upon In

the proceedings and any corrective actions recommended in the prior investigation

The other proceedings were instituted

on the baSIS of investigations In which

the Commission found that accounting

firms did not perform the audits of financial statements of registrants filed with

the Commission In accordance with generally accepted auditing standards. In one

proceeding 32 the accounting firm was

censured by the Commission. In the

second proceeding 33 the accounting firm

was ordered to employ consultants to

review and evaluate ItS auditing procedures and professional practice in connection with the audits of publicly held

companies with a report of conclusions to

be made to the Commission, and the firm

was ordered not to accept engagements

to examine new clients' tlnancrat statements to be filed with the Commission

until one month after the report of the

consultants IS submitted to the Commission.

EXEMPTIONS FOR

INTERNATIONAL BANKS

Section 15 of the Bretton Woods Agreements Act, as amended, exempts from

registration 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 on securities as the

Commission determines to be appropriate. The Commission has adopted rules

requiring the Bank to file quarterly reports and copies of annual reports of the

Bank to ItS Board of Governors. The Bank

IS also required to file advance reports of

57
any distribution In the United States of Its

primary obligations. The Commission,

acting In consultation with the National

Advrsory Council on International Monetary and Financial Problems, IS authorized

to suspend the exemption for securities

Issued or guaranteed by the Bank The

following summary of the Bank's activities

reflects information obtained from the

Bank Except where otherwise indicated,

all amounts are expressed In U.S. dollar

equivalents as of June 30, 1975.

Net Income for the year was $275 milnon, compared with $216 million the

previous year. Of the $275 million net

income, the Executive Directors allocated

$165 million to the Supplemental Reserve

Against Losses on Loans and from Currency Devaluations and recommended to

the Board of Governors that an amount of

$110 million be transferred by way of

grant to an affiliate of the Bank, the International Development Association

Repayments of principal on loans received by the Bank dUring the year

amounted to $569 million, and a further

$80 million was repaid to purchasers of

portions of loans Total principal repayments by borrowers through June 30,

1975, aggregated $6.5 billion, including

$43 billion repaid to the Bank and $2.2

billion repaid to purchasers of borrowers'

obuqations sold by the Bank.

Outstanding borrowings of the Bank

were $12.3 billion at June 30, 1975. DurIng the year, the Bank borrowed $440

rnrlhon through the Issuance of 2-year

U S dollar bonds to central banks and

other governmental agencies In some 65

countries; $500 million In the United

States; OM 1,228.3 million (U.S. $5122

muuon) In Germany; 35.9 billion yen (U.S.

$122 million) In Japan; U.S. $150 million

In Iran, U.S. $240 rmlllon In Nigeria, SRCs

500 million (U.S. $140.8 million) and US

$750 million In Saudi Arabia; Bs 430 million (U S $100 million) and U.S $400

million In Venezuela; and the equivalent

of US. $35 million In other countries outSide the United States. The above U.S.

dollar equivalents are based on otncral

exchange rates at the times of the respective borrowings

These borrowings, In part, refunded

58

maturing issues amounting to the equivalent of $959 million. After retirement of

$68 million equrvalent of obligations

through sinking fund and purchase fund

operations, the Bank's outstanding borrowings showed a net increase of $2,637

million from the previous year after addIng $275 million representing adjustment

of borrowings as a result of currency

devaluations and revaluations In terms of

U. S dollars of the value of the nondollar currencies In which the debt was

denominated.

The Inter-American Development Bank

Act, which authonzes the United States to

participate In the Inter-American Development Bank, provides an exemption for

certain securities which may be Issued or

guaranteed by the Bank similar to that

provided for secuntres of the International

Bank for Reconstruction and Development. Acting pursuant to this authonty,

the Commission adopted Regulation lA,

which requires the Bank to file with the

Commission SUbstantially the same type

of information, documents and reports as

are required from the International Bank

for Reconstruction and Development. The

toltowmq data reflects information submitted by the Bank to the Comrrussron.

On June 30, 1975 the outstanding

funded debt of the Ordinary Capital resources of the Bank was the equivalent of

$1.606 billion, reflecting a net Increase

In the past year of the equivalent of $290

million. DUring the year, the funded debt

was Increased through two publrc offerrnqs In the United States totalling $225

million as well as private placements In

Italy, Trinidad and Tobago for the equivalent of $17 million. In addition, there were

drawings totalling $208 million under

arrangements entered Into dUring previous years With Finland, Japan and Spain.

Additionally, $55.6 million of two-year and

five-year bonds were sold to Latin Amerrca and Caribbean Central Banks, essentially representing a roll-over of a

maturing borrowing of $534 million. The

funded debt Increased by approximately

$78.2 million due to upward adjustment of

the U.S dollar equivalent of borrowings

denominated In non-member currencies.

The funded debt was decreased through
the retirement of approximately $53.2

million from sinking fund purchases and

scheduled debt retirement.

The Asian Development Bank Act,

adopted In March 1966, authorized United

States participation in the ASian Development Bank and provides an exemption

for certain securities which may be Issued

or guaranteed by the Bank, similar to the

exemptions accorded the International

Bank for ReconstructIOn and Development and the Inter-American Development Bank. Acting pursuant to this

authority, the Commission has adopted

Regulation AD which requires the Bank

to file with the Oornrmsaron. documents

and reports as are required from those

banks. The Bank has 41 members with

subscriptions totaling $3.08 billion

Through June 30, 1975, the Bank's borrowings totaled the equivalent of $567

million. In 1975 the Bank issued obligations of the equivalent of $103.6 million In

Japan, $14.4 million In Saudi Arabia and

$70 million to various Central Banks In

1975, borrowing in the United States was

$75 million at 8.5 percent. Before seiling

securrtres in a country, the Bank must

obtain the country's approval.

As of June 30, 1975, 12 countries had

contributed or pledged a total of $270

million to the Bank's concessionary loans

fund. A total of $57.4 million from Ordinary Capital resources have been set

aside by the Board of Governors for concessionary loan purposes. In addition

Congress has authorized a further $50

million contribution and is considering

the appropriation of these funds In fiscal

1976.

TRUST INDENTURE ACT OF 1939

Ttus Act requires that bonds, debentures, notes and similar debt securities

offered for public sale, except as specifically exempted, be Issued under an indenture which meets the requirements of

the Act and has been duly qualified With

the Commission.

The provrsrons of the Act are closely

Integrated with the requirements of the

Securities Act. Registration pursuant to

the Securities Act 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 designed to safeguard the rights and

Interests of the purchasers. Moreover,

specified information about the trustee

and the indenture must be Included In

the registration-statement.

The Act was passed after studies by

the Commission had revealed the frequency With which trust Indentures failed

to provide minimum protections for secunty holders and absolved so-called trustees from minimum obligations In the

discharge of the trusts It requires, among

other things, that the Indenture trustee be

a corporation With a minimum combined

capital and surplus and be free of conflicting interests which might Interfere

With the faithful exercise of its duties on

behalf of the purchasers of the secuntres,

and It imposes high standards of conduct

and responsibility on the trustee. During

nscat year 1975, 528 trust Indentures

relating to securities In the aggregate

amount of $34.9 billion were filed.

INFORMATION FOR PUBLIC

INSPECTION; FREEDOM OF

INFORMATION ACT

On November 21, 1974, Congress

passed over President Ford's veto amendments to the Freedom of lntormatron

Act 34 which Significantly changed the

procedures governing the handling of

requests made pursuant to the Freedom

of lntorrnatron Act (5 U.S.C. 552) as well

as the scope of certain of the exemplions

from the Act's provisions These amendments became effective February 19,

1975. The Oornmrssron amended ItS rules

under the Freedom of Information Act

(17 CFR 200.80) 35 to reflect the amended

provisions of the Freedom of Intorrnatron

Act; these rules specify the categones of

available matenals and those categones

of records that are generally considered

nonpubtrc. These rules establish the

procedure to be followed In requesting

records or copies and provides for a

method of adrninlstranve appeal from the

denial of access to any record. They also

59
provide for the Imposition of duplicating

fees and search fees when more than

one-half man-hour of work IS performed

by the Commission's staff to locate and

make records available. In addition to the

records described, the Commission

makes available for inspection and copyIng all requests for no-action and interpretative letters received after December

31, 1970, and responses thereto (17 CFR

200.81). Also made available since November 1, 1972 are materials filed under

Proxy Rule 14a-8(d), which deals with

proposals offered by shareholders for

inclusion In management proxy-soliciting

materials, and related materials prepared

by the staff (17 CFR 200.82).

Followrnq the effective date of the

amendments to the Freedom of Information Act, the Commission instituted the

practice of rssurnq a publrc release, In a

series desrqnated Freedom of Information Act Releases, In most administrative

appeals decrded under the Act The

Commission hopes that this series of

releases Will serve to Inform the pubhc

as to ItS disclosure polrcres under the

Freedom of Information Act and of the

manner In which It has Interpreted and

applied the Act to the many types of

records maintained by the Commission.

Most of the administrative appeals

decided by the Comrnissron from the

effective date of the amendments to the

close of the fiscal year were concerned

With investigatory records. The seventh

exemption of the Act, as amended, provices that the Freedom of Information

Act "does not apply" to such records to

the extent that their production would

"Interfere With enforcement proceedings," "deprive a person of a right to a

fair trial or an Impartial adjudrcanon,"

"constitute an unwarranted rnvasron of

personal privacy," or cause other types

of harm specifically enumerated an the

exemption. The Cornrnlssron, In the

administrative appeals It has decided,

has determined that investigatory records

Will generally be Withheld on the ground

that production Will "mtertere With enforcement proceedings" only If judrcral or

administrative proceedings brought by

the cornrmssron or other law enforcement

60

authonnes are In progress or there IS a

concrete prospect that law enforcement

proceedings will be instituted.36 Evidentiary materials contained In Investigatory

files closed after the completion of public

law enforcement proceedings Will generally be available to any person requestIng access to them.37 In those cases

where investigations are closed by the

Cornmisston without the institution of

public enforcement action, the Commission has recognized that consrderatrons

of personal privacy often require that

such records not be disclosed to members of the publlc,38 except where a

demonstration of particularized need for

access to the records suttrcrent to outweigh oonsrderatrons of personal privacy

has been made.39

Registration statements, applications,

declarations, and annual and periodic reports filed with the Oomrmssron each year,

as well as many other public documents,

are available for publrc Inspection and

copying at the Commission's publre reference room in its principal offices in

Washington, D.C. and, in part, at ItS regIOnal and branch offices.

The Oornrmssron has special public reference facilities In the New York, Chicago

and Los Angeles Regional Offices and

some facilities for public use in other regIOnal and branch offices. Each regional

office has available for public examination copies of prospectuses used In recent offerings of secuntles registered

under the Securities Act; registration

statements and recent annual reports

filed under the Securities Exchange Act

by companies having their princrpal office

In the region, recent annual reports and

quarterly reports filed under the Investment Company Act by management investment companies having their prlncipal

office in the region; broker-dealer and

Investment adviser applications onqmatIng In the region; letters of notification

under Regulation A filed In the region,

and Indices of Oommlsston decrsions.

During the 1975 fiscal year, 19,186 persons examined material on file In WashIngton; several thousand others examined

files in New York, Chicago, Los Angeles,

and other regIOnal offices. More than
47,282 searches were made for Information requested by Individuals, and approximately 4,949 letters were written on

Information requested.

The public may make arrangements

through the Public Reference Section of

the Commission in Washington, D.C. to

purchase copies of material in the Commission's public files. The copies are

produced by a commercial copying company which supplies them to the public

at prices established under a contract

with the Oomrrusston. Current prices begin at 15 cents per page for pages not

exceeding 8%" x 14" in size, with a $2

minimum charge. Under the same contract, the company also makes microfiche

and microfilm copies of Commission

public documents available on a subscription or individual order basis to persons or firms who have or can obtain

viewing facilities. In microfiche services,

up to 60 Images of document pages are

contained on 4" x 6" pieces of film, referred to as "fiche."

Annual microfiche subscnptrons are offered In a variety of packages covering all

public reports filed on Forms 1Q-K, 10-0,

8-K, N-1Q and N-1R under the Securities

Exchange Act or the Investment Company

Act, annual reports to stockholders; proxy

statements; new issue registration statements; and final prospectuses for new ISsues. The packages offered Include

various categories of these reports, including those of companies listed on the

New York Stock Exchange, the American

Stock Exchange, regional stock exchanges, or traded over-the-counter.

Reports are also available by standard

industry classifications. Arrangements

also may be made to subscribe to reports

of companies of one's own selection.

Over one hundred million. pages (rnrcroimagery frames) are being distributed

annually. The subscription services may

be extended to further groups of filings in

the future if demand warrants. The copyIng company will also supply copies In

microfiche or microfilm form of other

public records of the Commission desired

by a member of the public.

Microfiche readers and reader-printers

have been Installed In the public reference areas In Washington, D.C. and the

New York, Chicago, and Los Angeles

regional offices, and sets of microfiche

are available for Inspection there. Visitors

to the public reference room In Washington, D.C. may also make immediate

reproduction of matenal on photostatrctype copying machines. The cost to the

public of copies made by use of all

customer-operated equipment is 12 cents

per page. The charge for an attestation

with the Commission seal IS $2. Detailed

information concerning copying services

available and prices for the various types

of services and copies may be obtained

from the Public Reference Section of the

Commission.

FREEDOM OF INFORMATION

ACT LITIGATION

In Wolfson v. S.E.C.,40 plaintiff requested access to the contents of two

investigatory files compiled In the early

1950's. Following the enactment of the

amendment to the Freedom of Information

Act relating to the exemption for investigatory records, the Commission reconsidered its earlier denial of access to the

requested records, and granted plaintiff's

request with respect to all investigatory

records in Its pcssessron, with the exception of inter- and Intra-agency memoranda contained in the file, which In the

Commission's view were exempt by virtue

of the fifth exemption of the Freedom of

Information Act. The court thereupon

allowed plaintiff a period of time to

amend his complaint, and upon his failure

to do so, the action was dismissed.

In Ptrst Mid America v. S.E.C.,41 the

Commission was named In a SUIt seeking

an Injunction to prohibit the disclosure of

certain Investigatory records It had previously determined to produce to a third

party who had requested access pursuant

to the Freedom of Information Act. In ItS

complaint, plaintiff claimed that the

records the Commission proposed to

disclose were protected by the attorneyclient privilege and that disclosure would

be an unwarranted Invasion of personal

privacy. After stipulating that It would not

disclose the records pending resolution

61
by the court of the Issues raised by the

complaint, the Commission filed an Answer and Counterclaim for Interpleader

seeking to bring Into the SUIt as the real

party In Interest the person seeking the

records under the Freedom of Information

Act. Before the Commission's motion to

add the requester as a party had been

acted upon, however, plaintiff withdrew

ItS claim and the parties stipulated to the

dismissal of the action

At the close of the fiscal year, SUitS

brought pursuant to the Freedom of Information Act were pending against the

Commission In American tnstttute Counselors, lnc., et et. v. S.E.C.42 and Sahley

v. Federal Bureau of tnvestiqetton, et al.41

In both of these cases, subjects of Commrssron investigations are seeking access

to the contents of active investigatory

files concerning them

NOTES FOR PART 2

I Secunties Act Release No. 5530 (October 3,1974),5 SEC Docket 208.

2 Securities Act Release No 5231 (February 3, 1972).

ISecurities Act Release No 5515 (July

22,1974),4 SEC Docket 623.

4 Securities Exchange Act Release No.

11124 (December 6, 1974), 5 SEC Docket

626.

, Securities Exchange Act Release No.

11419 (May 14,1975),6 SEC Docket 893

6 Accounting Series Release No. 150

(December 20, 1973), 3 SEC Docket 275.

7 Securities Act Release Nos. 5541

(November 21, 1974), 5 SEC Docket 499,

and 5601 (July 31, 1975), 7 SEC Docket

457.

M Accounting Series Release No 180

(November 4, 1975) and Staff Accounting

Bulletin No 1 (November 4, 1975)

q Accounting Series Release No. 162

(September 27, 1974), 5 SEC Docket 181

and 387

IU Accounting Series Release No. 166

(December 23, 1974),5 SEC Docket 772.

II Accounting Series Release No 169

(January 23,1975),6 SEC Docket 130.

12 Accounting Series Release No 172

(June 13, 1975), 7 SEC Docket 143.

I I Accounting Series Release No 163

(November 14,1974),5 SEC Docket 436

H Accounting Series Release No. 164

(November 21,1974),5 SEC Docket 500.

t> Accounting Series Release No. 165

(December 20,1974), 5 SEC Docket 767

In Accounting Series Release No. 159

(August 14,1974),5 SEC Docket 1

J7 Accounting Series Release No 171

(May 1, 1975),6 SEC Docket 801

1M Accounting Series Release No 175

62

(July 10, 1975), 7 SEC Docket 339.

19 Accounting Series Release No. 177

(September 10, 1975), 7 SEC Docket 816.

20 Securities Act Release No. 5549 (December 19,1974),5 SEC Docket 727.

21 Securities Act Release No. 5579

(April 17, 1975), 6 SEC Docket 670.

22 Securities Exchange Act Release No.

11354 (April 17, 1975), 6 SEC Docket 682.

23 Securities Act Release No. 5612

(September 10,1975),7 SEC Docket 825.

24 Securities Act Release No. 5513

(July 11, 1974),4 SEC Docket 551.

2'; Securities Act Release No 5587

(May 27,1975),7 SEC Docket 58. 2617 C F.R. 201.2(e) Accounting Series

Release No. 157 (July 8, 1974), 4 SEC

Docket 547.

27 Accounting Series Release No. 158

(July 19, 1974), 4 SEC Docket 591; No.

161 (August 29,1974),5 SEC Docket 61;

and No. 170 (January 27, 1975) 6 SEC

Docket 188.

2M Accounting Series Release No. 167

(December 24,1974),5 SEC Docket 780.

29 Accounting Series Release No. 160

(August 27, 1974), 5 SEC Docket 89.

30 Accounting Series Release No 168

(January 13, 1975),6 SEC Docket 76.

31 Accounting Series Release No 173

(July 2,1975),7 SEC Docket 301

32 Accounting Series Release No 174

(July 2,1975), 7 SEC Docket 293.

33 Accounting Series Release No. 176

(July 22,1975),7 SEC Docket 432.

34 Pub L. No. 93-502

3, See Securities Act Release No. 5571

(February 21, 1975), 6 SEC Docket 286.

36 See, e.g., In the Matter of Request of

I Walton Bader, FOIA ReI. No.1, (April 3,

1975) 6 SEC Docket 541, In the Matter of

Request of Jeffrey B. Albert, FOIA Rei

NO.10 (June 11, 1975), 7 SEC Docket 138.

37 Securities Act Rei, No. 5571 (February 21, 1975), 6 SEC Docket at 288. In

the Matter of Request of John A. Jenkins,

FOIA ReI. No. 11 (June 11, 1975), 7 SEC

Docket 139.

3M In the Matter of Request of John A

Jenkins, FOIA ReI. No. 11, (June 11,

1975),7 SEC Docket 139

39 In the Matter of Request of Jung Ja

Malandns. FOIA ReI. No.8, (May 29,

1975), 7 SEC Docket 58.

40 D.D.C, No. 74-1372.

41 D D.C, No 75-0314

42 D. Mass., No. 75-1578-F For the

Commission's drsposmon of the adrrurustrative appeal In thrs matter, see In the

Matter of Request of American Institute

Counselors, FOIA ReI. No 3 (April 24,

1975),6 SEC Docket 718.

41 E.D. La., No. 75-1831. For the Commission's disposrtton of the administrative

appeal In tms case, see In the Matter of

Request of Lloyd William Sahley, FOIA

Rei NO.4 (April 24, 1975), 6 SEC Docket

719


REGULATION OF 

SECURITIES MARKETS 

In addition to the disclosure provisions 

discussed in the preceding chapter, the 

Securities Exchange Act assigns to the 

Commission broad regulatory responsibilities for securities markets and persons 

in the securities business. That Act, 

among other things, requires securities 

exchanges to register with the Commission, provides for Commission suparvision of the self-regulatory responsibilities 

of registered exchanges, and permits 

registration of associations of brokers or 

dealers exercising self-regulatory functions under Commission supervision. 

The Act requires registration and regulation of brokers and dealers doing a 

business in securities. it also contains 

provisions designed to prevent fraudulent, 

deceptive and manipulative acts and 

practices on the exchanges and in the 

over-the-counter markets. 

The Securities Acts Amendments of 

1975 (the "1975 Amendments") 1 establish a new self-regulatory organization, 

the Municipal Securities Rulemaking 

Board, to formulate rules for the municipai securities industry subject to the 

oversight of the Commission. The amendments also authorize a national system 

for the clearance and settlement of securities transactions and require municipal 

securities dealers, certain securities information processors, clearing agencies 

and transfer agents to register, keep 

records, and file reports with the Commission. These recent developments concerning regulation of the securities 

markets are discussed in Part I. 

REGULATIONOF EXCHANGES 

Registration 

The Securities Exchange Act generally 

requires a securities exchange to register 

with the Commission as a national securities exchange unless the Commission 

exempts it from registration, because of 

the limited volume of its transactions.2 

As of June 30. 1975. the followina- 13 

securltles axcnangas were reglsterea 

wllh the Commdsslon 

Amerlcan Srock Exchange Ing 

Board of Traoe of the C ty of Chlcago 

Boston Stock Exchanae 

Chicago Board options Exchange, 

Incorporated 

Cincinnati Stock Exchange 

Detroit Stock Exchange 

Midwest Stock Exchange. inc. 

National Stock Exchange 

New York Stock Exchange, Inc. 

Pacific Stock Exchange, Inc. 

PEW Stock Exchange, inc. 

intermountain Stock Exchange 

Spokane Stock Exchange 

On January 31. 1975 the National Stock 

Exchange ceased operations and has 

since been proceeding with the necessary 

steps under New York State law for corporate dis~oiution. That exchange is also 

in the process of seeking delisting of its 

listed securities and will then withdraw its 

registration as a national securities exchange. 

In March 1975 the Executive Committee 

of the Board of Trade of the City of 
Chicago adopted a resolution to close

the Board's secunties market The Commission's staff has been Informed that

the Board IS now prepared to file a written notice of withdrawal from registration.

Delisting

Pursuant to Section 12(d) of the Exchange Act, securmes may be strrcken

from listing and registration upon application to the Commission by an exchange,

or withdrawn from listing and registration

upon application by an Issuer, in accordance with the rules of the exchange

and upon such terms as the Commission

may Impose for the protection of investors It IS the Commission's view that In

evaluating dellstlng applications, It IS not

generally the Commission's function to

substitute ItS Judgment for that of an exchange, and that where there has been

full compliance with the rules of an exchange with respect to delisting, the

Commission IS required to grant a dehstIng appncation The authority of the Comrnrssron In such cases IS limited to the

Imposition of terms deemed necessary

for the protection of Investors 3

The standards for delistrnq vary among

the exchanges, but generally delistmq

actions are based on one or more of the

following factors. (1) the number of

publicly held shares or shareholders IS

insufficient (often as a result of an acquisition or merger) to support a broadbased trading market, (2) the market

value of the outstanding shares or the

trading volume IS Inadequate; (3) the

company no longer satisfies the exchange's cnteria for earnings or financial

condition; or (4) required reports have not

been filed with the exchange.

During fiscal year 1975, the Comrrussron granted exchange applications for

the delrsnnq of 125 stock Issues and 14

bond Issues The largest number of applications came from the American Stock

Exchange, 41 stocks and 4 bonds The

number of applications granted other

exchanges were: New York, 24 stocks

and 8 bonds, Pacific, 16 stocks and 1

bond, National, 15 stocks; PBW, 14

stocks, Midwest, 9 stocks, Boston, 4

66

stocks; Cmcrnnati, 1 bond; Detroit and

Intermountain, 1 stock each.

Exchange Disciplinary Actions

The 1975 Amendments adds a new

Section 19(d) to the Securttres Exchange

Act requmnq exchanges to report to the

Commission, and authorizing the Comrnissron to review. any final disciplinary

sanction Imposed by an exchange that (I)

denies membership or participation to

any applicant, (II) prohibits or limits any

person access to services offered by an

exchange or member thereof, or (IIi)

Imposes final disciplinary sanctions on

any person associated with a member or

bars any person from becoming associated with a member. Before the Amendments, the Securities Exchange Act did

not explicitly authorize the Oommlssion

to review exchange disciplinary actions,

although each natronal secuntres exchange did report voluntarily to the Comrnrssion disciplinary action taken against

members and member firms and their

associated persons.

Durmq the fiscal year, five exchanges

reported a total of 107 separate drscrphnary actions, Including the imposition

In 81 cases of fines ranging from $25.00

to $20,000, the expulsion of 6 individuals;

the suspension from membership (for

penods of 3 to 36 months) of 5 member

orqaruzatrons and 8 individual members;

and the censure of 20 member organizations

EXCHANGE RULES

The Commission's staff continually reviews the rules and practices of the

national securrtres exchanges to determine the adequacy and effectiveness of

the self-regulatory scheme To facilitate

Commission oversight, each national

secuntres exchange has been required to

file with the Oornrmsston a report of any

proposed change In rules or practices

not less than three weeks (or such shorter

period as the Commission may authorize)

before Implementing a change These

filings have been available for public

inspection
Under the 1975 Amendments, national

securities exchanges are now required to

file with the Commission any proposed

change In exchange rules accompanied

by a concise general statement of the

basis and purpose of such proposed rule

change. In general, the Commission must

then publish notice of the proposed rule

change together with the terms of such

change or a description of the subjects

and issues involved and give interested

parties an opportunity to submit their

views concerning such proposed rule

change. No proposed rule change may

take effect unless approved by the CommiSSIOn or otherwise permitted by the

Securities Exchange Act.

DUring the fiscal year, the Commission

received 153 letters from exchanges proposing amendments involving over 500

rules and stated practices. The following

were among the more significant:

1. All the registered exchanges

adopted rule amendments which provide

for competitive commission rates on

public transactions, and several exchanges adopted rule amendments which

provide for competitive commission rates

on intra-member transactions. For further

discussion of competitive commission

rates, see Part I.

2. The American Stock Exchange

("Amex") and the PBW Stock Exchange

adopted rule changes which allowed the

establishment of odd-lot markets in U.S.

government debt obligations on the

respective exchanges.

3. The New York Stock Exchange

("NYSE") adopted rule changes which

Increased fees for persons who elected

to utilize the NYSE's arbitration tacrhnes

and also modified certain arbitration

procedures.

4. Most of the national stock exchanges

adopted rule amendments which extended their trading hours from 3:30 P M.

to 4:00 P.M. EST

5. The NYSE, the Amex, the Midwest and Pacinc Stock Exchanges

adopted rule changes which increased

the original and annual maintenance listIng fees paid to the respective exchanges

by companies which have securities

listed on those exchanges.

6 The NYSE, the Amex, and their

affiliated clearing corporations submitted

for Commission review rule changes

designed to Implement continuous net

settlement systems for the clearing of

exchange-listed securities. For a further

discussion of the development and operation of continuous settlement systems,

see Part I

7. The NYSE, the Amex and the Chicago Board Options Exchange adopted

minimum margin maintenance requirements for options earned by brokerdealers for their customers, as well as for

market makers, specialists or registered

traders for whom such broker-dealer

clear transactions on an exchange. The

rules of each of the three exchanges

dealt with margining uncovered options

and various spread or hedged option

positions.

EXCHANGE INSPECTIONS

NYSE Specialist Inspection

On June 19, 1974, the Commission's

staff wrote a letter to the NYSE to inform

It of the findings of an inspection of that

exchange's specialist surveillance and

stock allocation programs which was

begun with a VISit to the NYSE on May

29,1973.4

The letter summarized the DIVIsion's

conclusions with respect to (1) the

NYSE's use of the "New Measures of

Specralrst Performance" ("New Measures"), (2) the basis for judging specialist performance developed by the

New Measures, (3) the use of sampling

techniques, (4) the use of disciplinary

action in cases of poor performance, (5)

the allocation of securities to specrallsts

and (6) the need for more complete

minutes of NYSE Floor Committee meetinqs,

On June 16 and 17, 1975, the Commission's staff conducted a further on-site

inspection to review procedures adopted

by the NYSE in response to the staff

letter of June 19, 1974 In a June 26, 1975

letter to the NYSE, the Commission staff,

after noting that only preliminary results

from the inspection were then available,

67
expressed concern that the NYSE apparently dId not Implement procedures to

provide for more detailed and Informative

NYSE Floor Committee minutes until long

after the staff made the request In the

June 19, 1974 letter. In addrtron, the staff

noted that the mitral exchange efforts to

maintain more extensive records snit did

not reflect suttrcrent lnforrnatron about

stock allocation decisrons. The staff

stated that until quesnons relating to the

specialrst system were resolved satisfactorily, a number of procedures should

be adopted to better enable the NYSE

Board of Directors to Insure that the

current system of allocating stocks to a

partrcular specialrst urut was adrrurustered adequately.

More specrtrcally, the Commission's

staff suggested that a transcript be kept

of those portions of NYSE Floor Oomrruttee meetings which related to the allocanon or reallocation of stocks to or from

specralrst units or to proposed mergers

of such units. It was also suggested that

the entire record, including copies of all

memoranda and reports considered by

the Floor Committee regarding such

matters, be made available to the NYSE

Board of Directors along With the Floor

Committee's recommendations, and that

those recommendations be supported by

a statement of the factors the Floor Committee considered In concluding that a

particular unit, as opposed to any other

Units, should have stocks allocated to It.

The Dlvrsron also urged again that minorIty views be reflected. The Division further requested an early status report

regarding thiS interim action.

Chicago Board Options

Exchange Inspection

From August 19-22, 1974, members of

the Commission's staff Inspected various

aspects of the Chicago Board Options

Exchange ("caOE") options pilot program. The purpose of the Inspection was

to gain a general familiarity With the

operation of the CBOE's floor, including

tracing the handling of an order from the

time of receipt on the floor through ItS

being filled and printed on the transac68

tion tape. The Oornrnlssron's staff noted

the crowded conditions of the CBOE floor

and reviewed with CBOE ottlcrals their

plans for a new trading floor. In accordance With those plans, the CBOE moved

durinq the frscal year to a new, greatly

enlarged floor which opened for options

trading on December 2,1974.

The Oornrmsslon's staff also took note

of problems relating to the reporting of

options transactions and the inability of

Investors to obtain quotations and last

sale data With respect to options transactions. Followinq the Oomrmssron's inspection, the CBOE installed high speed lines

for reporting transactional data and,

along With the Amex, engaged the Securities Industry Automation Corporatron as

a central processor for that data. As a

result of the CBOE's corrective measures,

slqrnncant progress has been made toward resotvinq the problems relating to

the reporting of transactional information

and obtaining quotations and last sales

data

The Cornrnisston's staff also Inspected

CBOE's floor surveillance program. DurIng that Inspection, the staff observed the

CBOE's Innovative system of usmq "post

coordinators" to monitor the performance

of market makers. Under the CBOE's

morutorinq system, post coordinators

stand at each trading post located on the

floor of the exchange to Insure that bids

and offers are properly recorded and to

detect and report possible violations of

exchange rules In the trading crowd. The

Commission's mspection group Informally

recommended expansion of the post coordinator function; because of staff problems, however, the CBOE substantially

eliminated the surveulance role of these

rndrvrduals. At the end of the fiscal year,

the Comrrusslon's staff planned to hold

further diSCUSSIons WIth ofhcials of the

CBOE about reinstating the post coordinator inspection system. In connection

with the CeOE's floor surverllance, the

Cornmrsston's staff recommended, and

the CBOE instituted, a floor members'

discrplmary action bulletin to descnbe

actron taken by the BUSiness Conduct

Cornrruttee of the CBOE for VIolations of

floor practice rules and to keep ItS floor
members abreast of the conduct proscribed by the CBOE.

American Stock Exchange

Options Program Inspection

On April 1 and 2, 1975, members of the

Commission's staff conducted an inspection of certain aspects of the Amex pilot

program for listing and trading call options. Special emphasis was given to an

examlnatron of the Amex's market surveillance of options trading, Its surveillance of registered options traders and

options specialists, and observation of

options trading as conducted on the exchange floor. The Commission's staff

also examined the Amex's methods for

conducting Inquiries into such matters as

unusual trading activity and/or vrolatrons

(if any) of exchange rules of policy.

Partly as a result of tms Inspection, the

Commission's staff recommended that the

Amex elaborate upon the responsibilities

of floor members in assisting the specialist in his options market-making capacity.

The Amex responded that it would again

inform all parties, i.e., registered traders,

specialists, and floor brokers, of their

obligations In that regard.s Furthermore,

through a special exchange bulletin on

this subject sent to its floor members, the

Amex outlined ItS policies concerning the

responsibilities of those mernbers."

Preliminary Inspection of

Contemplated PBW Option Pilot

On June 23 and 24, 1975, the Commission's staff conducted a preliminary inspection of the PBW Stock Exchange,

Inc. ("PBW") pilot program for trading

call options. The mspectron was conducted during the PBW's test simulation

program, before the actual initiation of

trading. The staff paid particular attention to the adequacy of exchange facilities

and market surveillance systems. The

Commission's staff found two possible

Impediments to future expansion of the

PBW's option pilot. The first was that the

use of a manual floor display of market

quotations on a chalkboard rather than

on a cathode ray tube might prove to be

inefficient In a period of heavy trading.

Secondly, the staff questioned whether

presently available floor space could

accommodate additional option classes

beyond the 10 initially authorized NYSElisted common stocks. These matters

were to be discussed with PBW officials

early in the next fiscal year.

SUPERVISION OF NASD

The Securities Exchange Act provides

that any association of brokers or dealers

may be registered with the Commission

as a national securities associatron If It

meets the standards and requirements

for the registration and operation of such

assocrations contained In the Act. The

Act contemplates that such associations

will serve as a medium for self-regulation

by over-the-counter brokers and dealers.

In order to be eligible for registration, an

association must have rules desrqned to

protect Investors and the public Interest,

to promote just and equitable princrples

of trade and to meet other statutory requrrernents, Registered national securities

associatrons operate under the Commission's general supervisory authority,

which Includes the power to review disCiplinary actions taken by an aSSOCiatIOn,

to disapprove changes In associatron

rules and to alter or supplement rules

relating to specrtied matters The National

Association of Securities Dealers, Inc.

("NASD"), IS the only assocratron registered with the Commission under the

Act.

In adopting legislation to permit the

forrnatron and registration of nationat

securitles assocratrons, Congress provided an incentive to membership by

permitting such associations to adopt

rules which preclude any member from

dealing With a nonmember broker or

dealer except on the same terms and conditions and at the same prices as the

member deals with the general pubhc.

The NASD has adopted such rules. As a

practical matter, therefore, membership

IS necessary for profitable participation

In many underwntlnqs, since members

properly may grant only to other members

price concessions, discounts and similar

69
allowances not granted to the general

public.

By the close of the fiscal year, the number of NASD firms had declined by almost

11 percent from the previous year, leavIng 2,991 members, a net loss of 327

members dunnq the year This loss reflects the net result of 158 adrrussrons to

and 485 terrrnnanons of rnembershrp. The

number of members' branch offices decreased by 224, to 5,924 as a result of

the opening of 834 new offices and the

closinq of 1,058. The reduction In the

number of members and branch offices

and the consolidation of others resulted

generally In larger and better capitalized

orgamzalJons. During the fiscal year, the

number of reqistered representalJves and

prrncipals (these categories Include all

partners, officers, traders, salesmen and

other persons employed by or affiliated

with member nrrns In capacities which

require reqrstratton) decreased by 9,393

to 197,702 as of June 30, 1975. ThIS decrease reflects the net result of 14,011

inItial registrations, 19,527 re-reqistranons

and 42,931 terrrunanons of registration

during the year

DUring the trscal year, the NASD administered 40,576 quanncanon examinations of which 21,799 were for NASD

qualification, 3,052 for the Commission's

SECD program 7 and the balance for

other agencies, including major exchanges

and various states

NASD Rules

Under the Securities Exchange Act, as

In effect before the enactment of the 1975

Amendments, the NASD was required to

file for Commission review copies of proposed rules or rule amendments 30 days

prior to their proposed effectiveness."

Any rule changes or additions may be

disapproved by the Comrrusaron If It finds

them to be inconsistent with the requirements of the Act Generally, the Commrssron also reviews, In advance of

publlcatron, general policy statements,

drreotrves and mterpretatrons to be

Issued by the Board of Governors pursuant to the Board's power to adrruruster

and Interpret NASD rules

70

During the fiscal year, numerous

changes in or additions to NASD rules

were submitted to the Commission for ItS

consrderatrcn. Among the major filings

which were not disapproved by the

Commission were.

1. Amendments to Schedule D of the

NASD's By-laws relating to the Initial

standards for mclusron of secuntles In

the NASDAQ system. The minimum number of shareholders was reduced from

500 to 300 It had become Increasingly

difficult for new Issues to meet the higher

500 shareholder test because of the

emphasis within the Industry on the practice of holding securities in "street name."

At the same time the price of the security

was eliminated as a criterion for inclusion

in NASDAQ. This major liberalization of

the requirements was made because It

was felt that the safeguards that are imposed by other applicable NASDAQ Criteria, such as the Section 12(g)( 1)

registration 9 and the assets and net

worth standards, as well as the NASD's

continuing and Improved market surveillance programs, are sufficient to prevent

the various abuses at which the price

criterion was aimed.

2. Amendments to Schedule D of the

NASD's By-laws to provide for the elrrrunanon of the minimum bid quotation requirements for Issues on the National lists for

over-the-counter secuntrss published In

newspapers and other media. The principal effect of trus amendment was to

allow the NASD, in face of lower market

prices during the past two years, to continue to utilize available newspaper space

for the Natronal LIsts.

3. Amendments to Schedule C of the

NASD's By-laws providing for the establishment of new NASD qualification

examinations for representatives engagIng In general secuntres activities. In

order to upgrade the qualification standards for secunnes industry personnel

and to develop tests surted to specific

categories of persons, the NASD, along

with the NYSE, developed a new comprehensive examination for general

securities representatives. The examrnanon consists of two 125 question parts

and IS given In separate three-hour ses-
srons, The examination IS divided Into

four subject matter areas: Industry Regulation and Brokerage Office Procedures,

Product Knowledge, Financial and Security Analysis, and the Servicmq of

Accounts. In addition, the NASD IS developing separate examinations, which

would be given In lieu of the new general securities examination to individuals

selling only special types of securities

such as mutual funds, variable life and

annuity contracts, or limited partnership

interests.

4. Amendments to Schedule A of the

NASD's By-laws providing for an Increase

In the gross income assessment rate for

member firms, and for a special service

charge for qualrtrcatron examinations administered by the NASD In its foreign test

centers. The gross income assessment

levy is a. means used by the NASD to

provide for the equitable allocation of

dues among its members to defray reasonable expenses of administration The

service charge for foreign test centers

was Imposed to cover the additional

expenses Involved In administering such

a program.

5. Amendments to Schedule G of the

By-laws governing the reporting by members of over-the-counter transactions In

listed securities to the consolidated tape,

and amendments to the By-laws, Operating Rules and Interim Rules of the National Clearing Corporation were adopted

to facilitate reportmq.t?

NASD Inspections

During the fiscal year, the Commission's staff Inspected the NASD's district

offices in Philadelphia and Chicago, and

commenced an inspection of the operations of ItS NASDAQ and Market Surveillance Departments located In ItS

Washington headquarters office Those

inspections were conducted as a part of

the Commission's oversight responsibilities to assure that the NASD IS properly

carrymq out ItS self-regulatory functions,

and to coordinate with the NASD in

regulating and enforcing activities in the

over-the-counter markets.

The district office lnspectrons Involved

a review of (1) the composition and effectiveness of the District Committees, the

District Business Conduct Committees,

examination subcommittees, nominating

committees and quotations committees;

(2) the functioning of the district staffs,

especially their working relationships with

the various committees; (3) the district

staffs' coordination and cooperation with

the Commission's reqional otnces, exchanges and other interested regulatory

bodies; (4) the effectiveness of drscrpunary procedures; and (5) the need, If any,

for new rules or amendments to existing

rules, policies or interpretations. The

Inspection of the operations of NASDAQ

and Market Surveillance Departments involved a review of similar areas of concern, with particular concentration on the

effectiveness of the NASDAQ regulatory

procedures necessary to protect and

promote a fair and orderly marketplace

The rnspectron of the NASD's Philadalptua district office revealed several

areas of concern which the staff felt

merited further discussion with representatives from the NASD's headquarters

office. Spectflcally, the staff noted problems In the totlowmq areas: (1) delays In

the preparation and subsequent processIng of formal complaint actions against

firms and rndrvrduals, (2) the adequacy of

follow-up inquiries based on notices received py the NASD of registered representative terminations of employment

with member firms; and (3) a lack of

communications with the Commission

concerning possible securrties acts

violations

These matters were discussed with

representatives of the NASD In response

to the problem of timely processing of

formal complaint actions, the NASD has

made personnel changes In the Philadelphia district and added an attorney to the

district staff to help in reducrnq backlogs.

In response to the other problems, the

NASD has Indicated to the Commission's

staff that greater depth would be sought

''1 the future with respect to the handling

of registered representative termination

notices and matters for referral to the

Commission concerning possrble securities acts vrolanons

71
An inspection of the NASD's Chicago

district office also revealed certain areas

of concern warranting drscussron with the

NASD's headquarters office. Specifically,

the staff noted problems In the following

areas: (1) possible over-representation of

exchange-oriented firms on the District

Committee; (2) some delays In the preparation of formal complaint actions and In

the writing of District Busrness Conduct

Committee ("DSCC") decrsrons against

firms and indrvrduals: (3) Imposition by

the DSCC of apparently insufficient sanctions In certain cases, (4) delays by the

staff In presentation of disciplinary matters to the DSCC In several Instances;

(5) a continuing reluctance on the part

of the District to utilize the Letters of Admrssron, Waiver and Consent 11 procedure

In appropriate cases In accordance With

headquarters policy; and (6) a possrble

need for more frequent DSCC meetings In

order to provide for more ettrcient disposition of ItS disciplinary caseload.

While a report on these findings tias

been prepared and the Commission's staff

sent a preliminary letter to the NASD,

these matters have not yet been discussed In detail With NASD representatives. A meeting With the NASD Will be

scheduled for early in the next fiscal year.

NASD Disciplinary Actions

The Oornrmssron receives from the

NASD copies of ItS dactsrons In all cases

where disciplinary actron IS taken against

members and persons assocrated With

members. Generally, such actions are

based on allegations that the respondents Violated specttred provisions of the

NASD's Rules of Fair Practice. Where

Violations by a member are found, the

NASD may Impose such penalties as

exputsron, suspension, fine, or censure.

If the Violator IS an mdrvidual, his registration With the NASD may be suspended

or revoked, he may be suspended or

barred from being associated With any

member or he may be fined and/or

censured.

DUring the past fiscal year, the NASD

reported to the Cornrrnssron ItS final dis72

position of 486 disciplinary complaints In

which 330 members and 553 rndrvrduals

were named as respondents. Complaints

against 23 members and 53 individuals

were dismissed for failure to establish

the alleged violations. Forty-stx members

were expelled from membership and 24

members were suspended for periods

ranging from one day to one year. In

many of these cases, a fine also was Imposed. In 210 cases, members were fined

amounts ranging from $25 to $50,000 and

In 27 cases members were censured. In

discrplmary sanctions Imposed on individuals associated With member firms,

142 persons were barred or had their

registrations revoked and 91 had their

registrations suspended for periods rangIng from one day to eight years. In

addition, 243 other mdrvicuats were censured and/or fined In amounts ranging

from $100 to $50,000.

Review of NASD Disciplinary

Actions

DIsciplinary action taken by the NASD

IS subject to review of the Oornmlsaron

on ItS own motion or on the timely application of any aggrieved person. In those

cases reViewed by the Commission before the enactment of the 1975 Amendments, the effectiveness of any penalty

Imposed by the NASD was automatically

stayed pending Comrmssron review,

unless the Commission otherwise ordered

after the notice and opportunity for hearIng}2 If the Oornmissron found that the

disciplined party committed the acts

found by the NASD and that such acts

Violated the specified rules, the Comrnissron was required to sustain the

NASD's action unless It found that the

penalties Imposed were excessive or

oppressive, In which case It was required

to reduce them or set them aside,

At the beginning of the fiscal year, 26

proceedings to review NASD dlecrplmary

decrsrons were pending before the Commission and, dunnq the year, 16 additional cases were brought up for review.

The Oornrmssron disposed of 11 cases.

In SIX cases the Commission affirmed the

NASD's action and In two other cases
dismissed the appeal because of respondent's failure to file a brief. In two

cases, the NASD's findings and/or penalties were modified and In one case the

NASD's action was set aside. At the close

of the fiscal year, 31 cases were pending.

In Thomas E. Jackson,13 the Cornrnrssron, affirming the NASD, held that a

registered representative can be dlscrplrned for conduct not arising directly

out of securities actrvmes. Jackson was

charged with violating the requirement of

the NASD's Rules of Fair Practice that

members and associated persons adhere

to "high standards of commercial honor

and just and equitable principles of

trade",14 because he forged the signatures on applications for Insurance in

order to obtain commissions to which he

was not entitled. The Commission held

that Jackson's conduct obviously did not

meet such standards.

The Oommlssron cited the 1938 Maloney Act amendment to the Securities

Exchange Act, which provided for the

voluntary reqistratron of self-regulatory

associations of secunnes brokers and

dealers and sought to eliminate abuses

and up-grade standards of conduct In the

over-the-counter markets by setting up

a system of self-regulation. Such associations were to provide rules designed to

prevent fraudulent and manipulative acts

and practrces, to promote just and equitable principles of trade and In general,

to protect Investors and the public interest. The Oornrnlssron saw no reason

why the NASD should be precluded from

carrying out Its mandate to protect its

members and their customers against a

repetition of the kind of conduct in which

Jackson engaged. In addition, the Commlssron noted that although Jackson's

wrong-doing in this Instance did not involve securities acnvmes, the NASD could

Justifiably conclude that on another occasion it might.

In Livada Securities CO.,15 the Comrmssion affirmed the NASD's findings that

the respondent violated the net capital

rule and failed to prepare and maintain

proper books and records. It sustained

the fine Imposed by the NASD despite the

respondent's contention that the penalties were excessive In light of various

mitigating circumstances, t.e., the violanons were Inadvertent and attributable

In part to respondent's inexperience and

there were no customer losses. The Comrrussron observed that the Issue before

It was not whether it would have Imposed

the same sanctions as the NASD, but

whether the penalties Imposed were excessive or oppressive, having due regard

for the public Interest The Commission

stated that It was in full accord with the

NASD's stress on the Importance of a

firm's compliance with the net capital and

recordkeepmq requirements. The Commission emphasized, furthermore, that

the net capital rule, which was designed

to assure financial responsibility of brokers and dealers, has been described as

"one of the most Important weapons in

the Commission's arsenal to protect investors," 16and that accurate and current

records are essential to enable a brokerdealer to determine compliance with net

capital and other requirements.

Review of NASD Membership

Action

Before the enactment of the 1975

Amendments, the Securities Exchange

Act and NASD By-laws provided that,

unless approved by the Commission, no

broker or dealer could become or continue to be an NASD member If It or any

person associated with It was subject to

specified dlsabllltres.!" Commission action

to approve or direct the admission of a

person to membership in the NASD, or

the continuance of membership of any

person, IS generally sought after an initial

petition to the NASD IS made by the

member or applicant for membership.

The NASD in ItS discretion may then file

an application with the Commission on

behalf of the petitioner. If the NASD refuses to sponsor the application, the

broker or dealer may apply directly to the

Ocrnrnisston for an order directing the

NASD to admit It to, or to continue it In,

membership. At the beginning of the fiscal

year, four applications were pending before the Commission. During the year,

seven applications were filed, five were

73
approved and two were withdrawn, leavIng four applications pending at the end

of the year. All of the applications were

filed by the NASD

NASDAQ Issuer Removal

On March 13, 1975, the Commission

Issued an order dismissing review proceedings on an application for review by

Tassaway, lnc.J" a publicly held company

whose common stock was removed from

the NASD's automated quotation system

("NASDAQ"),19 because the issuer failed

to maintain at least $250,000 In capital

plus surplus, as required by NASD rules

Tassaway's application under Securities

Exchange Act Rule 15AJ-2 for review of

ItS removal from NASDAQ was the first

ever made to the Commission by a

NASDAQ issuer. Tassaway conceded ItS

failure to meet NASDAQ's numerical

qualitative test 20 but argued that a proposed acqulsmon would, when consummated, give It more than enough capital

to meet NASDAQ's capital test. In view of

the fact that the acqursmon agreement

was rescinded dunnq the pendency of

the appeal, the Commission ordered that

the proceeding be dismissed.

Since this was the Commission's first

such appeal, however, It took the opportunity to state the basic standards by

which It would be gUided when asked to

review the NASD's actions With respect to

access to NASDAQ. The Ccrnmlsston expressed the view that the NASD's role In

NASDAQ IS, In essence, the same as that

of exchanges With respect to the listing

and dellstrnq of securities and, citing

prior decrsrons on the latter subject, the

Commission concluded that the governing

legal standards should be the same, I.e.,

(1) though exclusion from the system may

hurt exisnnq Investors, primary emphasis

must be placed on the Interest of prospective future Investors 21; (2) the Commission's review function IS solely that of

determining whether "the specrtrc grounds

on which the action of the self-regulatory

organization is based exrst In fact and

are In accord With the applicable rules

of the association", and (3) to the extent

that discretion enters Into the matter,

74

the Cornmlsston IS not at liberty to substitute Its discretion for that of the NASD.

EXPENSES AND OPERATIONS

OF SELF-REGULATORY

ORGANIZATIONS

The year 1974 was a poor one for the

secunnes markets In general, and the

major self-regulatory organizations suffered financially as a result.22 The high

national rate of inflation seems to have

been a primary Influence on the markets

during the year.

In an inflationary period, It can normally

be expected that expenses, such as

wages and salaries, Will rise in accord

with the general inflation rate; and durIng 1974 ttus was the case with the NYSE

and the NASD, whose expenses are

heavily weighted With personnel costs, as

might be expected of a regulatory body.

Many industries, however, pass on these

Increased costs through higher prices for

the goods and services they market. The

secunties Industry, however, IS almost

totally a service Industry and must finance

ItS self-regulatory effort very largely

through fees and assessments levied on

persons engaged In the business. Its

revenues, in turn, depend upon, and

fluctuate With, the price and volume levels

of the secunnes being marketed. The

self-regulatory organizations, whose revenues must depend, in the final analysis,

on the profitability of their member firms

were caught in the middle. Their revenues

declined while their expenses were increasing In line With the high rate of

inflation.

Cost-cutting measures were introduced

by most self-regulatory organizations to

meet this problem; nevertheless, particularly in the case of the NYSE and the

NASD, those measures were not fully

adequate because of their need to meet

on-going and increasing regUlatory and

surveillance responsibilities.

Total share volume of secunties traded

on all national securities exchanges and

over-the-counter continued to decline In

1974, amounting to approximately 6.0

billion shares In 1974 as compared With

7.4 and 8.5 billion shares In 1973 and
1972, respectively. As a group, the selfregulatory organizations' combined total

revenues declined to $173 mrlnon in 1974

from $180 million In 1972, as a result

mostly of the decrease In trading volume.

Communication fees, however, rose from

$19 million to $21 million, and revenue

from depository fees Increased by $3

million pnmanly because of the activity

of a newly formed Midwest Stock Exchange subsidiary, the Midwest Stock

Trust Company. Changes In various other

revenue components were as follows.

Revenues on transactions fees declined to $24 million from $29 million;

Revenues on listing fees declined to

$25 rrullron from $26 million;

Revenues from cleanng fees declined

to $30 million from $36 million;

Revenues from tabulating services

declined to $11 million from $12 million; and

Revenues from all "other" sources

increased to $39 million from $38

million because of an Increase In

membership dues 23

Thus, the self-regulatory organizations

as a group suffered a net loss of $1.1

million (before taxes) In 1974 as opposed

to net Income of $2.2 million and $18.9

million In 1973 and 1972, respectively In

the first SIX months of 1975, however, the

situation Improved In line With the increased market activity, resulting In net

income before taxes of $12.1 million.

Financial Results of the NASD

Each year the Commission reviews the

NASO's proposed fee and assessment

schedule, ItS supporting financial statements for the current and past fiscal

years, and proposed budget for the following fiscal year. The fee and assessment schedule is filed pursuant to Section

15A of the Securitres Exchange Act, which

requires the NASO to have an equitable

allocation of dues among ItS members to

defray reasonable expenses of administration.

The NASO's statement of financial reSUlts for ItS fiscal year ended September

3D, 1974, revealed that the NASO's equity

declined to $7.8 million from $8.4 million

the year before. The decline In equrty

resulted from lower net operating earnIngs and a larger loss Incurred by the

National Clearing Corporation, the

NASO's wholly-owned clearing Subsidiary,

which was charged to NASO earnings.

Operating revenues of the NASO declined by $0.5 million to $12.2 million, a

decline ot 4%. This reduction In income

was brought about by two major factors.

First, a major source of revenue, fees

charged for administering qualification

exarmnatrons given pnnclpally to mdivrduals entenng the business, declined

25%, to $3.1 million in fiscal year 1974,

versus $4.1 million In fiscal year 1973.

The number of examinees declined from

72,598 In fiscal year 1973 to 47,212 In

fiscal year 1974. Secondly, because of

poor market conditions, the number of

firms haVing public offenngs declined

Significantly. The total dollar value of

public offerings in which NASO members

participated fell to $8.65 billion from

$14.1 billion In fiscal year 1973, a 53%

decline. Thrs decline caused a drop In

NASO fees for underwntmq arrangements

filed With it for review during the NASO's

fiscal year. Other NASO revenues were

stable, except for a new revenue source

that went Into effect on June 1, 1974-

the NASOAQ Issuer fee, which brought In

$0.7 rnillron.

Operating expenses of the NASO

dropped by $0.2 million (to $12.1 million

In the NASO's 1974 fiscal year from $12.3

million In its 1973 fiscal year) largely as

a result of vanous cost-cutting measures

taken by It. Thus, the decreases In operatIng revenues and expenses resulted In

net operating Income of $0 1 million as

opposed to $0.4 million In the prior year,

down but stili POSitive, until the net NCC

loss of $0.7 million ($0.3 million In the

NASO's 1973 fiscal year) IS taken Into

account.s- ThiS addrnonat expense put

the NASO In a net loss posrtron of $0.6

million In ItS 1974 fiscal year as opposed

to a profit of $0.1 million In fiscal year

1973.

More recently, the high trading volume

for the first six months of 1975 resulted

in higher gross revenues and net income

75
for the NASD Over that six-month period,

both revenues and net Income before

taxes gradually Increased, providing a

January-to-June gross revenue In excess

of $10 million. Expenses, on the other

hand, remained relatively stable dunnq

this period, resulting In net Income of

$0.6 million for the period.

NASD Budget

The review of the NASD budget IS conducted as a part of the Commission's

regulatory oversight responsibilities, and

dunnq the past two years the Commission

has been concerned very largely with the

program for examination of member

broker-dealers to assure that the NASD

has a sufficient examiner staff to carry

out ItS enforcement and surveillance

responsibilities.

In addition to ItS usual budget subrrussron, In September 1974, the NASD submitted a "Personnel BUdget Study",

which outlined the NASD's projected staff

requirements for ItS fiscal year ending

September 30,1975 That study concluded

that a total of 168 field examiners, not

Including those needed to staff such departments and sections as Internal Review and Anti-Fraud, were needed to

complete the 1975 exarnmanon program.

Selective reductions of certain professronal and clerical positions, as recommended In that study, were made to

reduce the total authorized field staff

from 349 In the NASD's 1974 fiscal year

to 285 In ItS 1975 fiscal year. That was a

net budgeted decline of 64 positrons (47

professional and 17 clerical) With respect

to field staff then on board, however, the

study had recommended a reduction In

force of only 34 positrons (22 professional

and 12 clerical)

The recommended reduction was a

marked change from a 1973 NASD

personnel bUdget study, which had indicated that the examination program for

1974 would require 213,373 examiner

man-hours for completion. The 1974 study

concluded that the fiscal year 1975

examination program would require only

156,058 man-hours for cornplenon. Several factors accounted for that projected

76

decrease in staff. First, the number of

firms In the association's highest priority

category, i.e., member firms doing a general securities business whose only affiliation with a self-regulatory organization

IS the NASD, dropped appreciably during

the year (from 1,208 in 1973 to 1,010,

or a decrease of 198 firms). That decline

resulted In a "saving" of 15,246 examination man-hours, or 26.6% of the total

1973-1974 difference

Secondly, the reduction In required

man-hours for 1974 was partially the

outgrowth of positive enforcement programs In being since 1973, which resulted

In a decrease In the number of firms on

special survelliance,25 i.e., a decrease

from 90 firms In April 1973 to 48 In April

1974 That resulted in a saving of slightly

under 7,000 man-hours, or approximately

12% of the 1973-1974 difference

Additionally, since the Commission's

adoption of a rule about control of customers' secunties (Securities Exchange

Act Rule 15c3-3) In January 1973, the

staff of the NASD has encouraged members to operate pursuant to exemptions

afforded by that rule. The NASD estimates

that over 200 firms availed themselves of

such exemptions, which permitted a reduction In man-hours required for examination of such firms of approximately

8,500 hours, or 15% of the 1973-1974

difference. Also, the NASD eliminated the

three-year routine examination frequency

cycle for mutual-fund retailers, which reduced the workload by approximately

8,938 examiner man-hours, or 15% of the

difference.

Finally, estimates as to the required

amount of time for examination of different

categories of members were reVised In

the 1974 study. Those revrsrons were

based on actual experience gained over

the most recent eight-month period

through the use of the NASD's new timerecording system. That resulted in a

decrease of approximately 17,839 manhours, or 31.3% of the 57,315 man-hour

difference In the two studies.

Financial Results of the NYSE

In 1974, the NYSE had net operating
revenues of $0.66 million, on total revenues of $72.6 million, as compared with

net operating revenues of $3.7 million on

gross revenues of $78.0 rrullron In 1973.

In addition, the NYSE had a tax credit of

$221,000, equity In net revenues of the

Depository Trust Company of $552,000,

and a credit to capital of $990,000 from

initiation fees, for a total of $1.7 million,

resulting In an increase in equity to $62.8

million from $61.0 million in 1973. In the

prior year, the NYSE's equity had

increased by $4.5 mlllron.

As in the case of the NASD, declining

revenues as a result of poor market conditions for members In 1974 was the

primary reason for significantly lower

operating revenues, which decreased by

$5.3 million from the previous year to

$72.7 million, a decline of nearly 7%. A

decline in revenue from two sources

made up the bulk of this decrease. First,

charges on commissions declined by $2.0

million, to $17.0 million from $19.0 million

the previous year. This was a direct result

of reduced trading activity on the NYSEi.e., average dally volume fell from a

dally average of 16.1 million shares In

1973 to 13.9 million shares In 1974, a decline of 14%. Secondly, Initial listing fees

declined by $32 million, from $10.8 million In 1973 to $7.6 million In 1974. There

were only 48 new listings In 1974 as

against 98 In 1973 (which was also a

poor year for new listings). This loss In

initial listing fee revenue was offset In

part by an increase In continuous listing

fee revenue of $0.8 million. Thus, there

was a net decline of $2.4 million In total

listing fee revenue In 1974, to $18.9 million from $21.3 million in 1973. The NYSE's

other revenue sources, including commurucations charges and cleanng serVices, also yielded less In the aggregate,

declining by a total of $0.7 million.

Partly as a result of decreased activity

on the exchange and partly because of

cost-cutting measures, the NYSE reduced

ItS operating expenses by $1 7 million

(2.3%). The NYSE reduced expenditures

significantly In the following areas.

1. Reduction in leased tacrlrties and

equipment expenses by $1.6 million;

2. Elimination of the block automation

system, saving $2.2 mrtlron:

3. Reduction In legal expenses by $2.3

million;

4. Elimination of the NYSE's national

advertismq program, saving $1.5 million;

5. Reduction of staff 26 by a total of

280 people, saving $4.5 million; and

6. Reduction of other expenses by $1.0

million.

These savings were offset partially by

an salary Increases of $2.2 million.

Dunng the first SIX months of 1975 the

NYSE expenenced an Increase in total

revenues as share volume Increased from

388 million shares traded In January to

479 million shares traded In June. Expenses dunng thrs perrod were held to

$48 rmllron, producing a pre-tax net

Income of $8.4 million for the SIX months.

Boston Stock Exchange, Chicago

Board Options Exchange, and

Midwest Stock Exchange 27

In contrast to the NYSE and the NASD,

the Boston Stock Exchange ("BSE"), the

Chicago Board Options Exchange

("CBOE"), and the Midwest Stock Exchange ("MSE") expenenced increases

In revenues between 1973 and 1974. The

MSE Increase was caused pnmanly by

expansion of services offered to ItS members. The CBOE Increase was generated

mainly from cornrrussron charges on increased volume In listed option trading.

The BSE Increase was the result of a

general nse In all sources of revenue. Expenses also Increased dunng thrs penod,

resulting In a decline In net Income before

taxes between 1973 and 1974, except In

the case of the CBOE, which reduced ItS

losses In 1974 relative to 1973. Revenue

rntormatron for the MSE for the first five

months of 1975 showed an Increase,

dipping only slightly In June. Expenses

for the MSE during these SIX months were

relatively stable. MSE net Income from

operations for the first SIX months,

which fluctuated to some degree, totaled

$0.8 million. Likewrse, CBOE and BSE

expenenced greater revenues in the first

SIX months of 1975 Expenses for BSE

remained stable while those for the

CBOE rose because of higher salary costs.

77
Net Income for the first SIX months of

1975 was $0.2 million for the BSE and

$0.8 million for the CBOE

American Stock Exchange, Detroit

Stock Exchange, PBW Stock

Exchange and Spokane Stock

Exchange

The Amex, the Detroit Stock Exchange

("DSE"), the PBW Stock Exchange

("PBW"), and the Spokane Stock Exchange ("SSE") all experienced a decline

In revenues and expenses between 1973

and 1974, primarily because of low exchange volume and generally unfavorable

market conditions Nevertheless, the first

SIX months of 1975 showed a reversal of

the downward trend for these exchanges.

Only the PBW showrnq renewed signs of

decline In May and June Both the DSE

and the SSE showed steadily declining

expenses dUring the first half of 1975,

while PBW and Amex expenses experienced an overall upswing. Of those four

exchanges, only the SSE showed a loss

for the fl rst SIX months of 1975. The

Amex, DSE and the PBW had net Incomes

of $0.5 rnrltron, $4,000 and $0.3 rrullron,

respectively

Cincinnati Stock Exchange,

Intermountain Stock Exchange,

and Pacific Stock Exchange

The Cincinnati Stock Exchange

("CSE"), Intermountain Stock Exchange

("ISE"), and the Pacinc Stock Exchange

("PSE") all Increased their revenues and

decreased thei r expenses between 1973

and 1974. The revenue Increase for CSE

came primarily from listing fees and floor

usage revenues The slight rise In revenues for the ISE came entirety from rental

Income. The rise In revenues for the PSE

was due to Increases In member dues,

listing fees, and earnings from investments. The rise In revenues for those

exchanges caused all three to experience

Increases In net Income between 1973

and 1974.

DUring the first SIX months of 1975, the

CSE revenues and expenses varied consrdarably, resulting In a net loss for two

78

of the SIX months. The ISE experienced

declining revenues dUring the first SIX

months of 1975. ThiS, combined With

fluctuating expenses, resulted In losses

for four of the SIX months. The PSE on

the other hand, experienced an upward

movement In total revenues dUring the

first SIX months of 1975 Expenses for

the PSE also increased, but the Increases

did not prevent the PSE from operating

at a pront for the first half of 1975.

The combined revenues and expenses

of all the exchanges and the NASD for

the years 1972, 1973 and 1974, and for

the months of January through June,

1975, are presented In tables In part 9.

Revenue and expenses for each exchange and for the NASD for 1974 and

for the period January through June,

1975 are also shown in Part 9.

BROKER-DEALER REGULATION

Registration

Brokers and dealers who use the malls

or a means of interstate commerce In the

conduct of an Interstate over-the-counter

secuntrss busmess are required to reqrster With the Commisslon.28

As of June 30, 1975, there were 3,546

broker-dealers registered, compared with

3,982 a year earlier. This represents a

decrease of 436, or 10.9 percent, since

June 30, 1974. During the year, 709 registrations were terminated, of which 576,

or 81 2 percent, were WIthdrawn by the

broker-dealer and 133, or 18 8 percent,

were revoked or cancelled by the Commissron. During the year, 274 new

applications became effective, whrle 235

new applications were either Withdrawn,

returned, or denied.

On May 16, 1975,29 the comrntssron

announced the adopnon of Form U-3, a

uniform application for reqlstratron as a

broker-dealer under Section 15(b) of the

Securities Exchange Act and for the

amendment of that registration. Form U-3

replaced Form BD, but the desrqnatron

"Form BD" has been retained. The Comrmssion also announced adoption of

Form u-4, a urntorrn applrcatron for

registration of associated persons, which

will replace Form SECD-2.3o
In addition, Secunties Exchange Act

Rule 15b3-1 was amended to provide

that each registered broker-dealer be

required to file new Form BD (that IS,

Form U-3 as adopted) furnishing all required information at such time as the

broker-dealer's registration presently on

file requires amendment. In any case, a

new Form BD would be required to be

filed within 120 days after the effectIve

date of the amendment to Rule 15b3-1.

Paragraph (a)(3) of Securities Exchange

Act Rule 15b8-1 was amended to require

that any broker or dealer whose Form

SECD-2 becomes Inaccurate or incomplete for any reason file a Form U-4

Form U-4 would not have to be filed for

associated persons within any specified

time.

On July 10, 1975, the Commission postponed .the effective date of the new

forms and the amendments to the related

rules until October 1, 1975, and made

certain changes in the forms and rules,

including changes In Form BD required

by the 1975 Act Arnendments.»

Recordkeeping

On May 7, 1975,32 the Commission proposed amendments to a portron of Securities Exchange Act Rule 17a-3. Rule 17a3(a)(12)(A)(8) presently requires brokers

and dealers to obtain for each associated

person a record of any arrests, indictments, or convrctions for any felony or

misdemeanor, except minor tratnc offenses The Oornrmssron proposed to

amend Rule 17a-3(a)(12)(A)(8) to limit

the reference to arrests or Indictments

for crimes whrch were related to the safe

operation of the securities industry. The

rule WIll continue to require employers In

the securrtles industry to maintain records

of all convictions other than minor trattic

offenses of their associated persons

Financial Responsibility

On January 23, 1975,33 the Comrrusston

announced that it had under consrderation a proposal to amend Secunties Exchange Act Rule 15c3-2. Presently Rule

15c3-2 prohibits a broker or dealer from

usmq customer free credit balances In tus

business, unless the customer IS given

notice at least once every three months

informing him of the sum due and that

such funds. (1) are not segregated; (2)

may be used In the operation of the

broker-dealer's business. and (3) are

payable upon demand With the adoption of Securitres Exchange Act Rule

15c3-3,34 which limits the extent to

which a broker-dealer can use customer

funds or secuntres In the operatron of hrs

busrness, the drsciosures required by

Rule 15c3-2 are no longer appropriate

Rule 15c3-3 permits the use of customer

funds only In limited areas of the brokerdealer's business relating to the renderIng of services to customers. Funds not

used In those limited areas are required

to be deposited In a "Special Reserve

Bank Account for the Exclusive Benefit of

Customers."

The proposal to amend Rule 15c3-2

would require any broker or dealer subject to the Rule to send to ItS customers a

quarterly statement of account reflecting

any money balances held for the customer's account, securities positions and

secunties transactions In the customer's

account. The proposed amendments

would further require a broker or dealer

to disclose, among other things, that

customers' free credit balances and fullypaid securmes are available to customers

In the normal course of business operations following demand and that the

broker or dealer may use any customers'

free credit balances left With It In the

business of such broker or dealer except

as limited by Rule 15c3-3 The Commission IS presently considering the comments received on the proposed rule

Broker-Dealer Examinations

DUring the past few years the Commission has continued to ernphasize the

Importance of a strong requlatory program aimed at Improving and raIsing the

regulatory standards In the industry, informing all registered broker-dealers of

therr responsibrlmes and, where appropriate, detecting infractions and deviations from the regulatory rules and

79
standards which have been established to

protect the investing publrc The Commission IS aided In ItS efforts by examiners who are employed by the various

self-regulatory organizations and who

carry out exarmnatrons, inspections and

related functions A result of that effort

has been a substantial decrease In the

annual Incidence of losses of funds or

securities to the customers of falling

brokerage firms requiring the assistance

of the Securities Investor Protection

Corporation ("SIPC"), while more and

more firms which find It necessary to

leave the securities business are liqurdating In an orderly tashron Without loss to

customers or creditors."

The Commission's Office of BrokerDealer Examination Program, recently

redesignated as the Office of BrokerDealer Compliance and Examination, In

the Divrsron of Market Regulation, IS

charged with carrying out the Commission's program to Insure compliance by

broker-dealers With applicable rules

relating to supervrsron, sales practices,

trading practices, suttabilrty, books and

records, financial responsibility and other

related activities. During the past fiscal

year, the Office of Broker-Dealer Compliance and Examination has expanded

ItS efforts to Insure that the secuntres

Industry has an up-to-date, comprehensive early warning and surveillance

system and examination and examiner

training programs

Early Warning and Surveillance

The Commission IS responsible for the

financial and operational soundness of all

registered broker-dealers and members

of self-regulatory orqaruzations In thrs

connectron, pursuant to secnon 5(a) of

the Securities Investor Protection Act of

1970 (the "SIPA Act"), the Commission

requires monthly or more frequent earlywarnang lists from each self-regulatory

orqaruzanon Identifying member nrms

whrcn may be In or approaching financial

difficulty or whrch may require closerthan-normal surveillance for any reason.

Ttus information IScollected on a monthly

basis and sent It to the appropriate Com80

mission regional office for Verification. A

continuing monitoring program With

respect to firms on the early-warning list

IS subsequently undertaken In cooperation With the self-regulatory organizations.

Other Commission early warning and

surveillance tools used during the fiscal

year Included (1) Secuntres Exchange

Act Rule 17a-11, which requires a brokerdealer to notify the Commission If it

breaks through certain specified financial

or operational parameters, (2) Securities

Exchange Act Rule 17a-5(j), which requires a broker-dealer. to notify the

Commission If ItS exemption from the

Commission's net capital rule has ceased

because It no longer IS a member of a

national securities exchange; and (3)

Securities Exchange Act Rule 17a-1O,

which requires a broker-dealer to file

Form X-17A-10 annually With the Comrnlssron. The Commission continues to

monitor these programs, although some

or all of them may eventually be incorporated Into the Financial and Operatronal Combined Uniform Single (FOCUS)

Report Program being developed for the

Industry by the Report coordinating

Group.

The Commission periodically reviews

through on-site mapections and an-house

studies the early warning surveillance

tools of the self-regulatory orqanizations

to Insure that they constitute sound,

effective programs which will enable

each orqaruzatron at the earliest possible

time to detect and monitor member firms

which are an or approachang financial

difficulty.

DUring the past fiscal year, the Commission's staff conducted on-site inspecnons of the early warning and surveillance programs of the CBOE, Boston

Stock Exchange, Midwest Stock Exchange, and PBW Stock Exchange; it

completed on-site inspections of the

Amex, the NYSE and the Pacific Stock

Exchange in the previous fiscal year. In

addition, the Commission's staff reviewed

the programs of the NASD, as Implemented by ItS district offices located in

Philadelphia, Cleveland, New York,

Chicago, San Francrsco and Atlanta.
The various self-regulatory orqaruzations have primary responsibility for examining their members with respect to

compliance with the applicable financial

responsibility rules. With respect to firms

not belonging to any self-regulatory

organization (SECO firms), the regional

office having JUrisdiction IS responsible in

the first instance for compliance monitorIng The responsibilities of a principal

examining authonty, and of the Commission's regional offices In the case of

SECO firms, Involve routine examinations

of the broker-dealers or when necessary.

The regional offices, In addition, conduct

oversight examlnatrons of member firms

In furtherance of the Commission's early

warning and surveillance efforts.

The Commission's program for exarmnIng the self-regulatory organizations has

two phases Through the first phase, onsite Inspections of the self-regulatory

orqaruzatrons, the Commission's staff

reviews and attempts to strengthen,

where necessary, their exarrunatron, early

warning, surveillance and training programs, while at the same time evaluating

and defining the goals, pollcies, procedures, design, budget and staffing of

those programs. DUring the past two

fiscal years, the staff has conducted

Inspections of all eight major selfregulatory organizations and, dunnq the

past fiscal year, 13 out of the 14 district

offices of the NASD In order to evaluate

and, where appropriate, to recommend

Improvements in the scope and desrqn of

each of those programs.

While It IS Important for the Commission to review at a national level the

system and desiqn of the examination

programs of the self-regulatory orgamzanons and to recommend that those programs be strengthened where appropriate,

the second phase of the Commission's

examination program, the direct examination of the members of the self-regulatory

organization, IS the entreat element of the

examination program. Among other reasons, the proximity of the Cornrnisston'a

regional offices to the members being

examined puts them In the best position

to judge the effectiveness of the selfregulators' examination programs and to

ascertain whether the stated pohcres and

procedures of the national offices of the

self-regulatory organizations are being

Implemented. The regional offices' overSight programs Involve (1) examinations

of member firms to determine whether

such firms are In compliance With the

federal securities laws, and (2) concurrent reviews of the reports and working

papers of the latest examinations performed by the various self-regulatory

organizations of their members to determine whether the self-regulators' examination programs are thorough and

effective.

In addition to oversight exarmnattons,

the Commission's regIonal offices conduct cause examinatrons and SECO

examinations. Cause examinations usually result from a complaint received by a

customer or another broker-dealer and

are usually limited to the SUbject matter

of the complaint. The examiner may,

however, enlarge the scope of the examination If he believes that the firm's

operations warrant further study

The regional offices have established a

regular examination cycle In wtuch each

SECO broker-dealer IS examined 30 to

60 days after It becomes registered With

the Commission and on an annual basis

thereafter. Such examinations are usually

routine examinations covering all aspects

of a broker-dealer's operations. Other

exarnrnatron goals of the regional offices

are to conduct oversight examinations of

at least five percent of the members of

each self-regulatory orqaruzatron in their

region.

The Oornmrssron headquarters rnorutors

the examination activities of the regional

offices, meeting With the regional office

examiners on a quarterly baSIS to review

the effectrveness of the examination program.

Of great assistance to the self-regulatory

organizations, and to the Oornmrsston In

the case of firms which are members of

more than one such organization, has

been the designation, formerly made by

SIPC, but now made by the Oommrssron

as a result of amendments to Section 9(c)

of the SIPC Act effected by the 1975

Amendments, of one regulatory orqarnza81
tion In each case to serve as that firm's

pnncrpat examining authonty for compliance with the financial responsibility

rules

Another step toward eliminating duplication of effort has been the Commission's development of a monthly

exammation report which It transmits

both to ItS regional offices and to any

self-regulatory organization which requests It The report IS a cornpuation of

all examinations of all broker-dealers

conducted dunng the previous twelve

months by either a regional office of the

Commission or a self-regulatory organization. This report has aided the regional

offices and the self-regulatory orqarnzanons In avoiding duplicative examinations.

In fiscal year 1975, the Commission's

regional offices conducted a total of

1,071 broker-dealer exarmnanons, which

exceeded by 14% the year's total examination goal of 942. Of the 1,071 examinations

conducted, 449 were oversight examinations, 426 were cause examinations and

196 were routine examinations (mostly of

SECO f1rms).36

In early 1972, the Commission developed a revised and expanded brokerdealer exarrnnatron report form and

outlined the appropriate report procedures to be undertaken by an examiner

In the conduct of his duties. These procedures were revised a number of times

and have been updated In order to reflect

the current rules and regulations applicable to broker-dealers. A special procedure

outline was prepared for firms which

engage In specialized types of business

In addition to those covered under the

general procedural outline.

A manual of instruction which amplifies

the outline for the secuntres compliance

examiner In connection with the conduct

of an examination of a broker-dealer was

greatly expanded and Improved In 1972

and again In 1974 and 1975. In addition,

the self-regulatory organizations have

been requested to formulate, update

and/or revise appropnate procedural

outlines for use by their employees engaged In the exarninanon of member

firms The Commission's staff has also

82

requested that examination manuals and

other instructional matenals be prepared

by each self-regulatory organization

The Commission's staff prepares and

transmits to the regional offices a monthly

status report of current broker-dealer

regulatory developments to Insure greater

control over and more timely coordrnanon with the Commission's exarrunation

program. In addition, quarterly meetings

are held with the regional office employees

who are responsible for each office's

examination programs for the purpose of

msunnq greater cooperation and control

over the Commission's regulatory program.

Training Program

The Commission believes very strongly

In the need for comprehensive training

programs for secuntres compliance examiners, both those on the Commission

staff and those on the staffs of the vanous

self-regulatory organizations. Such trainIng efforts, by continually updating the

skills and knowledge of the examiners,

contnbute substantially to the effectiveness and efficiency of the examination

programs conducted by the Oommlssion

and the self-regulatory organizations.

Accordingly, the Commission has utilized

In the past fiscal year a senes of training

courses, some directed toward only Commission examiners and others toward

both Commission examiners and the selfregulatory organizations' examiners. The

training program IS divided Into two

categones training provided by outside

institutions and training provided by

Internal SEC programs.

The Commission encouraged ItS own

securities compliance examiners to improve their skills through correspondence

courses, seminars and/or college courses

and has paid tumon for such study, where

appropnate. The Commission has also

instituted a program whereby examiners

are encouraged to take a self-taught

training course prepared by an outside

agency and has provided each examiner

with the course materials. Furthermore,

the Commission IS presently assisting in

the development of a course specifically
designed to provide examiners with the

skills necessary to examine a firm having

computerized books and records.

The internal SEC training program for

securities compliance examiners consists

of four parts:

1 Periodic, two-day training seminars

In the regional offices on the subject of

Oomrntssron's oversight examinations

to which the self-regulators are invited.

Such seminars review the results of

oversight examinations, diSCUSS any

new and Important developments or

techniques With regard to these examinations, and provide an opportunity

for the regional offices to discuss With

the self-regulators ways in which they

can further the principles and effectiveness of cooperative regulation.

2. Two-day seminars held twice each

year In each regional office for experienced securities compliance examiners

on the subject of exarrunatron techniques. Such seminars are not only

refresher courses, but also focus on

Significant new developments and

serious recent problems in the Industry

and the particular examination techniques that might be used to deal With

such developments or problems.

3. Two four-day training seminars

held at the Commission's headquarters.

These seminars increasingly employ

audio-visual Instruction and provide

examiners from the Cornmissron, the

self-regulatory organizations and state

securities commissions With information on the baSIC examination techniques and the various rules, reputatrons

and regulatory programs of the Comrrussron which pertain to broker-dealer

tmancral and operational compliance.

4. Regional office continuing examiner training program Involving biweekly, one-hour training sessions In

the regional offices These sessions

focus on new developments, problems,

rules and examination techniques

Within the regional offices on an informal, continuing baSIS.

To insure a coordinated training effort,

the Commission has adopted a program

In which the regional office chief examiners meet every three months to diSCUSS

new training techniques, areas where

additional training is required, and the

strengths and weaknesses of the current

program.

In addrtion to incorporating the selfregulators' examiners into the Commission's training programs, the Commission

has also emphasized the need for the

self-regulators to Improve their own trainIng programs. Consequently, the Commissron periodically reviews the training

efforts of the self-regulators and has encouraged each self-regulator to hold

Informal, bi-monthly training programs

and more formal annual training sessions.

Regulation of Broker-Dealer

Trading in Gold

As of December 31, 1974, the federal

restrictions upon the ownership of gold

bullion by United States Citizens were

eliminated It was apparent that some

broker-dealers were planning to engage

In transactions Involving gold bullion and

that such activity might present many new

problems. The Commission Issued a

release calling some of them to the attention of broker-dealers and Investors and

suggesting several gUidelines for purchasing or investing In gold 37 The

Oommissron emphasized the extreme

Importance of exercrsinq caution In such

dealings and of becoming entirely familiar

With the business reputation and credentials of those seiling gold.

The Commission was concerned that a

number of broker-dealers might partrcipate in a variety of marketing arrangements for Interests In gold requrrinq

registration under the Securities Act of

1933 Without such broker-dealers realizIng this. In view of the uncertainty as to

the market for gold which would evolve

and of the risks Inherent In purcnasmq

gold, the Commission proposed to adopt

Securities Exchange Act Rule 15c3-5

designed to assure that broker-dealers

who effected transactrons for the accounts of customers would not undertake

Imprudent tmancral risks when settling

such traneacnons.w In addition, proposed

Rule 15c3-5 would establish certain

minimum standards for broker-dealers

83
with respect to the custody and safekeeping of gold held for customers. The

Commission's concern was based, In

part, on the substantial volatility of the

price of gold.

The Commission considered It Important, moreover, for each self-regulatory

organization to be certain that member

firms were familiar with the applicable

financial responsibility rules and regulations, including the recently proposed

Rule 15c3-5, pertaining to transactions

in gold In that connection, the Commission thought it useful to review the regulatory program of each of the self-regulators

In order to Insure a coordinated and

effective program of industry-wide regulation for broker-dealers engaging In transactions In gold for the accounts of

customers. Accordingly, the staff held a

meeting with representatives from seven

national securities exchanges, the NASD

and SIPC on January 21, 1975. The meetIng considered such Issues as the Commission's approach to certain Interests In

gold involving securities, its views on

financial responsibility rules and regulations pertaining to transactions In gold

(Including the proposed Rule 15c3-5),

appropriate sustabihty standards and

procedures for supervrsron of sales practices, and examination and surveillance

procedures for broker-dealers trading In

gold.

The Commission continues to monitor

the self-regulatory orqaruzatrons' efforts

to Insure proper regulation of their member firms transactions In gold Specifically, the Oomrmssron has been

monitoring self-regulatory procedures

for requirlnq member firms to submit a

plan descnbmq their proposed manner

of trading In gold, and for the subsequent

examination and surveillance of such

firms.

In much the same way, the Oomrmssion

has coordinated the efforts of ItS regional

offices In surveying SECD broker-dealers

with regard to their mtentrons to trade In

gold and In developing a program for the

examination and surveillance of such

firms That program Involved the development of a specral exarrunauon checklist

84

for SECD broker-dealers trading in gold.

Finally, the Oornrmssron has coordinated

many of ItS efforts In this area with the

bank regulatory agencies.

Regulatory Burdens on the Small

Broker-Dealer

The Oornmtssron has analyzed the effects Its rules and regulatIOns are having

on the viability of small brokers and

dealers and IS aware of the need to

Identify and eliminate any unnecessary

reporting or regulatory burdens upon the

small broker-dealer firm, without compromising any needed protections afforded the public. In that connection, and

In order to help to assure the continued

participation of small brokers and dealers

In the United States securities markets,

the Commission has addressed itself to

the problems of the small broker-dealer.

Beyond the Comrnissron's continued

review of ItS tmancial and operational

responsibility rules, perhaps the most

VISible demonstration of the Oomrnlssron's

concern for eliminating unnecessary or

duplicative reporting burdens, particularly

for small broker-dealers, has been its

active participation in the work of the

Report Coordinating Group. That group's

progress is summarized in Part 1 of trus

report.

Oonstderatron of the regulatory burden

on the small broker-dealer has generally

been part of a broader regulatory effort

by the Commission and the self-regulatory

organizations to eliminate duplicative,

unnecessary and unduly burdensome

elements. Actions already taken by the

Commission in this area Include:

1. ReView of the Commission's tmancral and operational responsibility

rules, all other rules and requlatrorrs,

and related reporting requirements for

broker-dealers;

2. Forrnatron of the SEC Advrsory

Committee on Broker-Dealer Reports

and RegistratIOn ReqUirements-Report

Coordinating Group (Advisory);

3. Formation of the SEC BrokerDealer Model Compliance Program

Advisory Committee;
4. Formation of the SEC Advisory

Committee on the Implementation of a

Central Market System; and

5. Consideration of additional securities legislation.

CLEARANCE AND SETTLEMENT

A number of clearing entities 39 and

depositories 40 affiliated with national

securities exchanges or the NASD are

currently In operation. During fiscal year

1975, numerous changes and additions to

the rules and practices of these clearing

and depository entities were submitted

to the Commission for review and consideration under various provrsrons of the

Act. The following are among the Significant Items on which the Commission

acted favorably:

1. Pursuant to Securities Exchange

Act Rule 9b-1, the Amex and the CBOE

proposed the establishment of the

Options Clearing Corporation, which

was Intended to act as a single clearing

and settlement entity for transactions

in exchange-traded options. The submission by the two exchanges was the

result of Commission urging that they

direct their efforts toward the establishment of a central option market system,

for which common clearing facility was

one of the essential elements,

2. The NYSE proposed that its wholly

owned subsidiaries, the Stock Clearing

Corporation ("SCC") and the Depository

Trust Company ("DTC"), establish and

operate a Continuous Net Settlement

("CNS") System. The CNS System

reduces, through netting, the number

of trades which a participant In SCC

must settle and makes possrble,

through a link between SCC and DTC,

automatic book entry settlements

through clearing participants' accounts

in DTC.

3. The Amex proposed that ItS whollyowned subsidiary, American Stock

Exchange Clearing Corporation, establish a CNS System which IS comparable

to SCC's system and has a Similar link

with DTC

4. The Boston Stock Exchange, the

Midwest Stock Exchange, Inc., the

PBW Stock Exchange, Inc and TAD

Depository Corporation ("TAD") proposed that TAD establish a transfer

agent depository as a tacrlrty of those

exchanges. As a transfer agent depository, TAD accepts from particrpatinq

broker-dealers deposits of those securities for which the transfer agents have

entered Into an expediting relationship.

TAD holds the securities as a custodian

and, pursuant to withdrawal instructions, re-dellvers the securities to ItS

particrpants or to customers of ItS

partlcrpants on an expedited basts.

TAD's services Include divrdend protecnon and proxy handling with respect

to securities held In custody.

5. Followrnq favorable action by the

Commission with respect to the TAD

transfer agent depository, TAD and the

National Clearing Corporation ("NCC"),

a wholly-owned subsrdrary of the NASD,

proposed to establish an Interface between TAD and NCC. As proposed, the

interface would enable broker-dealer

participants in either or both TAD and

NCC to effect delivery of securities to

other broker-dealers In TAD or NCC by

bookkeeping entry.

6. The NCC proposed to establish a

National Envelope Settlement System

("NESS"). NESS would expand NCC's

extstrnq Envelope Settlement System

In New York to provide for inter-city

deliveries of securities and settlement

of trades not qualified for clearance

and settlement through NCC's CNS

system NCC's goal was to lower the

cost of inter-city settlements to ItS

participants through the use of NCC's

existrnq network of regional service

centers, comrnumcatrons and couriers.

In reviewmq these matters, the Commission acted with a view toward tacuuatIng the development of a national system

for the prompt and accurate clearance

and settlement of sscunnes transactions,

including the elimination of the use of

secunues certificates by broker-dealers

In connection With the settlement of

secuntres transactions.

85
SECURITIES INVESTOR

PROTECTION CORPORATION

SIPC was established to provide certain protections to customers of SIPC

members. It IS a non-profit membership

corporation, the members of which are

registered brokers and dealers and members of national secuntres exchanges

While SIPC IS funded prrmarrly through

assessments on ItS members, under

certain conditions It may borrow up to $1

brllron from the Unrted States Treasury

Durrng the summer of 1974, a Special

Task Force organized by the Chairman

of SIPC made ItS report and recommendations for changes In the SIPC Act to the

SIPC Board of Directors 41 DUring fiscal

year 1975, the SIPC Board approved

essentially all of the report and In late

1974 presented It to Congress. The legislative proposal was Introduced Into both

Houses of Congress In late 197442 and

was reintroduced In the first half of

1975.43 The major recommendations of

that proposal are: (1) to amend exrstrnq

procedures which require court-appointed

trustees in all SIPC lrqurdatrons to permit

SIPC to make direct payments to customers In small cases, (2) to permit customer accounts to be transferred In bulk

to other brokers In appropriate cases

rather than to be hquidated account by

account, and (3) to raise the dollar limits

of protection to correspond to the limits

of protection afforded depositors by the

Federal Deposit Insurance Corporation.

Litigation Related to SIPC

In SEC v. Guaranty Bond and Securtties Corp.,H the United States Court of

Appeals for the Sixth Orrcuit held, among

other things, that the receiver of a brokerdealer appointed by the district court had

standing to bring an action on behalf of

customers of the broker-dealer to compel

SIPC to initiate Ilqurdatron proceedings

under the SIPC Act. In response to SIPC's

petition, which the Commission supported,» the Supreme Court agreed to

review this decisron On May 19, 1975,

the Supreme Court reversed the decrsron

of the Sixth Crrcurt and held that the

86

Cornrrnssron's statutory right to brrng an

action to require SIPC to discharge its

duties IS exclusive and that customers

have no similar Implied right of actlon.w

That decision affirms the Oomrmssron's

position that only It may seek judrcral

review of a discretionary determination

by SIPC not to initiate proceedings.

Commission Rule Changes

Relating to SIPC

On October 8, 1974, the Commission

announced the adoption of Securities

Exchange Act Rule 15b5-1 and the

amendments of Securities Exchange Act

Rule 15b6-1 and related Form BDW.47

The rules and forms provided that where

the Commission revokes or cancels the

registration of a broker-dealer, or a

broker-dealer withdraws ItS registration,

the effectiveness of such revocation,

cancellatron, or withdrawal would be

delayed for six months for purposes of

the SIPC Act. Thus, during that period,

the protection of the SIPC Act would be

available to the customers of the brokerdealer whose claims arose prior to the

effective date of revocation, cancellation,

or withdrawal

SECO BROKER-DEALERS

Under the Securities Exchange Act, the

Commission IS responsible for establishIng and adrmnlstennq rules on qualification standards and business conduct of

broker-dealers who are not members of

the NASD (referred to as SECD brokerdealers) in order to provide regulation of

such broker-dealers comparable to that

provided by the NASD for ItS members.

At the close of the fiscal year, the number of nonmember broker-dealers registered with the Cornmrssron totaled 302

and the number of associated persons of

such firms (i.e., partners, officers, directors and employees not engaged In

merely clerical or rntrustertal functions)

totaled 21,122.

On May 1, 1975, the Oornrmssron announced adoption of Securities Exchange

Act Rule 15b10-11, which establishes

fidelity bonding requirements for SECO
broker-deaters.w A similar rule had been

adopted by the NASD, as described in

the Commission's 40th Annual Report.49

The primary purpose of the bonding rules

IS to prevent the unwarranted exposure

of SIPC funds to certain special kinds of

losses, such as misappropriation of firm

assets through employee theft and dishonesty.

Securities Exchange Act Rule 15b1()-11

requires that SECO broker-dealers carry

a fidelity bond In the form, amount and

type of coverage prescribed by the Rule.

The bond IS required to contain agreements covering at least the tollowrnq

areas:

1 A "Fidelity" insuring clause to

Indemnify the Insured broker-dealer

against loss of property through any

dishonest or fraudulent acts of employees (this clause also generally

covers losses due to "Fraudulent

Trading" by employees);

2. An "On Premises" agreement

Insuring against losses resulting from

common law and statutory crimes such

as burglary and theft and Including a

"Misplacement" clause specifically

covering misplacement and "mysterious, unexplainable disappearances" of

property of the insured (no matter

where located),

3. An "In Transit" clause indemnifying against losses occurring while

property IS In transit,

4. A "Forgery and Alteratron" agreement insuring against loss due to forgery or alteration of various kinds of

negotiable Instruments (including

checks); and

5. A "Securities Loss" clause protecting the insured against losses

incurred through forgery and atteration

of secuntres, or written documents

relating to securities, ownership, or

conveyance.

In addition, Rule 15b1()-11 requires

SECO broker-dealers to obtain certain

minimum coverages similar to the coverages set forth In the NASD's bonding

rule

Securities Exchange Act Rule 15b9-2

Imposes an annual assessment to be paid

by SECO broker-dealers to defray the

cost of their regulation by the Commission. During the fiscal year, the Commission increased the fee for each associated

person of a SECO member from $12 to

$15.50 Additionally, the Form SECC-2

filing fee Imposed pursuant to Securities

Exchange Act Rule 15b9-1 , was Increased

from $35 to $50. These Increases were

made necessary by Increased costs of

the SECO program.

EXEMPTIONS

DUring fiscal year 1975, the Commission or ItS staff, acting pursuant to delegated authority, granted the toltowmq

exemptions to statutory provrsrons or

rules adopted under the Securities Exchange Act.

1. Of 487 requests for exemption

under paragraph (f) of Securrtles Exchange Act Rule 10b-6, 347 were

granted because the transactions did

not constitute a manipulative or deceptive device or contrivance within the

meaning of the rule. Rule 10b-6 places

certain prohibitions upon trading In

secunties by persons Interested In a

distribution of such securities.

2. One request for an exemption

from the broker-dealer registration

requirements was received and granted

pursuant to Section 15(a)(2) as necessary and appropriate In the public

Interest and for the protection of

Investors 51

3. Ten requests for exemptions under

Rule 17a-20 were received by the

Commrssron. Rule 17a-20 was adopted

as part of the Commission's morutorrnq

of the effects of the introduction of

competitive comrrnsston rates and

requires certain brokers and dealers to

submit to the Cornrmssron mformatron

relating to revenues and expenses and

other matters. Two exemptions were

granted (8 were pending as of June

30, 1975) because the applicant did no

business for which a negotrated commission was charged.

87
OTHER COMMISSION RULE

CHANGES AND DEVELOPMENTS

Mortgage Market Exemptions

As previously reported,52 the Oomrrussion had been working with the Federal

Home Loan Mortgage Corporation

(FHLMC) to clarify the applicability of

the federal secuntres laws to Arnrrunet,

Inc., which was established under FHLMC

sponsorship to operate an automated

trading Information system to promote

a more liquid secondary market for

residential mortgages. FHLMC and the

Commission developed proposed leqislanon on that subject, which resulted In

the 1975 Amendments adding an exemption for certain mortgage-related securities to Section 4(5) of the Securities Act

of 1933.

Under the new exemption. transactions

involving (I) offers or sales of certain

mortgage-related securities, or (ii) nonassignable contracts to buy or sell such

secuntres which are to be completed

within two years may be conducted, under

the conditions and manner specrned,

without compliance with the registration

and prospectus requirements of Section 5

of the secunnes Act The exemption IS

available only with respect to promissory

notes directly secured by a first mortgage

on a single parcel of real estate upon

which IS located a residential or comrnercrat structure, and participation

Interests In such notes For offers or sales

of such mortgage-related securmes to

qualify for the exemptions, three conditions of sale must be satisfied: the minimum aggregate sales price per purchaser

must be not less than $250,000, the

purchaser must pay cash either at the

time of sale or within sixty days thereof,

and each purchaser must buy for hrs own

account. Furthermore, for the transaction

to qualify for the exemption, only desiqnated types of institutions may originate

the mortgage-related secuntres, and In

certain Instances, only designated rnstrtunons may purchase such securities

Finally, the exemption does not apply to

resales of secuntres acquired pursuant to

that exemption unless each of the conditions of sale ISsatisfied.

88

Regulatory Problems Posed by

"Going Private"

On February 6, 1975, the Commission

announced that It was ordering a public

investigatory and rulemaking proceeding

relating to so-called "going private"

transactions by public companies or their

afflliates.53 The Commission mvited both

oral and written comments from interested persons regarding rules It was

proposing and various specific inquiries

related to such transactions.

The Oornmlssion noted that the two

rules it was proposing were desrqned to

provide an opportunity for public comment, but that It had not at that time

reached any conclustons with respect to

the proposed rules. The Oomrmssrcn also

noted that the announced proceeding and

proposed rules should not in any way be

owned subsidiary, American Stock

Exchange Clearing Corporation, estabto such transactions.

The first of the two proposed rules

(Securities Exchange Act Rule 13e-3(A)

was designed to protect Investors, particularly the Interests of minority security

holders, In "going private" transactions.

The Rule would make unlawful certain

purchases of an Issuer's securities, and

certain related solicitations of proxies, by

the Issuer or ItS affiliates, as defined, unless the Issuer or its affiliate compiled

With specmc disclosure and substantive

provlsrons

As an alternative to certain of the provrsrons of proposed Rule 13e-3(A), the

Commission at the same time also published for comment proposed Rule 13e3(8). That Rule would require that, when

the purchase of an equity security by the

Issuer or an affiliate would result or was

Intended to result In any of the enumerated consequences, terms of the transaction, including any consrderanon to be

paid to any secunty holder, be fair and, In

transactions by the Issuer, that a valid

busmess purpose for the transaction

exist Proposed RuIe 13&-3(8), which

would also Include some or all of the

disclosure and tender offer requirements

set forth In proposed Rule 13e-3(A), was

Intended to provide the Commission With
sufficient flexibility to deal with any type

of transaction by an issuer or its affiliates

having the same consequences

The Commission received a substantial

number of written comments, which are

being reviewed and analyzed. The Commission noted that, after the proceeding,

it might adopt or propose for comment

one or more rules under the Securities

Exchange Act and/or recommend legislation to the Congress.

Foreign Access to United States

Securities Markets

On February 8, 1974, the Commission

solicited public comment on Issues affecting foreign professional access to the

United States securities markets. 54 The

Commission received a number of comments, which are being studied by the

staff together with the provisions of the

1975 Amendments as they may relate to

the issue of foreign access. The Commission expects to complete its study of this

matter In the near future.

Real Estate Investment Contract

Securities

On January 31, 1975, the Commission

adopted Rule 3a12-5 and amendments to

Rule 15c2-5,55 which served to exempt

certain investment contract secunnes

involVing the direct ownership of specified

resrdennal real property from the Exchange Act's credit arrangement provisions when offered by broker-dealers,

subject to certain conditions. The Commission stated that the unique characteristics of lhese investment contract

securities make the existence of the

concerns about credit arrangements In

Sections 7(c) and 11(d)(1) of the Exchange Act unlikely. The Commission

considered the lack of a secondary

trading market a significant factor In

support of the proposed exemption.

Confirmation Requirements for

Periodic Transactions

On September 24, 1974, the Cornrrussion adopted an amendment to Rule

15c1-4 under the Exchange Act relating

to purchases of redeemable securities

issued by registered Investment companies and unit Investment trusts.56 The

Commission had published notice of a

proposal to adopt these amendments on

March 15, 1974.57

Before the adoption of the amendment,

Rule 15c1-4 required brokers and dealers

to give or send to their customers wntten

confirmations of securities transactions

effected with or for the account of such

customers at or before the completion of

each such transaction. Representatives of

the mutual fund Industry sought the

amendment to make It more economical

for registered open-end investment companies to sell shares to participants In

group plans and tax qualified pension

plans which might Involve small and

frequent purchases. They noted that the

need for tms amendment was especially

Important in view of the recently enacted

Employee Retirement Income Security

Act of 1974,58 which permits the use of

mutual funds as investment media for

certain tax qualified individual and group

pension plans.

The amendments relaxed the requirements of Rule 15c1-4 with respect to

certain purchases of shares of open-end

investment companies and unit investment trusts by permitting a broker-dealer

to confirm on a quarterly basis, rather

than Immediately, purchases of securities

of such Issuers pursuant to (a) mdrvrduat

retirement or pension plans under the

Internal Revenue Code, or (b) group plans

whether or not qualified under the IRC.

The Commission did not relax the confirmation requirements for purchases of

equity securities made pursuant to certain systematic accumulation plans

administered by broker-dealers. The

Oornrnissron indicated that the various

policy issues and technical problems

relating to a further relaxation of Rule

15c1-4 In this area would continue to

receive staff study.

Short Selling into Secondary

Offerings

On April 2, 1975, the Commission pub89
"shed for comment revrstons of proposed

Rules 10l:r-20 and 10l:r-21 under the Exchange Act and proposed amendments

to Rules 17a-3(a)(6) and 17a-3(a)(7). ';9

Those rules were first proposed on February 11, 1974,&11and relate to certain

practices which were brought to the

Commission's intention, partly as a result

of an mvestrqatron by the Commission's

staff 61

Proposed Rule 10l:r-20 would prohibit

underwriters and dealers participating In

a secunties distribution from requiring a

purchaser, In order to receive an allocation of secuntres from the underwriter or

dealer, to pay consrderatron In addition

to the amount indicated In the prospectus

or to perform any other act such as

purcnasmq an additional security In an

unrelated offering (so-called "tie-in"

arrangements). Proposed Rule 10l:r-21

would Impose certain limitations on purchases to cover short sales where such

short sales were effected before the

commencement of an offering mvolvmq

securities of the same class.

Under the proposed amendments to

Rule 17a-3, broker-dealers would be

required to ask customers, or note If the

sale was for the broker-dealer's own

account, whether the sale was "long" or

"short" These record keeping changes

are Intended to assist broker-dealers In

complying With provrsrons relating to

short sales under the secunnes laws, and

most notably Regulalion T (broker-dealer

margin provrsron) promulgated by the

Board of Governors of the Federal Reserve System Furthermore, the amendments would aid the Commission's

enforcement of the margin provrsions.

NOTES FOR PART 3

I Pub. L No. 94-29 (June 4,1975).

! The Honolulu Stock Exchange IS the

only securities exchange presently exempted from registration.

I See In the Matter of Ecological

SCIence Corporation, Securities Exchange

Act Release No 10217 (June 13, 1973),

1 SEC Docket No. 20, p 5, and cases

Cited therein DUring fiscal 1975, the

Cnrnrrusaton took a Similar position In ItS

first decrsron concerning the removal of a

security from NASDAQ, the automated

90

quotation system for trading over-thecounter securities sponsored by the

National Association of Secunties Dealers,

Inc. See In the Matter of Tassaway, Inc.,

Securrtles Exchange Act Release No.

11291 (March 13, 1975), 6 SEC Docket

427. See drscussion of the Tassaway

case at p 74.

4 For a summary and the conclusron of

that inspection VISit, see 40th Annual

Report, pp. 4~50.

'; Amex letter to DIVISion of Market

Regulation dated May 2, 1975.

6 American Stock Exchange, Inc.,

Special Bulletin to Floor Members dated

June 2,1975. See also Amex Rule 958.

7 Those registered broker-dealers

which are not NASD members are referred to as SECO (SEC Only) brokerdealers. See p. 86, mfra.

H The 1975 Amendments amended Secnon 19 of the Securities Exchange Act to

provide that proposed rules of a selfregulatory organization may not take

effect unless approved by the Commission or otherwise permitted In accordance

With the provrsrons of that Section.

9 Section 12(g)(1) of the Securities

Exchange Act generally requires the

registration of equity securities with the

Commission If, at the close of any fiscal

year of the Issuer, the class of securmes IS held of record by 500 or more persons

and the Issuer has $1,000,000 or more In

assets Such registration causes the

reporting and other requirements of Secnon 13, the proxy requirements of Section

14, and the rnsider trading provrsrons of

Section 16 to apply to the Issuer to the

same degree they apply to Issuers of

exchange-listed secunties Registration

under Section 12{g) IS permitted to be

terminated If the number of record holders

of the class of secunnes registered falls

below 300.

10 See part 1 page 11.

II This procedure IS employed In discrplrnary cases where the respondents,

In lieu of Institution of complaint proceedIngs, admit the findings made by the

DBCC, waive their right of review of the

DBCC's action by the NASD Board of

Governors, the Commission and the

Courts, and consent to the penalties

Imposed by the DBCC The respondents

submit a letter to thrs effect which must

be accepted by both the DBCC and the

Natronal BUSiness Conduct Committee

before the matter ISclosed.

12 Under Section 19{d)(2) of the Securilies Exchange Act, as amended, an appncatron for review or the institution of a

review by the Commission no longer

operates as a stay unless the Commlsston

otherwise orders

I I Securities Exchange Act Release

No. 11476 (June 16, 1975), 7 SEC Docket

193.
14 Article III, Section I.

15 Securities Exchange Act Release

No. 10894 (July 2, 1974), 4 SEC Docket

529

16 Blaise D. Antoru & Associates, Inc.

v. S.E.C., 289 F.2d 276, 277 (C.A 5,1961).

17 The 1975 Amendments have altered

this procedure by adding Section 15A(g)

(2), under which a registered securities

association need only file notice with the

Commission of ItS intention to admit a

member or any person associated with it

subject to a statutory disqualification.

Such notice must be filed not less than

thirty days prior to admission of such

member or person.

18 Securities Exchange Act Release

No. 11291 (Mar. 13, 1975),6 SEC Docket

427.

19 Article XVI of the NASD's By-laws

(which became effective on December

16, 1968) describes the system and sets

forth rules with respect to it.

20 Tassaway, Inc.'s annual report on

Form 10K filed with the Oomrrussron

showed that by April 30, 1973, It not only

lacked the required $250,000, but had a

capital deficit of over $3.4 million.

21 Compare Exchange Buffet Corporation v. New York Stock Exchange, 244 F.

2d 507, 510 (C A. 2, 1957), affirming

Atlas Tack Corporation 37 SEC 362

(1956); Polarad ElectrOnics Corporation,

Securities Exchange Act Release No.

9419 (December 15, 1971); Langley

Corporation, Securities Exchange Act

Release No. 9729 (August 16,1972).

22 Section 23(b) of the Securities Exchange Act, as amended by the 1975

Amendments, requires that the Commission submit "a statement and analysis of

the expenses and operations of each

self-regulatory organization In connection

with the performance of ItS responsibilities under thrs title, for which purpose

data pertaining to such expenses and

operations shall be made available by

such organization to the Commission at

its request" The discussion In this section IS In response to that requirement.

Thrs section of the annual report is necessarily less detailed than the Commission

anticipates will be the case In future

years since the Oornrmsston did not,

prior to the 1975 Amendments, require

self-regulatory organizations to compile

or furnish to the Commission the data

which the Commission will Include In

future annual reports. The staff IS engaged in a study with respect to financial

reporting of expenses and revenues of

the self-regulatory organizations to determine what additional Information is

needed to accommodate the needs expressed by the Congress. Because of the

complexity of the revenue studies needed,

it may not be possible to collect and

analyze the data In time for the Commission's annual report for 1976. We

anticipate that the staff's study and ItS

implementation will be completed In time

for inclusion in the Commission's annual

report for fiscal year 1977 The data included In trns annual report were compiled from the annual reports submitted

to the Commission by the self-regulatory

organizations and the "Survey of SelfRegulatory Organizations and Substdlanes," which was conducted in

connection with the Oornmrssron's program for rnorutorinq the effects of competitive brokerage commission rates on

the securities Industry

23 It should be noted that other revenue

sources Include revenues which are not

related to exchange business and selfregulatory actrvrtles (e.g., real estate).

24 The selection of Bradford Computer

& Systems, Inc. as the NCC tacumes

management contractor precludes further

losses In this area. NASD 1974 Annual

Report, P. 1.

25 Personnel Budget Study 19.

26 Including staff reductions at SIAC.

27 These exchanges are grouped according to trends In revenues and expenses.

28 Section 15(a) of the Securities Exchange Act, as amended by the 1975

Amendments, now requrres the registration by December 1, 1975, of brokers and

dealers who were previously exempt from

registration because they confined their

secunues business to an exchange

Brokers and dealers who confine their

activities to exempted secunnes, as defined In Section 3(a)(12) of the Securities

Exchange Act, continue to be exempt

from the registration requirement Effective December 1, 1975, rnunlcipal securities are no longer defined as exempted

secunnss for purposes of the registration

requirement applicable to brokers and

dealers.

29 Securities Exchange Act Release No.

11424 (May 16,1975),7 SEC Docket 2

30 New Form BD Will be used by approximately 45 states and the NASD

Form lJ--4 Will nkewrse be used by approximately 45 states, as well as the

NASD and the exchanges

31 Secuntres Exchange Act Release

No. 11530 (JUly 10, 1975), 7 SEC Docket

343.

32 Securrtres Exchange Act Release

No. 11402 (May 7, 1975), 6 SEC Docket

856.

33 Securities Exchange Act Release

No. 11196 (January 23, 1975), 6 SEC

Docket 144.

34 39th Annual Report, pp 59-60

Securities Exchange Act Release No.

9856 (November 10, 1972)

305 In the past few years, while SIPC's

91
assistance has been necessary In more

than 100 cases of firms failing and causing losses of funds or securities, more

than 1,000 firms have left the securities

Industry without the assistance of SIPC

and without losses to customers or

creditors.

36 Few routine exarninanons are now

conducted of firms other than SECO

firms, as all examinations of member

firms of self-regulatory orqaruzanons

must now be oversight examinations,

which go one step further than routine

examinations by their evaluation of the

self-regulatory orqaruzatrons' reports of

examinations

17See Securities Exchange Act Release No. 11125 (Dec. 9, 1974), 5 SEC

Docket 667.

1H See Securities Exchange Act Release No. 11158 (Dec. 31, 1974), 6 SEC

Docket 6.

19Clearing entities clear and settle

transactions between participating brokerdealers. Offsetting transactions between

broker-dealers are netted out and settlement and delivery are effected only as to

the balance under the traditional balanceorder system. Under the more recent and

now almost universally utilized continuous

net settlement system, balances may be

carried forward and netted against future

settling trades

40Deposttorres hold securities certificates and effect delivery between partlcipants by book entry.

41 See 40th Annual Report p. 64.

42S.4255, 93d Cong., 2d Sess (1974),

H.R. 17684, 93d Cong., 2d Sess. (1974)

41S.1231, 94th Cong., tst Sess. (1975);

H.R. 8064, 94th Cong., tst Sess. (1975).

44 496 F.2d 145 (C.A 61974)

4';40th Annual Report, p 65.

92

46 Secunties Investor Protection Corp.

v. Barbour, 421 U.S. 412 (1975).

47Securities Exchange Act Release

No 11042 (October 8, 1974), 5 SEC

Docket 247.

4H Securities Exchange Act Release

No. 11388 (May 1, 1975), 6 SEC Docket

784.

4940th Annual Report, p. 53.

50Securities Exchange Act Release

No. 11425 (May 16, 1975), 7 SEC Docket

21.

51See Securities Exchange Act Release

No. 11355 (Apr. 17, 1975), 6 SEC Docket

683.

5240th Annual Report, p. 66.

,';3 Securities Exchange Act Release

No. 11231 (Feb. 6, 1975), 6 SEC Docket

261.

54Securities Exchange Act Release

No. 10634 (February 8, 1974), 3 SEC

Docket 507.

5';Securities Exchange Act Release

No 11220 (Jan 31, 1975),6 SEC Docket

342. See 40th Annual Report, p. 66.

';6Securities Exchange Act Release

No. 11025 (Sep. 24, 1974), 5 SEC Docket

184.

,';7Securities Exchange Act Release

No. 10681 (Mar. 15, 1974), 3 SEC Docket

691. See 40th Annual Report, p. 67.

5H Pub. L. No. 9~06 (1974).

,';9Securities Exchange Act Release

No. 11328 (Apr. 2, 1975), 6 SEC Docket

552.

60Securities Exchange Act Release

No. 10636 (Feb. 11, 1974), 3 SEC Docket

540.

61 In the Matter of A.P. Montgomery &

Co., tnc., Securities Exchange Act Release

No. 10637 (Feb. 11, 1974),3 SEC Docket

542.
PART 4

ENF R(E E T

The Commission's enforcement actrvrties, which are designed to combat securities fraud and other Illegal activities,

continued. at a high level durrnq the past

year These activities encompass CIVil

and criminal court actions, as well as

administrative proceedings conducted

Internally. Where violations of the securities laws are established, the sanctions

which may result range from censure by

the Comrnisston to prison sentences

Imposed by a court.

The enforcement program is designed

to achieve as broad a regulatory Impact

as possible within the framework of resources available to the Cornrnrssron. In

light of the capability of self-regulatory

and state and local agencies to deal

effectively with certain securities violations, the Commission seeks to promote

effective coordination and cooperation

between its own enforcement activities

and those of other agencies

DETECTION

Complaints

The Commission receives a large volume of communications from the public.

These consist mainly of complaints

against broker-dealers and other members of the secunties community as well

as complaints concerning the market

price of particular securities. During the

past year, some 4,000 complaints against

broker-dealers were received, analyzed

PART 4

ENFORCEMENT

and answered. Most of the above mentioned complaints dealt With operational

problems, such as the failure to deliver

securities or funds promptly, or the

alleged mishandling of accounts. In addition, there were some 5,500 complaints

received concerning Investment advisers,

issuers, banks, transfer agents and

mutual funds.

The Comrnlssron seeks to assist persons In resolving complaints and to furnish requested information. Thousands of

Investor complaints are resolved through

staff inquiries of the firms Involved. While

the Comrrussron does not have authority

to arbitrate private disputes between

brokerage firms and investors or directly

to assist Investors In the legal assertion

of their personal rights, a complaint may

lead to the mstitutron of an investigation

or an enforcement proceeding, or It may

be referred to a self-regulatory or local

enforcement agency.

Market Surveillance

To enable the Commission to carry out

surveillance of the securities markets, Its

staff has devised procedures to identify

possible violative activities. These include surveillance of listed secuntres,

which is coordinated With the market

surveillance operations of the New York,

American and regional stock exchanges.

The Oommrsston's market surveillance

staff maintarns a continuous watch of

transactions on the New York and Ameri95
can Stock Exchanges and the Chicago

Board Options Exchange and reviews

reports of large block transactions to

detect any unusual pnce and volume

vanatrons. Also the financial news tickers, financial publications and statistical

services are closely followed. In addition,

the staff has supplemented Its regular

reviews of dally and perrodrc market

surveillance reports, which provide a

more In-depth analysts of the information

developed by the exchanges.

For those secuntres traded by means

of the NASDAQ system, the Commission

has also developed a surveillance program, which IS coordinated with the

NASD's market surveillance staff, through

a review of weekly and special stock

watch reports.

For those over-the-counter secuntres

not traded through NASDAQ, the Commission uses automated equipment to

provide an efficient and comprehensive

surveillance of stock quotations drstnbuted by the National Quotation Bureau.

This IS programmed to Identify, among

other things, unlisted secuntres whose

pnce movement or dealer Interest

vanes beyond specttied limits In a preestablished time penod When a secunty

IS so Identified, the equipment prints out

current and hrstonc market information.

Other programs supplement this data

with information concerning sales of

secunties pursuant to Rule 144 under the

Secunties Act, ownership reports, and

penodrc company filings such as quarterly

and annual reports. This data, combined

with other available information, is analyzed for possrbte further mquiry and

enforcement action.

In addition, recognizing that the computer provides the most expeditious

method of reviewing and analyzing the

volurnmous trading data generated by the

secunties markets, the Commission has

developed a program which provides an

analysrs of the bid listings for each secunty by surnrnanzmq specified types of

activity by each broker-dealer firm submitting pnce quotations for that particular

secunty.

The staff oversees tender offers, exchange offers, proxy contests and other

96

activities Involving efforts to change

control of public corporations. Such oversight Involves not only review of trading

markets In the securrtres involved, but

also filings with the Commission of requrred schedules, prospectuses, proxy

matenal and other information.

INVESTIGATIONS

Each of the acts administered by the

Commission authorizes investigations by

It to determine If violations have occurred.

Most of these are conducted by the

Commission's regional offices. Investigations are earned out on a confidential

baSIS, consistent with effective law enforcement and the need to protect persons against whom unfounded charges

might be made. Thus, the exrstence or

results of a nonpublrc investigation are

generally not divulged unless they are

made a matter of public record In proceedings brought before the Commission

or In the courts. Dunng fiscal year 1975,

a total of 490 investigations were opened,

as against 382 In the preceding year.

LITIGATION INVOLVING

COMMISSION INVESTIGATIONS

In White v. Jeeqermen,' the plaintiffs

had filed SUit against the Commission's

Chief Investigative Counsel, seven other

present or former Commission employees

and others alleging that the Chief Investigative Counsel had malicroualy harassed

them by, among other things, leaking to

the New York Times confidential information acqurred dunng an Investigation of

the plaintiffs. The plaintiffs also alleged

that the Chief Investigative Counsel

conspired With the other defendants to

cause the accounting firm for the corporate plaintiff to withdraw a favorable

financial report concerning It, to cause

the Commission to suspend over-thecounter trading of the stock of the corporate plaintiff, and to cause another

company controlled by the rndivrdual

defendant to be placed on the Commission's Foreign Restncted List.

On October 9, 1969, United States

District Judge McLean dismissed the
complaint against each of the former and

present Commission employees, with the

exception of the Chief Investigative

Counsel, on the ground that the activities

alleged In the complaint were within the

scope of their official duties and they

therefore were Immune from SUIt. In

Judge McLean's View, however, the alleged leaking by the Chief Investigative

Counsel of Information obtained by him

during a confidential investigation, which

Information the plaintiffs alleged was

false, would have been outside the scope

of his employment. Judge McLean indicated that the plaintiffs should have the

opportunity to present proof as to these

allegations and that their complaint

should not be disposed of by motion for

summary JUdgment.

On October 2 and 3, 1974, the case

was tried before Judge Bonsai sitting

without a Jury. After the trial, Judge

Bonsai dismissed the complaint against

the Chief Investigative Counsel, who was

the only remaining defendant, on the

ground that the plaintiffs had failed to

prove that he acted outside the scope of

his employment or that he intimidated

them or otherwise engaged in Improper

conduct. In order to sustain their claims

against the Chief Investigative Counsel,

the court held that the plaintiffs had to

show "that he acted outside the limits of

the broad investigative responsibilities

with which he was charged." 2

Furthermore, the court held that the

plaintiffs would not be entitled to damages In any event Since, among other

things, the truth of the information published In the New York Times had been

established In the Commission's injunctive action against the plalntlfts."

S.E.C. v. Csapo 4 involves the application of the Commission's sequestration

rule in a non public investigation. The

district court conditioned the enforcement

of a Oornmisston Investigative subpoena

directed to Mr. Csapo upon his being

permitted to be accompanied and represented by certain attorneys who also

represented various other persons involved In the investigation. The Commission appealed from the portion of the

enforcement order Imposing this condition, and the matter IS pending In the

court of appeals.

In S.E.C. v. Republic National Life

Insurance Co., et al.,5 one of the defendants, Peat, Marwrck, Mitchell and Co.

filed a counterclaim against the Commission seeking, In effect, an order requiring

the Commission, whenever It uncovers

information that might be material to an

Independent public accountant's examination of financial statements that are to

be filed With the Commission, to disclose

that information to the accountant. On

October 18, 1974, the district court dismissed the counterclaim finding that It

was Within the Commission's discretion

to deny Peat Marwlck access to investigative materials and that the exercise of

discretion was not reviewable.

ENFORCEMENT PROCEEDINGS

The Commission has available a Wide

range of possible enforcement remedies.

It may, In appropriate cases, refer ItS

files to the Department of Justice With a

recommendation for criminal prosecution. The penalties upon conviction are

specmed in the various statutes and

Include Imprisonment for substantial

terms as well as fines.

The securities laws also authorize the

Comrmssron to file injunctive actions In

the Federal district courts to enjoin continued or threatened violations of those

laws or applicable Oomrrusston rules. In

injunctive actions the Commission has

frequently sought to obtain ancillary

relief under the general equity powers of

the Federal district courts. The power of

the Federal courts to grant such rehef

has been judrctally recognized. The

Commission has often requested the

court to appoint a receiver for a brokerdealer or other business where Investors

were likely to be harmed by continuance

of the existing management. It has also

requested, among other things, court

orders restricting future activities of the

defendants, requiring that rescissron be

offered to secunnes purchasers, or reqUiring disgorgement of the defendants'

III-gotten gains.

The SEC's primary function IS to pro97
tect the public from fraudulent and other

unlawful practices and not to obtain

damages for Injured individuals. Thus, a

request that drsqorqernent be required IS

predicated on the need to deprive defendants of profits derived from their unlawful conduct and to protect the public by

deterring such conduct by others.

If the terms of any injunctive decree

are violated, the Commission may file

criminal contempt proceedings, as a

result of which the violator may be fined

or imprisoned

The Federal securities acts also authorize the Commission to Impose remedial

administrative sanctions. Most commonly, administrative enforcement proceedings Involve alleged violations of the

securities acts or regulations by firms or

persons engaged In the secuntres business. Generally speaking, if the Cornrnrssion finds that a respondent willfully

violated a provision of or rule under the

secuntres acts, failed reasonably to

supervise another person who committed

a violation, or has been convicted for or

enjoined from certain types of misconduct, and that a sanction IS In the public

Interest, It may revoke or suspend the

registration of a broker-dealer or investment adviser, bar or suspend an mdrvidual from the secunnes business or from

associatron with an Investment company,

or censure a firm or individual. ProceedIngs may also cover adequacy of disclosure in a registration statement or In

reports filed with the Commission. Such

a case may lead to an order suspending

the effecllveness of a registration statement or directing compliance with reporting requirements The Commission

also has the power summarily to suspend

trading In a security when the public

Interest requires.

Proceedings are frequently completed

without hearings where respondents

waive their right to a hearing and submit

settlement offers consenting to remedial

action which the Commission accepts as

an appropriate disposition of the proceedings The Commission tries to gear

ItS sanctions In both contested and settlement cases to fit the circumstances of the

particular case. For example, It may limit

98

the sanction to a particular branch office

of a broker-dealer rather than sanction

the entire firm, prohibit only certain kinds

of activity by the broker-dealer during a

period of suspension or only prohibit an

mdivrdual from engaging In supervisory

activities

A chart listing the various types of enforcement proceedings, as well as statlstrcs on such proceedings are located In

the statistical section

ADMINISTRATIVE

PROCEEDINGS

Summarized below are some of the

many administrative proceedings pending

or disposed of In fiscal 1975.

Financial Programs, Inc.6-The Commrssion instituted administrative proceedings against Financial Programs, Inc., a

Denver-based mutual fund manager and

five of ItS former officers. Pursuant to

offers of settlement submitted by Finanoral Programs and two of the Individual

respondents in which they neither admitted or denied the charges, the Comrnissron found that respondents violated

the antifraud provisions of the SeCUrities,

Securities Exchange, Investment Company and Investment Advisers Acts.

Specifically, it was found that Financial

Programs and the two former officers

committed over $21 million of the assets

of the four funds, for which Financial

Programs served as investment adviser,

to several over-the-counter securities that

were speculative, unseasoned and in

limited supply. This was done on the

basis of recommendations made by a

single salesman and Without adequate

Independent study.

The Commission found that the funds'

prospectuses and periodic reports disseminated to the public were false and

misleading because the stated investment

policies were disregarded. There was no

disclosure about the practices described

above or their effect on the net asset

values of the funds, or about the funds'

inability to dispose of these securities at

prices that their own trading had created.

The Commission also found that Financral Programs Violated certain provisions

of the Federal securities laws by causing
i

j

\,

1

J

1

)

.1

:l

I

A

I

'\

.

the funds It managed to maintain excessive cash balances with a certain bank

which considered those balances in

lending money to persons affiliated with

Financial Programs.

The Commission further found that the

two officers of Financial Programs referred to above received compensation

from the salesman who had arranged the

sales of the thinly traded over-the-counter

securities to the funds and that such

compensation was obtained In violation

of the Investment Company Act.

The Commission ordered Financial

Programs to comply with ItS undertaking

to, among other things, offer the four

funds $2.5 rmllron In settlement of claims

against It and refrain for 180 days from

performing any Investment advisory

function for any new client. The Commission barred one of the former officers,

and barred in certain respects and

suspended In other respects the other

former officer from engaging In certain

activities in the securities Industry,

In a subsequent order, the Commission

found, pursuant to an offer of settlement

submitted by Financial Programs's former

president, that he failed to adopt adequate supervisory procedures, misrepresented to shareholders that the funds

would be properly managed, and caused

the funds to maintain excessive cash

balances. He was suspended for a SO-day

period from engaging In certain activities

In the secuntres industry. The Commission noted his undertaking to pay $15,000

to two of the tunds.?

The proceedings against the two remaining respondents were stili pending

at the end of the fiscal year.

Chase Investment Services of Boston,

Inc.8.-The Commission simultaneously

instituted administrative proceedings

against Chase Investment Services of

Boston, Inc. (CIS), John P. Chase, Inc.

(JPC), CIS's parent, and certain lndividuals, and issued an order Imposing remedial sanctions against respondents, based

upon offers of settlement In which respondents, without admitting or denying

the charges against them, consented to

certain findings and sanctions. Pursuant

to these offers, the Commission found

that (a) CIS, certain officers of CIS and

JPC and others violated the antifraud

provrsrons of the secunties laws; and

(b) JPC and the chairman of JPC's board

of directors failed reasonably to supervise

with a view toward preventing such

violations.

The Oornrnlsston found that advertisements were distributed and oral sales

presentations made to CIS clients which

contained untrue and misleading statements relating to, among other things,

the similarity between CIS's advisory

service to the kind of service furnished

by JPC and other Investment counsel

firms to wealthy Investors, the past performance of CIS accounts, and the risks

Involved In CIS's Investment methods.

The Commission also found that investment decisrons for CIS clients were made

without regard to their SUitability for the

particular client; clients accounts were

not promptly reviewed when material

changes occurred in CIS's research

positions about secuntres in such accounts; Inducements were offered to

broker-dealers to recommend that their

customers become clients of CIS, mcludIng a share of the advisory fees paid by

such clients and the likelihood of substantial brokerage Income; and that the

foregoing facts were not disclosed to

clients or prospective clients of CIS.

The Commission's order: (1) Suspended both CIS and JPC for 180 days

from solicrtrnq or accepting new clients

for or on behalf of CIS; (2) Required CIS

to serve ItS existlnq clients at cost during

the aforementioned 180-day suspension

period; (3) Suspended the chairman of

JPC's board of directors from assocration

with an Investment advrser for 30 days;

(4) Suspended the Investment adviser

registration of JPC's former executive

vice-president and his right to associate

himself with any other Investment adviser

for 30 days; and (5) Precluded CIS's

former president from associating himself

with an investment adviser, a broker, or a

dealer without the Commission's pnor

approval. The Commission's order noted

that CIS and JPC have undertaken to

institute certain remedial steps for the

conduct of CIS's advrsory business and

99
that JPC's former executive vice-president

has made a similar undertaking with

respect to his Investment advisory

business

Intersearch Technology, Inc.-The

decrsion of an administrative law Judge

revoking the investment adviser registrations of Intersearch Technology, Inc, and

Intersearch Publications, Inc and barring

Jesse B. Reid, who controlled both firms,

from being associated with an Investment

adviser became the final decrsion of the

Commission

It was found that during 1970 and early

1971 respondents had violated the antifraud provrsrons of the Investment Advisers Act by uSing false and misleading

statements in subscriptions to the investment advisory publication Interscan

and failing to disclose the firms' insolvency to subscnbers or potential subscnbers to their publications.

Third National Corporation 9-Admlnrstrative proceedings were instituted

against Third National Corporation, a

registered bank holding company, to

determine whether certain of ItS filings

with the Oornmrssson under the secunttes

Exchange Act were deficient. Third National consented, without admitting or

denying the charges, to findings that ItS

filings were detrcient In several material

respects. The Commission ordered Third

National to correct ItS filings to disclose.

(1) that key management of Third National's pnncrpal Subsidiary, Third National Bank, had a significant undisclosed

Interest In certain acquisitions effected

by Third National, and (2) that Third

National Bank, in connection with ItS correspondent banking actrvmes, had a

practice of making loans to persons In

positrons of control or influence at correspondent banks, which loans were on

terms more favorable than those available to comparable borrowers not In a

position to Influence Third National Bank's

correspondents

As part of ItS settlement offer, Third

National undertook to Inform ItS shareholders fully of these matters and to offer

rescission to offerees of a current exchange offer.

100

Laidlaw & Co., Inc.-Public administrative proceedings were ordered against 21

respondents based on charges of violations of various provrsrons of the Federal

securrties laws, primarily In connection

with an unsuccessful public offering of

200,000 shares of SaCom common stock

on October 31, 1972. Named as respondents were the managing underwriter,

Laidlaw & Co., Inc. (now known as LAC,

Inc.) and Rollin F. Perry, the former head

of Laidlaw's corporate finance drvrslon:

two market makers in SaCom stock, A.P.

Montgomery and Torpre & Saltzman, Inc.;

eight of the participating underwriters

in the SaCom offering and the legal

counsel for Laidlaw. The Commission

also named NDF Securities, Inc. and

seven individuals In connection with

trading actrvmes in SaCom.

It was alleged that Laidlaw and Perry,

in the SaCom offering, engaged In manipulative activities to facilitate the distribution of the SaCom offering and create the

false rrnpressron that the offering had

been successfully distributed to the

public. In thrs regard it was alleged that

members of the underwriting syndicate

sent false "all-sold" wires to the manager

of the syndicate. It was further alleged

that there were undisclosed pre-effective

date arrangements between underwriters

whereby certain underwnters would not

have to accept unsold stock. Laidlaw,

Perry and others also were alleged to

have violated the Federal securities laws

In connection with trading activities in

the common stock of Manchester Life &

Casualty Management Corp. and Dynalectron Corporation.

Nineteen of the respondents have

consented to the entry of various sanctions against them.1O A public hearing on

the charges against the two remaining

respondents IS scheduled for October,

1975.

Steadman Security Corporation (SSC)-

Ttus IS an administrative proceeding

against SSC, a registered Investment

adviser, and Its president, board chairman, and controlling shareholder. He IS

also president and board chairman of

four registered investment companies
(Steadman Funds) managed by the registered Investment adviser. Also named

as respondents were certain affiliated

registered broker-dealers.

An administrative law Judge found that

respondents committed violations of the

antifraud and other provisrons of the

federal securities laws. Specifically,

respondents were found to have, among

other things, (a) caused the Steadman

Funds to maintain at or to transfer to

certain banks their custodian accounts

to enable respondents to get loans and

brokerage commission business from

such banks instead of obtaining for the

Steadman Funds the best available custodian services at terms most advantageous to such Funds, (b) caused

securities transactions between the

Funds and an off-shore fund controlled

by respondents to be effected without

obtaining approval from the Commission

as required by the Investment Company

Act of 1940, (c) failed to see to It that the

funds filed reports required by the federal

securities laws on time and (d) failed to

disclose the above described conduct

The administrative law jUdge concluded that the investment adviser registration of SSC should be revoked and its

president be barred from association

with any investment adviser or registered investment company and suspended for one year from association

with any broker-dealer. At the end of the

fiscal year, the case was pending before

the Commission on review of the Initial

decision.

Samuel H. Sloan II-The Commission

barred Samuel H. Sloan from association

with any broker-dealer and revoked the

broker-dealer registration of his firm. The

Commission's action was based on

Sloan's persistent violations of the Exchange Act's recordkeeping, net capital,

and reporting provrsrons and on mjunctive decrees restraining him from further

violations of the record keeping and net

capital provrsrons. The Commission concluded that: "Sloan's Violations are

neither tnvral nor technical. They Involve

flagrant and long-continued breaches of

significant duties Imposed on persons In

the securities business."

APPLICATIONS FOR RELIEF

FROM DISQUALIFICATION

On February 26, 1975, the Commission

Issued a release announcing the various

factors which are considered when it

entertains an application for readmission

to the securities business by mdlvrduais

or firms which previously have been

barred from partrcrpatron In the securities

business or some aspect thereof.12 The

Commission noted that situations may

exrst where, In view of changed circumstances and after the passage of a penod

of time, It may appear appropriate to the

Commission, In ItS discretion, to lift the

disqualification If the applicant is able to

demonstrate to the Commission's satisfaction that removal of the disqualification would be consistent With the public

Interest.

The Oommissron enumerated the following factors, among others, wrucn It

generally considers In exerclsinq ItS

discretion In the review of applications

for relief: the period of time which has

elapsed since entry of the disqualification order, the nature of the findings that

resulted In the disqualification, the applicant's attempts to undo any Injury

resulting from his pnor misconduct, the

applicant's overall conduct since the

entry of the disqualification order, the

type and nature of the applicant's prospective duties, and any other factors

which the Commission may deem pertinent. In addition, the Commission noted

that it may seek addrtronat rntorrnatron

concerning the applicant by conducting

an mvesnqatron or by obtaining the views

of Interested third parties.

As a final matter, the Commission

specrtied the procedures to be followed

by an applicant seeking relief from disqualitrcatron

TRADING SUSPENSIONS

The Securities Exchange Act authorizes the Commission summarily to sus101
pend trading in a security traded on

either a national securities exchange or

In the over-the-counter market for a

period of up to 10 days If, In the Commission's opinion, such action IS required In

the public Interest

DUring fiscal 1975, the Commission

suspended trading In the securities of 113

companies, a decrease of 59% from the

279 securities suspended In fiscal 1974

and a 35% decrease from the 174 securities suspended In fiscal 1973. The decreased number of trading suspensions

reflected a significant reduction in the

number of issuers which were delinquent

In filing required reports with the Comrrussron. In most Instances, the suspensions were ordered either because of

substantial questions as to the adequacy,

accuracy or availability of public informalion concerning the companies' financial

condition or business operations or because of transactions in the companies'

secunties suggesting possible manipulation or other violations.

On January 3, 1975, the Commission

suspended trading In the securities of

American Agronomics Corporation 13 because of questions concerning the market

activity in the shares of the company.

On April 22, 1975, the Commission suspended trading In the securities of General Retractones Corporation 14 because

of the unavailability of current accurate

Information concerning certain business

transactions conducted by the company

with a principal European stockholder

and companies under his control, and

because of questions concerning the

Identity of that stockholder and the extent

of his holdings.

DEUNQUENTREPORTS

PROGRAM

Fundamental to the success of the disclosure scheme of the Federal securities

laws is the timely filing In proper form

and content of annual and other penodic

and current reports required to be filed

by Issuers and indivrduats The Delinquent Reports Program IS designed to

Identify required reports which have not

been timely filed and, when appropriate,

102

to recommend remedial enforcement

action Such enforcement action entails

alerting the public to the lack of current

and accurate Information and, where

necessary, seeking a court order requrrIng the filing of the delinquent reports

coupled with an injunction against further

violations of the Exchange Act's reporting

provisrons.

The statutory framework within which

thrs program operates IS primarily Secnons 13(a) and 15(d) of the Exchange

Act and the rules thereunder which requrre companies whose securities are

registered under Section 12 to file periodrc and current reports in proper form;

Section 12(k) of the Exchange Act which

authorizes the Oomrnlssron to suspend

temporarily trading in the securities of issuers, and Rule 15c2-11 under the Exchange Act which requires broker-dealers

making specrnc quotations in an Interdealer quotation medium to have available certain Information regarding the

Issuer of the securities quoted.

During the 1975 fiscal year, the Comrnrssion temporarily suspended trading In

the secunties of approximately thirty

companies solely due to the lack of current and adequate Information. They

hadn't even filed at least a Form 1o-K

annual report dlsclosmq their audited

financial condition and results of operations.

During this fiscal year, the Commission

brought thirteen CIVil injunctive actions 15

solely on the basis of the Issuers' failure

to comply with the reporting requirements

of the Exchange Act. In some of these

actions, the chief operating officer was

included as a defendant for his alleged

failure to cause the company to file the

delinquent reports.

For example, on December 20, 1974 an

action was filed against Data Lease

Financial Corporation ("Data Lease"), a

bank holding company, in which It was

alleged that Data Lease was delinquent

In filing its Annual Report on Form 1o-K

for ItS fiscal year ended June 30, 1974

and an amendment to its Form 1o-K for

fiscal year ended June 30, 1973. The

Commission's Motion for Summary Judgment was granted by the court on Feb-
ruary 14, 1975. Data Lease was ordered

to file the delinquent reports immediately,

and a permanent Injunction was Issued

against further Violations of the reporting

requirements of the Exchange Act. One

week later, the delinquent reports were

filed with the Commission.

After an issuer has been enjoined from

violating the reporting provisrons of the

Exchange Act, the program rnorutors ItS

SUbsequent compliance With the court's

order. If It continues to Violate the reportIng requirements of the Exchange Act

and the court's order to file timely and

proper reports, further action may be

instituted. In the past fiscal year, proceedings seeking to hold three such

companies and certain of their officers In

CIVil contempt of prior injunctive orders

were initiated and successfully concluded.16

The Commission hopes this program

has succeeded in making issuers increasingly aware of the Importance It

attaches to the prompt filing of required

reports, and the necessity of informing

shareholders why such reports are not

being filed on time and furnishing them

with any available preliminary financial

and operational information.

CIVIL PROCEEDINGS

DUring fiscal 1975, the Oomrnissron

Instituted a total of 174 injunctive actions.

Some of the more noteworthy injunctive

proceedings and Significant developments in actions instituted In earlier years

are reported below. Several of these enforcement actions were achieved through

coordination between self-regulatory

bodies and the Drvlsron of Enforcement.

S.E.C. v, PhIllips Petroleum Company.

On March 6, 1975, the Commission filed

a complaint against Phillips Petroleum

Company and several of its past and

present officers and directors to enjoin

them from further Violations of Sections

12(b), 13(a) and 14(a) of the Securities

Exchange Act and rules thereunder. The

complaint alleged that the defendants

maintained a secret fund of corporate

monies which were used for unlawful

political contributions and other purposes. In particular, It was alleged that

durtnq the period from 1963 to 1975, the

defendants disbursed In excess of $2.8

million In Phillips's corporate funds to

two SWISScorporations by means of false

entries on the books and records of

Phillips. These disbursements were then

converted Into cash. In excess of $1.3

million of this fund were returned to the

United States of which about $600,000

was expended for political contributions

and related expenses, a substantial portion of which was unlawful. The balance

of the funds was allegedly channelled

Into the SWISS corporations and distributed overseas In cash.

Each of the defendants consented,

Without admitting or denying the facts set

forth In the complaint, to the entry of a

permanent injunction prohibiting future

violations of the Federal securities laws.

In addition, Phillips undertook to prepare

a written report descnbmq ItS Internal

investigations Into the matters set forth

In the Commission's complaint together

with the results thereof and to make appropriate disclosure of the matters Involved In thrs report to its shareholders.

On April 11, 1975, the Commission

filed a complaint against Accuracy In

Media, Inc. ("AIM"), a non-partisan and

non-profit organization devoted to promoting accuracy and correcting errors in

the media, seeking to enjoin AIM from

violations of the proxy provrsrons of the

Exchange Act and rules thereunderP

The complaint alleged that AIM solicited

proxies by means of newspaper advertisements while falling to furnish the shareholders of RCA Corporation and CBS,

Inc., with written proxy statements

containing certain specnlc Information.

It was also alleged that AIM failed to file

With the Commission copies of preliminary proxy statements furnished to shareholders of RCA Corporation and CBS,

Inc., Within the time prescribed In Rule

14&-6. The complaint further alleged that

AIM's newspaper advertisements Violated

Rule 14a-9 in that such advertisements

contained statements whrcn, at the time

and In light of the circumstances under

which they were made, omitted to state

material facts necessary in order to make

103
the statements contained therein not

misleading. In addition, the Commission

sought to require AIM to publish corrective advertisements and to make an offer

to return all contributions received In

response to AIM's initial advertisements.

AIM consented without admitting or

denying the allegations of the complaint

to the entry of a final Judgment of permanent injunction enjoining it from vrolatIng Section 14(a) of the Exchange Act

and Rules 14a-3, 14a-6, and 14a-9 thereunder. The Court's order further provided

that AIM publish the corrective advertisements and make an offer to return the

contnbutions received In response to the

initial advertisements.

In S.E.C. v. Management DynamIcs,

Inc.,18 the court of appeals affirmed a

preliminary Injunction for Violation of the

registration provisions of the Securities

Act and the antifraud provrsrons of Section 10(b) of the Securttres Exchange Act

and Rule 10b--5 by a lawyer responsible

for the dissemination of almost a rmlhon

unregistered shares of Management

Dynamics's stock in relatively smalldenomination certificates. These shares

were in the name of a person who had

purported to represent one or more foreign Investors, but who, In fact, attempted

to sell the shares Within the United States.

The court also upheld a preliminary

Injunction against a broker-dealer firm,

which had acted as market maker for

Management Dynamics's stock, for Violation of the antifraud provisions of the

securities laws. The firm's vice-president

In charge of trading continued trading

the shares even though there was no

logical explanation for a pnce nse from

$0.38 to $6 00 In a penod of about six

months and the company had not responded to an Inquiry for Information

sent by the broker-dealer. The court of

appeals stated that It agreed With the

Commission's position that Section 20(a)

of the Securities Exchange Act "was not

intended as the sole measure of employer

liability" In an enforcement action

brought by the Commission, because

Section 20(a) was "enacted to expand,

rather than restnct, the scope of liability

under the secunties laws."

104

The court also explicitly held that

"proof of Irreparable injury or inadequacy

of other remedies as in the usual suit for

injunction" is not required in an injunction action brought by the Commission.

S.E.C. v. Geon Industries, Inc.,19 involved trading on rnsrde information

about a proposed merger between Geon

and Burmah Oil Co., Ltd., of Great Bntam,

The complaint charged violations of Section 10(b) of the Securities Exchange Act

and RuIe 10b--5 In connection with several purchases of Geon stock by individuals who knew about the state of the

merger negotiations that was not publicly

known. It also charged violations of those

provtsrons and of Section 17(a) of the

Securities Act In connection with the sale

of Geon stock by persons having inside

knowledge that the merger might not go

through. Also, violations of Section 10(b)

of the Securities Exchange Act and Rule

10b--5 were charged against Geon's

secretary-treasurer, who, when the stock

exchange on which the Geon stock was

trading mquired whether there was any

reason for a large Imbalance of sell orders, stated that he knew of none, thus

resulting in the commencement of trading

In Geon stock, when he knew that insiders had become aware that the merger

might fail.20

The district court held 21 that the company's president Violated the antifraud

provrsrons by disclosing nonpublic information about the fact and progress of

the proposed merger, which resulted in

purchases and sales of Geon stock, and

that Geon was liable for these acts of its

president. The court refused to hold that

a brokerage firm was liable for purchases

and sales made by a registered representative on the basis of Inside information,

although the registered representative

consented to an injunction against him.

The court also refused to hold liable the

secretary-treasurer of Geon for his alleged misleading statements to the stock

exchange. Geon and its president have

appealed, as has the Commission.

In May 1975, the Commission filed a

complaint in the United States District

Court for the District of Columbia seeking

to enjom General Refractories Company
("GRX"), Joseph G. Solari, Its chairman,

and John E. Hartshorn, Its executive vice

presldent.22 Also named In the complaint

were Hermann Mayer, a SWISSbusinessman, Dan Mayer, his son and a former

GRX director, several SWISS and liechtenstein companies owned or controlled

by Hermann Meyer, a Swiss attorney who

acted for several of such companies, and

Swiss Bank Corporation. Preliminary and

permanent injunctions from further violations of Section 13(d) of the Exchange

Act and the anti-fraud, financial reporting

and proxy solrcrtatron provisions of that

Act were requested.

The complaint charged, among other

things, that Hermann Mayer had for many

years been a substantial stockholder of

GRX, owning or controlling as much as

17% of GRX's outstanding common stock,

and that In an effort to conceal these

holdings failed to file with the Commission the required reports on Schedule

130 when he acquired In excess of 5% of

GRX's outstanding stock. In addition, the

complaint alleged that, with the assistance of SWISS Bank Corporation, he

dispersed his GRX stockholdmqs to make

It more difficult to trace its ownership

Mayer subsequently caused false and

misleading Schedules 130 to be filed.

Solari was also charged with violating

Section 13(d) of the Exchange Act in

connection with his purchase, as part of a

group, of in excess of 5% of GRX's outstanding stock without filing the required

report on Schedule 130.

The complaint further charges that the

defendants failed to disclose in filings

with the Cornmlsston that Hermann Mayer

and the defendant companies owned or

controlled by him have engaged In extensive business transactions with GRX

amounting to millions of dollars These

filings with the Commission and materials

sent to stockholders also failed to disclose that Hermann Mayer was, during

the period 1965-1975, represented on

GRX's board of drrectors, They further

failed to disclose that GRX had made

payments to officials of foreign governments.

In addition to mjuncnve relief and drsgorgement of Illegally obtained benefits,

the Oommrsslon IS also seeking the apporntment of a special counsel for GRX

to Investigate the Mayer transactions and

foreign payments. The Court granted the

Commission's motion for a temporary

restraining order freezing Hermann

Mayer's GRX stock GRX stipulated that It

would send materials to stockholders

drsclosmq the GRX-Mayer dealings.

The case ISstill pending.

S.E.C. v. Ambassador Church Financel

Development Group, Inc. and Henry C

Atke/son, Jr.23 ThiS case Involved a

broker-dealer which engaged In the bUSIness of assisting churches to raise capital

through the sale of church bonds The

Oornrruasron instituted an injunctive

action alleging violations of the anti-fraud

provisrons of both the Securities Act and

Exchange Act and requested that a receiver be appointed and a trust Imposed

on the assets of Atkerson, the president

and sole shareholder of the firm. A permanent consent injunction was secured

and a SIPC trustee appointed. On January

16, 1975 the trustee filed a petition With

the court requesting that Atalbe Christian

Credit Association, Inc., an affiliate of

Ambassador, and Ambassador be declared alter egos of Atkerson for the

purpose of liqurdauon under the Secunties Investor Protection Act of 1970. This

was done With the consent of Ambassador, Atalbe, Atkerson and SIPC and the

trustee is now Irqurdatmq all three estates

In this manner

The Cornrtussion filed a CIVil injunctive

action against James Corr III and several of his relatives and associates

alleging violations of the anti-fraud, antimanipulative, margin, stock ownership

reporting and registratIOn provrsrons of

the secunnes laws and seeking ancrllary

relief 24 The complaint alleged that dUring

the latter part of 1974, the defendants

participated In a scheme to manipulate

upwards the price of the common stock of

American AgronomIcs Corporation, listed

on the American Stock Exchange, pursuant to which scheme Carr and his

group acquired approximately 57% of

American Agronomics' outstanding stock

and approximately 63% of the floating

supply of shares.

105
The complaint also charged that Clinton Youmans, former president of the

Community Bank of St Petersburg,

Florida, rnisappropnated approximately

$4 million from the bank which funds

were used by Corr and his associates, In

Violation of the margin requirements, for

manipulative purchases of American

Agronomics stock. Alfred Hamilton, a

friend of Corr's and a member of his

undisclosed group, also effected a manipulative series of transactions and

further participated In the alleged manipulation by, among other things, effecting

wash sales and matched orders and sales

with Corr as part of the defendants'

overall scheme to create a false and

misleading appearance of active trading

In American Agronomics stock. In addition, the complaint alleged that the

defendants made certain false filings,

which omitted to disclose sources of

funds used to buy the stock and the

existence of the group, and failed to

make certain required filings With the

Commission regarding their purchases of

American Agronomics stock. The complaint further charged that certain of

Hamilton's shares had been sold In Violation of the registration requirements and

that Corr and others, under the circumstances, were about to Violate the registratron provrsions. The case IS stili

pending

On April 10, 1975, the Commission

filed an injunctive action against Sarutas

Service Corporation and five other defendants alleging vrolatrons of the anti-fraud,

financial reporting and proxy soncitatron

provisions of the Exchange Act.2'; The

complaint alleged that several of the

individual defendants, who were officers

and directors of samtes. caused Sarutas

to pay In excess of $1 million to a company owned by Sarutas' executive vicepresident These funds were then converted Into cash and used for political

payments, bribes and kickbacks to local

and state autnormes and others. The

complaint alleged that Sarutas and the

other defendants made these payments

Without disclosing to Sarutas' stockholders, the public and the Commission,

the true nature, purpose and amounts of

106

such payments. In addition, the complaint

alleged that Sarutas had Improperly used

"pooling" accounting for an acquisition

of a waste disposal company In 1971 and

that It misrepresented and improperly

accounted for the sale of one of ItS major

linen laundry divisions in 1972.

Sarutas and all but two of the other

defendants have consented to permanent

rnjunctrons. The court's order provided

that Sanrtas and ItS new Independent

auditors would take various steps to determine the ultimate recipients of the

cash payments With a view to recouping

such payments for the company. The

consent order also provided that Sarutas

would maintain ItS new audit and legal

committees which would review accountIng procedures and review potential

claims which Sanrtas may have against

former employees and others after reviewing investigations performed by its

new counsel and auditors. Further,

Sarutas was directed to file a report of ItS

investigation of certain matters With the

court and Commission and file amended

reports With the Commission.

The litigatIOn IS continuing against the

remaining two defendants.

S.E.C. v. Minnesota Mining and Manufacturing Co.26-ln January 1975, the

Commission filed an injunctive action In

the United States District Court for the

District of Minnesota against Minnesota

Mining and Manufacturing Co. ("3M"),

and three individuals who were officers

and directors of 3M.

The complaint alleged that the defendants Violated the proxy rules and reportIng provrsions of the Exchange Act In

connection With secret funds used to

make unlawful political contributions With

corporate montes. The complaint alleged

that these monies were falsely recorded

on the books of 3M as Insurance and

legal expenses, and further alleged that

the reports and proxy matenal of 3M filed

since 1963 failed to disclose the facts and

circumstances surrounding the operation

and maintenance of the secret fund and

the Involvement of the individual defendants

Without admitting or denying the allegations of the complaint, the defendants
consented to a permanent mjunctron enjoining them from:1) usrnq corporate

funds for unlawful political contributions

or other similar purposes, 2) filing and

disseminating materrally false and misleading annual and other periodic reports

and proxy material, and 3) making or

aiding and abetting the making of materrally false and trctlcrous entries In the

books of 3M, or establishing or maintaining any secret or unrecorded funds of

monies or other assets or making any

disbursements therefrom.

The order also provides that the defendants arrange for the reimbursement to

3M of at least $425,000 and transmit to

&II .. reholders a statement descrrbing the

facts and circumstances regarding the

allegations of the proceeding. 3M also

undertook to appoint a special agent to

investigate any Instances In which 3M

expenses were recorded on the books for

other than their actual purposes.

On December 17, 1974, the Oornrnrssron filed a civil injunctive action In the

U.S. District Court for the Distrrct of

Columbia charging OSEC Petroleum

S.A., of Luxembourg, OSEC Petroleum

A.G., of Munich, West Germany, and

Jacques Sari re, a non-resident American

Citizen and lntennventa Trust, liechtenstein trust, with violations of the Exchange Act and rules thereunderP All

defendants, except Interinventa, have

consented to the entry of a final judgment

which, in part, provides for an mjunctron

and for the payment of $150,000 to persons who sold common stock of Ulster

Petroleums, Ltd. to OSEC SA between

September 17, 1973 and January 4, 1974

Ulster is a Canadian company.

The complaint charged, among other

things, that OSEC S.A., at the direction of

ItS parent, OSEC A.G., and Sari ie, purchased over 20% of the stock of Ulster

through a Canadian broker on the Toronto

Stock Exchange. Ulster shares are listed

on varrous Canadian exchanges and on

the Pacific Stock Exchange. The complaint further charges that defendants

did not file a timely report with the Commission when OSEC S.A. purchased more

than 5% of Ulster's stock, as required

by law. Violation of Section 10(b) of the

Exchange Act and Rule 10b--5 was also

charged because of their purchasing as a

result of purchases of Ulster stock without first disclosing to sellers and to the

public certain material, non public information concerning OSEC's intention to

acquire control of Ulster, since OSEC

previously had announced the cancellation of a proposed transaction with Ulster

which would have resulted In OSEC's

acquisition of control of Ulster. The

Commission also charged Interinventa

Trust, alleged owner of approximately

11% of OSEC A.G.'s shares, with refusing

to release Its Identity and the identity of

its beneficial owner to OSEC SA or the

Commission for inclusion in OSEC S.A.'s

Schedule 130 filed with the Commission.

Under the final judgment, eligible sellers who submit claims to share In the

$150,000 fund will receive, pro rata, the

difference between their sale price and

$1.52 per share In add Ilion, OSEC SA,

OSEC A.G. and Sarlie must grant a proxy

covering most of OSEC's Ulster shares to

an approved proxy holder who shall independently vote the shares in nearly all

matters until the fund has been paid or 14

months from the date of judgment, whichever 15 later. During trus period, OSEC

SA's power to dispose of the stock, In

other than ordinary brokers' transactions.

is conditioned upon its disclosure In

advance of certain information to the

Commission concerning such transactions.

In S.E.C. v. Capital Growth Company,

S.A. (Costa Rica), et al.2M, the Commission filed a complaint on September 3,

1974 alleging anti-fraud violations and

seeking Injunctive relief and the appointment of the receiver

The complaint alleged that beginning

about September 1968 and continuing to

the present, Clovis W McAlpin, Capital

Growth Company, SA (Costa Rica) ("the

Capital Growth companies"), New Providence Securrties, Ltd. and their predecessors, along with other persons and other

defendants, Including, Sanford C. Shultes,

Sheffield Advisory Company, Sheffield

Advisory Company, SA ("Sheffield") and

EHG Enterprrses, Inc., Arrel E Gutierrez

and Enrique H. Gutierrez ("EHG") con107
verted and misappropriated the assets of

the Capital Growth companies for their

own benefit The draining of the assets

of Capital Growth companies was accomplished through 'a series of self-dealing

transactions which Included eliminating

the Independent trustee, the close-ending

of the Capital Growth companies and the

diversion of the marketable assets of the

Capital Growth companies Into newlyformed entities owned or controlled by

certain of the defendants or their associates.

An order of preliminary Injunction was

entered and a receiver was appointed.

Sheffield consented to a permanent

Injunction and a final judgment of default

was entered against the remaining defendants, over the argument of EHG, who

contended that telephoruc notice of the

temporary restraining order was inadequate and that service of the summons

and complaint was not made In a timely

manner. These defendants were then

granted additional time to file their

answer and present factual evidence why

the preliminary relief granted should not

stand. Ttus was not done.

Defendants appealed from the decisron

of the District Court and urged the Court

of Appeals for the Second Ctrcurt to

vacate the order of preliminary injunction

and the appointment of a receiver On

June 2, 1975, the Court of Appeals for

the Second circurt, In an unwritten opmIon affirming the lower court's decrslon

held, among other things, that the defendants had received suttrcient notice of

the proceedings and were given an adequate opportunity to present their objections to the relief granted by the District

Court.

SEC v J&B Industnes, Inc 2" On September 3, 1974, the Commission filed a

complaint against J&B Industries, Inc.,

and nine other defendants alleging that

"special land rights" representing fractronahzed Interests In a large tract of

Canadian land constituted a security In

the form of an Investment contract that

was being offered and sold In Violation

of the registration and anti-fraud provrsions of the Federal securities laws.

Although each purchaser received title

108

In fee Simple, the defendants retained

total control over all Investments by

havrnq each Investor execute an "Irrevocable power of attorney" and a "firm

option" In favor of the defendants contemporaneously With each purchase.

On October 2, 1974 the court Issued a

preliminary injunction and appomted a

temporary receiver.

Several of the defendants have consented to permanent injunctions Without

admitting or denying the alleqanons In

the Oommrssron's complaint.

SEC v Bull Investment Group.30 On

December 20, 1974 the Oornrmssron filed

SUit In the Federal District Court for the

District of Massachusetts charging Bull

Investment Group, Ronald Kimball, Richard G. Grondin, Richard F. Tosti, Golden

Book of Values and James Sanford with

violating the registration and anti-fraud

provrslons of the federal securities laws.

The complaint, alleging that the defendants sold investment contracts in the

form of pyramid marketing plans, sought

Injunctive relief and the appointment of a

receiver.

After an evidentrary hearing, the court

noted the parallels between the Bull

Investment Group case and the SEC v

Glenn Turner Enterpnses, tnc., 474 F. 2d

476 (C.A 9, 1973) and SEC v. Koscot

Interplanetary, Inc., 497 F. 2d 473 (C. A

5, 1974), indicated that the Commission

would probably succeed In establishing

that the defendants pyramid plan was an

investment contract, and accordingly

entered a preliminary injunction on March

11, 1975 The Cornrnrsston's monon for

default judgment was granted against the

defendants Bull, Kimball, Grondin, and

Tosti for their failure to comply With the

Court's order compelling discovery. The

matter IS stili pending against Golden

Book and Sanford.

Noteworthy collateral matters were In

Issue during the course of the litigation.

The Commrssron on February 4, 1975

moved that the defendant's answer be

stricken because It was filed In bad faith

In that It contained many patently false

assertions. The motion was subsequently

granted, but the defendants were granted

leave to amend. During the course of the
hearing on preliminary injunction a

"clean hand" defense was raised, assertIng that the Commission had violated Its

own rules of confidentiality by providing

Information gathered from the defendants

to other law enforcement agencies. The

court, after taking testimony on the Issue,

rejected the defense. Finally, the Cornrrussron, upon learning that the defendants

were Violating the preliminary injunction,

moved to modify that order to Insure that

the injunction would be honored. After a

heanng concerning these vrolatrons, the

court entered an order which broadened

the injunctron's scope, and Installed

rnorutorrnq devices to Insure compliance.

SEC v, Howard Garfmkle, et al.31 On

January 14, 1975, the Commission filed a

complaint In the Southern Drstnct of New

York alleging that Howard N. Garfinkle

and other defendants had Violated the

anti-fraud and registration provrsrons of

the secuntres laws in connection With the

sale of limited partnership Interests In

apartment buudrnqs, The complaint alleged that the offerings Involved misstatements and omissions to state matenal

facts concerning, among other things, the

financial projections Inserted In the offerIng circulars, the failure to transfer record

title to the properties, the quick sale of

the properties causing the limited partners to lose tax benefits and part of their

Invested capital, the commingling and

rnisappropnatron of funds of the limited

partnerships and the failure to drstnbute

proportionate shares of the proceeds of

sales to the limited partners.

The complaint also alleged that Bernard Tolkow, the busmess manager of

United Welfare Fund and another defendant, caused United to provide monies to

Garfinkle by purchasrnq participations In

short-term notes collateralized by mortgages on properties sold to limited

partnerships, and that Garfinkle rnrsappropnated for hrs own benefit the rnorues

he received from United. It was alleged

that Garfinkle provided kickbacks to

Tolkow In the form of purported returns

on Investments by Tolkow In limited

partnerships. Dlsgorgement IS sought of

funds received by Garfinkle from investors and received by Tolkow from Gartmkle as a result of the fraud.

After a hearing, the Court granted

preliminary injunctions against Tolkow

and the Secunty DIVISion of United Welfare Fund and ordered the Secunty DiVIsron to maintain specific Investment

procedures to limit the possibility of

Improper Investment of welfare funds.

Garfinkle had consented to a preliminary

injunction pnor to the heanng All the

defendants, except Garfinkle, Tolkow

and the Welfare Fund, including a lawyer

who had procured Investors In the limited

partnerships, have been permanently

enjoined by consent The action continues as to the remaining defendants.

In SEC v. Town Enterpnses Inc et al.,32

the Commission alleged a massive fraudulent scheme In the offer and sale of

unregistered securities In the form of

"passbook certificates" and "time certificates" by Town through at least eight

wholly-owned, uninsured subsrdtarles

operating under Morns Plan and Industrial

Banking statutes of seven states The

Commission's complaint alleged, among

other things, that the defendants offered

and sold these securities durmq a penod

when Town and ItS subsrdranes were

experiencmq large undisclosed unancrat

losses Approximately $16,000,000 of

such secuntres, held by at least 15,000

Investors, were In the hands of Investors

at the time the complaint was filed.

All defendants, without admitting or

denying the allegations of the complaint,

consented to orders permanently enjoinIng them from further Violations of the

registration and anti-fraud provisrons of

the Federal securities laws. Town and

several subsrdianes, named as defendants, have subsequently filed voluntary

pennons In Bankruptcy under Chapter

XI of the Federal Bankruptcy Act.

SEC v. Bngadoon Scotch Dtstnbutors,

Ltd., et a/.3J On December 12, 1974, the

Cornrnrssron instituted an injunctive action against Bngadoon Scotch Distnbutors, Ltd. and 26 other defendants alleging

violatrons of the registration and antifraud provisions of the Federal securities

laws In connection with the offer and sale

by the defendants of Investment Interests

In scotch whisky and rare COin portfoliOS.

109
Of particular note, and a question of first

Impression was the charge In the Commission's complaint that the offer and

sale of rare COin portfolios by the Federal

COin Reserve, Inc ("FCR") constituted

the offer and sale of a security subject to

the junsdictron of the federal securities

laws

In this regard, the court In an opinion

dated February 10, 1975, after a hearing

on the Commission's motion for a preliminary rnjunctron against FCR, ItS principals and key sales personnel, found

that the Investment Interests in rare COin

portfolios being offered and sold by the

defendants to the investing public did, In

fact, constitute the offer and sale of a

security within the province of the Federal

secunties laws, Accordingly, the court

granted the Commission's request for a

preliminary mjunctron.

In SEC v Robert Dale Johnson, et al.l~

the Commission, on June 14, 1974, filed

an injunctive action alleging violations

of the registratIOn and antifraud provisions of the Federal securities laws, variously, by Robert Dale Johnson, Ridge

Associates & Co and ten other defendants In connection with a multi-million

dollar industrial wine Ponzt scheme. The

Commission alleged that the defendants

offered and sold secunties In the form of

Investment contracts to approximately

400 Investors without compliance with the

securities registration requirements In

addition, It was alleged that Johnson and

Ridge engaged In a fraudulent scheme

rnducrnq Investors by falsely representing

that their funds would be used to purchase European industrial wine to be

resold at huge profits In fact, Johnson

and Ridge kept selling wine contract

obligations, evrdencinq a promised return to Investors of principal Invested

and profits ranging from 30 to 100%,

which were being paid off with the funds

of other Investors No wine Investment

program ever existed Approximately $75

million was raised from approximately

400 Investors under such promissory

notes Final Judgments of Permanent

Injuncnon were entered against all defendants On August 26, 1974, Johnson

pleaded gUilty to a criminal information

110

charging him With one count of securities

fraud and one count of mail fraud arising

out of thrs scheme and was sentenced to

a term of six years impnsonment.se

SEC v. North American Acceptance

Corporetion.v: On February 7, 1975, the

Commission filed a complaint seeking to

enjorn North American Acceptance Corporation (NAAC), a Georgia corporation,

and 10 other defendants alleging Violations of the registration and antifraud

provrsrons of the securities acts The

complaint alleges that NAAC and others

made false and misleading statements

and omitted to state material facts In the

sale of ItS high interest unsecured corporate notes to residents of Georgia.

Among other things, these statements

related to the use of proceeds; that land

development companies owned by NAAC

were causing a negative cash flow for

NAAC; that NAAC was having liquidity

problems; that financial statements did

not reflect substantial changes in the

financial condition of NAAC; that NAAC's

parent corporation, Omega-Alpha, Inc.

(OA) was losing money; and that millions

of dollars transferred from NAAC to OA

were being utilized by OA for working

capital and the retirement of debt not

related to NAAC.

NAAC sold promissory notes With

maturity dates of one to five years and

promissory notes payable on demand In

January 1974, NAAC mailed an annual

financial statement to ItS noteholders

which contained adverse information As

the result of thrs information, noteholders

Immediately began to demand the return

of their Investment which NAAC was

unable to repay. Thereafter, on February

6, 1974, NAAC filed a petition under

Chapter XI of the Bankruptcy Act which

was later converted to a Chapter X proceeding. About 5,000 Investors stili hold

NAAC notes aggregating $38,000,000.

In S.E.C. v Cambndge Capital Corporation, et al.:17 and S.E.C. v. Interstate

Syndications, Inc, et al.,IS the Commission Instituted injunctive actions against

two Atlanta-based land syndication companies charging Violations of the registration and antifraud provrsions of the

securities laws Both companies were

engaged In the business of seiling Invest-
ments In various tracts of raw land In the

form of either limited partnership interests or co-tenancy Interests In the real

estate. The sales terms of these real

estate syndication Interests called Initially for downpayrnents and later for

yearly payments by each Investor to

cover the annual mortgage, Interest and

real estate tax obuqanons relating to

each tract of raw land. In order to protect

the Investors' Interests In the real estate,

a court-appointed agent was needed to

administer the receipt and disbursement

of the funds. In each SUit, the court, at the

request of the Commission, appointed a

special fiscal agent to administer the

various land syndications. Because these

Interests were frequently sold to persons

who were told or led to believe that they

would not have to make more than one or

two of the annual payments before the

land was "turned over" at a profit and because the raw land was not producrnq

any Income, the special fiscal agents

encountered difficulties preserving the

Investors' interests Subsequent efforts

made by the court, the special fiscal

agents and the Commission's staff have

been directed toward minimizing Investor

loss In the adverse climate of a tight

money market and a general recession

In the market for unimproved real estate

In SEC v. Strathmore Distillery Co.

Ltd.39 an order of permanent injunction

was entered against Strathmore and

defendant John B. R. Turner, both of

Glasgow, Scotland, enjoining further

violations of the secuntres registration,

broker-dealer registration and anti-fraud

provrsrons of the federal secuntres laws

The Commission alleged in ItS complaint that the defendants were engaged

In a nationwide campaign to sell the

Scotch whisky interests and that in some

cases the prices for the whisky Interests

sold by the defendants were 100 percent

above the prevailing market prices for

such interests. The complaint further

alleged that In connection with the sale

of those interests in scotch whisky the

defendants made untrue statements of

material facts including, but not hrruted

to, statements that Investors would obtain

profits of 20% per year, that overproduction of scotch whisky was an Investment

risk, and that there are no qualitative

differences between various scotch gram

whiskies. Also It was alleged that the

defendants omitted to state certain facts

necessary to make the statements made

not misleading Among other things, the

defendants did not disclose the amount

of the sales proceeds retained by the

defendants, the source of market price

quotations and the actual market price

quotations for the scotch whisky being

sold.

S.E.C. v. R. J. Allen & Associates,

Inc.411-Thls case Involved the use of

fraudulent sales practices by a dealer of

tax-exempt secunties In seiling Industrial

Development Revenue Bonds Neither the

dealer nor the bonds were registered With

the Commission The firm, three of ItS

prlnctpals and two sales personnel were

defendants in the action which the Comrrussron instituted In the United States

District Court for the Southern District

of Florida. After a trial which lasted several days and after one salesperson

consented to the entry of a permanent

injunction against her, the court found

that the defendants had engaged in

various fraudulent practices, including:

misrepresentations and omissions of

material facts about the bonds; the

practices of "bucketmq't-e-not filling

orders for which customers had paldand "swltchlng"-dellverlng bonds to

customers other than those they had

ordered. Prominent among the victims

were a number of returned prisoners of

war from Vietnam who had Invested all

or part of the back pay earned while they

were prisoners based upon the false

promise of fully insured tax-free Income.

In addition to the entry of a permanent

injunction agamst the defendants prohibiting further Violations of the anti-fraud

provrsrons of the Securities Act and the

Exchange Act, the court also appointed a

receiver, required an accountmg, froze

the defendants' assets, and ordered the

firm and ItS two principals to JOintly drsgorge to the receiver an amount equal to

the total sales of all Industrial Development Revenue Bonds to all customersapproximately $4,500,000.41 Since the

111
entry of the order, the Commission has

continued to assist the receiver In locatIng assets of the defendants and to complete an accounting of the firm's books

and records

S.E.C. v. Prudenuet Funds, Inc.42-ln

June, 1975, In U.S. District Court for the

District of Columbia, the Commission

sued Prudential, ItS Executive vicePresident (Finance), Winston S McAdoo,

and ItS broker-dealer subsidiary, Prudential Ventures Corporation, charging

violations by all the defendants of the

anti-fraud, reporting and prospectus

provrsrons of the federal securrnes laws,

and the violation by Prudential of the

proxy solicitation provrsions.

The Commission alleged that the defendants, when offering and seiling over

$10 million In limited partnership Interests

In "leveraged" 011 and gas drilling programs prospectuses, misrepresented the

manner In which they would conduct the

business of the drilling programs In a

way materially at variance With representations to Investors made In prospectuses, tax opinion letters, and seiling

literature, and Ignored the warnings of

their tax counsel as to the possible

adverse tax consequences of such conduct.

The Commission alleged that the defendants engineered a series of sham

transactions In late 1972 which were of

doubtful validity from a tax viewpomt,

and which had not been disclosed to

Investors Investors were Informed by

Prudential as to the availability of leveraged tax deductions (In excess of their

cash Investment) for their 1972 tax returns, Without being Informed as to the

nature of the transactions purportedly

giVing rise to the deductions or as to the

tax risks associated With claiming the

deducllons The defendants consented

to the entry of an injunction against

further vrolatrons Without admitting or

denying the Commission's allegations

S.E.C. v. G.C. George secumie«, Inc.43

-On February 12, 1975, the Commission

filed an injunctive action In the United

States District Court for the Eastern

District of Washington against eleven

Spokane-based securities broker-dealers

112

and sixteen individuals associated with

the broker-dealer firms. The suit alleged

that the defendants were Violating the

anti-fraud provrsrons of the Federal

securities laws in connection with the

publication and nation-wide drstnbutron

of over-the-counter quotation sheets for

the securities of some 80 local mining

companies, which reflected quotations

navrnq little or no relationship to the

prices at which concurrent transactions

were being effected In such secunties

by the defendants.

The Commission's Motion for Preliminary Injunction has been consolidated

With a hearing on the merits No trial date

has been set pending the outcome of

settlement negotiations

In S.E C. v. Western PacifIC Gold and

SIlver Exchange Corporeuon, et al the

United States District Court for the District

of Nevada held that the offer and sale of

investment interests In gold and silver

to Investors In several states involved

the offer and sale of investment contracts, evidences of Indebtedness in

Interests and Instruments commonly

known as securities, In Violation of the

registration and antifraud provrsrons of

the Federal secunues laws.

The court found that the defendants

had omitted to state, among other things,

that: Western Pacrtrc Gold and Silver

Exchange Corporation was Insolvent; ItS

Investment agreements were written Without acqumnq the corresponding gold

and silver, or Silver futures contract

for each contract sold to Investors; It paid

Investors by raising funds from other

Investors, It could not fulfill ItS guarantee

to repurchase gold and silver from

investors; Investors' funds were not

being used to acquire silver and gold

and were being diverted and converted to

the use of the defendants, Silver was not

stored In Independent storage facilities,

nor was the Investors' Silver segregated

from the Silver of another Investor, and

little, If any, Silver presently exrsts In or

otherwise for the accounts of Investors

who requested storage

The Order of Preliminary Injunction

was followed by a summary Judgment~;

~~
which prohibited the named defendants

from violating the registration and antifraud provrsrons of the secuntres laws

The JUdgment also provided for certain

ancillary relief The defendants were

enjoined from altering, destroying, concealing, dissipating, disclosing, transferring or moving any books, records,

documents, correspondence, funds or

assets of the defendants. The Judgment

continued the appointment of a receiver

of all assets and property of, belonging to,

or in possession of the defendants which

have been received as a result of the acts

and practices complained of. It required

the defendants to make an accounting of

all funds received from investors in connection with the silver investment agreements, and to disgorge to the receiver any

and all funds and silver which they

received as a result of their sales and

purchases of the secunnes described in

the complaint.

In addition, In fiscal 1975, the Commission filed S.E.C. v. SIlver Mint Mortgage,

Co., Ltd, et al.,~6 S.E.C. v. Constitution

Mint, Inc., et al.,47 and S.E.C. v. Douglas

S. Warren, et al.~H Preliminary or final

injunctions have been entered In the

above cases

S.E.C. v. Seaboard Corp.~9-The Comrrussron obtained consent Injunctions

against all but two of the twenty-nine

defendants In this previously reported 50

case. The SUit dealt essentially with the

alleged mismanagement and outright

looting of a complex of mutual funds

("Funds").

The complaint alleged that a portfolio

manager of the Funds engaged In a

practice of first purchasing thinly traded

securities through nominees, then causIng the Funds to purchase the same securities In large volume, thereby causing a

price rise. He then allegedly sold his

personal holdings either to the Funds or

Into the market when the Funds were

bUying As a result, the Funds were alleged to have lost as much as $4,000,000.

The complaint also alleged that finders'

fees In excess of $200,000 were Illegally

paid to affiliates of the Funds and that

secunnes were purchased, Investment

advisers selected and other decrsions

relating to the Investment funds made In

order to benefit Seaboard and ItS affiliates

to the detriment of the Funds.

In additron to enjoining the defendants

from further violations of the antifraud

provrsrons of the federal secuntres laws,

the court has Imposed other sanctions,

mctudmq the payment of money to the

Funds and to special funds administered

by the court for the benefit of other

classes of persons who were Injured

tprough the defendants' actions

. S.E.C. v. Republtc National Life Insurance Company.5t-As previously reported.s- the Commission instituted an

injunctive action against Hepublrc Natronal life Insurance Company ("RepubIre"), Realty Equines Corporation of New

York ("Realty"), Peat, Marwlck, Mitchell

& Company ("PMM"), Westhelmer, Fine,

Berger & Co. ("Westhelmer"), and eleven

mdrviduals who were employees of Republic or Realty The Commission

charged extensive violations of antifraud

and reporting provisrons of the Exchange

Act. In essence, the complaint alleged

that Republic, In trying to conceal Its

failing Investment In Realty, put rnuuons

of dollars Into Realty through certain

transactions The proceeds were usually

channeled back to Republic to repay

earlier Realty debt Realty was thus enabled to retain suttrcrent funds through

the transactrons to continue In operation

Republic and Realty and each of their

Independent auditors were alleged to

have made and Issued false and mrsteadIng financial statements.

Republic, Realty, PMM, Westhelmer,

and eight of the eleven individual defendants consented to permanent injunctions

enjoining them from future vrolatrons of

various provrsrons of the Exchange Act.

Certain of the defendants also consented

to ancillary remedies designed to prevent

recurrences of VIOlative conduct. The

litigation IS continuing With respect to

three remaining defendants.

S.E.C. v, MatteI, Inc n-In two separate

proceedings dunnq 1974, Mattei, Inc, a

California toy manufacturer, was enjoined

on ItS consent from Violating the antifraud

and reporting provrsions of the Securities

113
Exchange Act. The alleqatrons related to

material misstatements In MatteI's financial statements durrnq 1971 through 1973

and press releases Issued during that

period

In addrtron to the rnjunctrons, the court

ordered that Mattei (1) appoint and maintain a majority of Its directors who are

unaffiliated with Mattei, (2) maintain committees of such Independent directors to

review financial controls and auditing

procedures and also lrtrqatton, (3) appoint

a special counsel to Investigate the matters alleged In the complaint, to report hrs

findings to the court and the Commission

and to Initiate actions on behalf of the

company against management, and (4)

appoint a special auditor to examine the

company's past financial statements

S E.C. v Solnron Devices, Inc "~-In an

action filed In March 1975, the Commission obtained a final order against

Solltron Devices, Inc. on allegations that

Solltron's 1967 through 1970 Annual

Reports on Form 1G-K were false and

misleading because the accompanying

audited financial statements matenally

overstated the value of ItS Inventory,

sales and accounts receivable and ItS

pre-tax and net Income In addition, the

complaint alleged that Solltron's annual

and other reports from 1971 and audited

financial statements failed to disclose

that a substantial part of the wntedown

of Solltron's Inventory described therein

was due to, among other things, Solltron's

falsification of ItS prior tmancral statements and that Solltron had a substantial

contingent liability arising out of ItS

prror falsified financial statements

The court ordered Solltron, With ItS

consent, to file timely complete and

accurate annual and penodic reports With

the Commission containing all material

facts. Further, Solltron was ordered to

make only such public statements as are

complete and accurate In all material

respects.

Moreover, the court's order directed

the company to restate correctly ItS prior

filings which were the subject of the

Commission's complaint. Finally, the

court directed Solrtron to retain specral

counsel, satisfactory to the Commission,

114

to accomplish the matters referred to In a

strpulatron and undertaking executed by

Solltron and annexed to the court's order

and to comply fully With the snpulanons

and undertakings contained therein

S.E C. v Savoy Industnes Corporation ;;-Thls case exemplifies how cooperative efforts of the Commission's

staff and self-regulatory bodies produce

effective enforcement actron. On November 22, 1974, the Commission, after an

investigation resulting from information

received from the American Stock Exchange, instituted an injunctive action

against Savoy and five other defendants

alleging Violations of the reporting and

anti-fraud provrsions of the Federal

secunties laws. The complaint alleged

that the defendants made numerous

fraudulent misstatements of material facts

and omitted to state other material facts

In reports requtred to be filed With the

Commission and the Arnencan Stock

Exchange The defendants were charged

With failing to disclose the role of one of

the defendants as a controlling factor In a

scheme to acquire Savoy stock and that

the real purpose of the acqursrtron was to

turn Savoy Into an Insurance holding

company

Savoy and three other defendants,

Without admitting or denying the allegations, consented to permanent rnjuncnons enjoining them from further Violations of the reporting and anti-fraud

provrsrons of the Federal secunnes laws.

In additron, all defendants who acquired

shares of Savoy common stock have

agreed not to dispose of those shares for

at least two years.

Three CIVil actions were initiated dunng

fiscal 1974 by the Cornrrussron against

Honda-based Issuers of unregistered

mortgage notes and the mortgage brokers

seiling the notes. These actions against

a total of 21 defendants, were captioned

S.E.C v Continental Land Management

Corp ,": S.E C v. L. T P. Properties, lnc.,"

and S.E.C v Horowitz," Each of the

cases Included charges of Violations of

registration and anti-fraud provrsrons by

the Issuers and sellers of corporate

promissory notes collateralized by mortgages or assignments of Installment land
sales contracts Typically, the lots purportedly mortgaged or assigned to investors were, at best, much less valuable

than represented and, at worst, nonexistent The Issuer in each of these

cases IS currently in receivership as a

result of the Commission action or In

bankruptcy proceedings. Approximately

2,300 Investors sustained losses on the

secuntres Issued of about $20 million

PARTICIPATION AS

AMICUS CURIAE

Slade v Shearson, Hemmttt & Co,

Inc.fi9-ln this action brought pursuant to

Section 10(b) of the Securities Exchange

Act and Rule 101>-5 thereunder, an investor was seeking damages suffered when

she purchased securities on the baSIS of

the recommendations of a salesman of

the defendant made at a time when the

defendant's Investment banking department was In possession of adverse material non-public information about the

Issuer of the secunties, which was also

an investment banking client. Shearson

asserted that ItS Internal poucies prohibited the firm from making any recommendations With respect to Investment

banking clients, although individual

salesmen of the firm were permitted to

make recommendations based on their

analyses of publicly available information. Shearson contended that It was

precluded from uSing mside Information

In the possession of ItS Investment bankIng department for the benent of ItS

brokerage customers, and that thrs

would be the case If It caused its salesmen to Withdraw outstanding recommendations after receipt of the adverse

non-publrc mtorrnatron. The lower court

denied Shearson's motion for a partial

summary Judgment and certified a controlling question of law to the Second

crrcuit for Interlocutory appeal The

Second Ctrcurt accepted the certrtrcatron

The Ccrnmisston as emtcus curtee

argued In the court of appeals that tms

case should not be viewed as governed

solely by cases where an insrder takes

advantage of inaide information In effectIng securities transactions In thrs case,

the Oomrrussron noted, the broker's recornrnendatron did not permit hrs customer

to benefit from mside information; rather,

the recornendanon was that, notwithstanding material adverse information,

the customer buy the securities In question In these circumstances, another

principle becomes applicable, specifically,

the Cornrrusston argued, Rule 101>-5 must

be Interpreted to prohibit a recommendanon contrary to non-public facts about the

security In question known by the brokerdealer The preservation of necessary

restrictions upon the use of material inSide information does not require that the

broker's misrepresentations be condoned

They could be avorded With no drastrc

affects on a multi-function securities firm

If, In addrtron to separating ItS departments and not allowrnq non-public information to pass from the Investment

banking department to the broker-dealer

department, the firm would also use a

devrce such as a restricted lrst, pursuant

to which the firm and ItS salesmen would

be prevented from making recommendations With respect to securities at such

times as the firm may have, or IS likely to

obtain, material mside information This

device would enable the firm to avoid

inadvertant Violations by salesmen who

are unaware of mstde information that

may be inconsistent With the mtorrnanon

which served as the baSIS for the recommendation

On December 16, 1974, the court of

appeals held that ItS acceptance of the

certification of the question for review

had been rmprovrdently granted, and

remanded the case to the district court

Noting the Implications the resolution of

this case had for both the secunties

Industry and the investing public, the

court decided that It would proceed

further In thrs case only on the baSIS of

full findings of fact and a consequent

narrowing of the Issues

In Schltck v Penn-Dixie Cement Corporeuon, et al.,"<1 the United States Court

of Appeals for the Second CirCUIt reversed a lower court ruling which had

dismissed the complaint The complaint

was filed by minority shareholders of

Continental Steel Corporatron It alleged

115
violatrons of sections 10(b) and 14(a) of

the Securities Exchange Act and Rules

10b-5 and 14a-9 thereunder It charged

that Penn-DIxie, as the majority shareholder of Continental, engaged In a

scheme to manipulate the business affairs of Continental, thereby depressing

the market price of Continental stock In

relation to that of Penn-DIxie, In order to

effect a merger between the two companies on the basts of an exchange ratio

that reflected the manipulated price, and

was thus unfair to the minority shareholders of Continental. Penn-DIxie was

also alleged to have failed to disclose

certain facts concerning the scheme In

proxy materials sent to Continental shareholders In connection with the merger

With respect to plaintiff's claim under

Rule 10b-5, the court of appeals held, In

substantial agreement with the posrtron

taken by the Commission In an amicus

curiee brief, that where a majority shareholder engages In "a scheme to defraud"

minority shareholders, which Includes

market marupulatron and a merger on

preferential terms, of which alleged orrussions and rmsrepresentatrons contained

In proxy soliciting material are only one

aspect, a plaintiff need allege only that

he suffered economic harm In order to

state a cause of action (I.e., that the

exchange ratio arguably would have been

fairer had the baSIS for valuation been

disclosed) The plaintiff did not have to

allege that the merger transacnon itself

was "caused" by material ornrssrons and

misrepresentations

The court of appeals also held, again

In substantial agreement with the position

of the Commission on the allegations

about Rule 14a-9, that certain misstatements or ormssrons In the proxy materials

were material and that the proxy solicitation was an essential link In effecting the

merger, were sufficient to plead the element of causation In the merger transaction and, therefore, were sufficient to

state a cause of action under those

provrsions In this regard, the court observed, among other things, that If shareholders had been fully Informed, they

may have had recourse to measures

other than the casting of proxies In op116

posing the merger, or at least, have been

In a better position to protect their

Interests

CRIMINAL PROCEEDINGS

As a result of investigations conducted

by ItS staff, the Commission during the

past fiscal year referred BB cases to the

Department of Justice for criminal prosecution This represents a substantial

Increase over the 65 cases referred during the preceding fiscal year. As a result

of these references, 53 indictments naming 199 defendants were returned, as

compared to 40 indictments against a

total of 169 defendants dunng the previous

year In addition, dunng the past fiscal

year, the Commission authonzed its staff

to file 17 crtrnmal contempt actions, and

convictions were obtained against 10

defendants. Dunng the past fiscal year,

116 defendants were convicted In the 33

cnrnrnal cases that were tried. Oonvrcnons were affirmed In 6 cases that had

been appealed, and appeals were stili

pending In 5 other cases at the close of

the penod.

Members of the staff of the Comrnisston

who have investigated a case and are

familiar with the facts Involved and the

applicable statutory provisions and legal

pnncrples, are usually requested by the

Department of Justice to participate and

assist In the tnal of a cnrrunal case referred to the Department, and to partrcipate and assist In any subsequent appeal

from a conviction.

The cnrnrnal cases that were handled

dunng the fiscal year demonstrated the

great variety of fraudulent practices that

have been devised and employed against

members of the Investing public.

After three weeks of tnal,hl J Harlow

Tucker of Spokane, Washington, pled

gUilty to five counts of an indictment

chargmg securities fraud and mall fraud

The defendant defrauded In excess of

1,300 mvestors, resrdmq pnrnanly In eastern Washington, of more than $4,000,000

through the sale of common stock and

subordinated convertible debentures of

The Davenport Hotel, Inc. and other investment programs related thereto. Funds
raised were purportedly to be used to

renovate The Davenport Hotel, a landmark located In Spokane, Washington,

and to butld an adjacent convention

center, but were In fact primarily used

for other undisclosed purposes. The

defendant capitalized on the area's sentimental attachment to the hotel and a

promise to pay an 8% return on the debentures, which enabled Tucker to sell securities to numerous older retired persons

and many others who had never previously Invested In securities.

Sentencing has been delayed by the

court pending a pre-sentence investigation report.

In u.s v. E. M. Riebold,G2 a multi-count

Indictment was returned in the United

States District Court for the District of

New MeXICO alleging vrolatrons of the

wrre fraud, mall fraud and Interstate

transportation of stolen property and

rrusapplrcatron of bank funds statutes by

E. M. Rrebold, a New MeXICO businessman; Donald T Morgan, a former New

Mexico banker; Harold M. Morgan, an

Albuquerque, New Mexico, attorney;

E J Hammon, a New MeXICO busrnessman, and HIlliard Crown, a Santa Fe,

New MeXICO,accountant

The mdrctrnent alleged that the defendants obtained In excess of $5,000,000

from various Victims, including banks,

and the Home-Stake Production Co. of

Tulsa, Oklahoma.

Harold Morgan pled gUIlty to an information charging him With one count of

securities fraud.G E. J. Hammon pled

gUilty to an information charging him with

one count of securities fraud, and Hilliard

Crown pled gUilty to one count of the

indictment alleging that he made a false

statement to a bank In connection With a

10an.04 The case remains for trial against

defendants E M. Rlebold and Donald

Morgan.

Gary J. Awad was the Operations Manager for some 9 years In the Detrort

branch of a large brokerage firm which

was and IS a member of the New York

Stock Exchange. In August, 1970, Awad

opened a secuntres trading account at

the firm In a ncnuous name and from that

time to about October, 1973, effected

numerous purchases and sales In the

account DUring that same period, he

was able to alter the records of ms employer to reflect receipt Into the account

of various secuntres, which were either

nonexistent or the property of other customers of the firm. USing these Securities

supposedly In the account as "collateral,"

Awad caused the nrm to Issue checks

out of the account, the proceeds of which

Awad converted to hrs own use and benefit. Since Awad had authorrty to srqn

checks drawn on the firm's bank accounts, he was able to have checks

Issued to the person In whose name the

account was maintained, sign thrs name

on the back of the checks, and deposit or

cash the checks at banks where Awad

maintained accounts In the fictitious

name. During the period the scheme was

In operation, the purchases and sales In

the account resulted In a loss to the firm

of about $80,000. In addition, checks

issued out of the account to the purported

customer totaled about $124,200, compared to deposits Into the account of

some $42,800, or a loss to the firm of an

addrtronal $81,400.

Followmq a lengthy investigation by

the Detroit Branch Office, an Informal but

detailed report was furnished to the

United States Attorney In Detroit On

June 19, 1975, Awad entered a plea of

guilty to a one-count Information filed

that same day In Detroit federal court, for

Violation of Section 10(b) of the Secuntres

Exchange Act of 1934 and Rule 10b-5

thereunder oS Sentencing was deferred

until completion of the pre-sentence

report As of the date of this resume, a

sentencing date has not been set.

After a tive-week trial, three defendants

In U.S. v The Technical Fund, Inc, et a/.

were found gUIlty of Violating various

provisions of the Federal securities

laws."" The seven counts which went to

the Jury concerned the defendants and

their relationship With a Boston based

mutual fund, the Technical Fund, Inc.,

and a Boston and New York brokerage

house, Security Planners limited The

fund had been placed In receivership

pursuant to an S.E.C action In May of

1972, while the brokerage nrrn had been

117

•l
committed to a Securitres Investor Protection Corporation trusteeship, again following Commission action, In July 1971

Sumner H Wooctrow, who was counsel

for both the Investment company and the

broker-dealer, was convicted of particrpatinq In the filing of a false brokerdealer registration form on ItS behalf and

certain undisclosed pnncrpals and of

employmg a scheme to defraud In connection with the diversron of funds from

Technical Funds to the broker-dealer

Howard P Smolar, president of the fund,

and Edward Vanasco, an undisclosed

pnncipal of the broker-dealer, were convicted of conspiracy, of the filing of false

tmancial reports and of engaging rn

prohibited affiliated transactions with the

fund rn vrolation of the Investment Company Act Smolar and Vanasco were also

convicted m separate counts of partrcipatrnq in a course of conduct whereby

Vanasco, who had been barred by the

SEC from bemg associated with any

broker-dealer, became an undisclosed

controlling person of Secunty Planners

limited Vanasco was sentenced to 3

years in Jail, Smolar was sentenced to 2

years m Jail, one month to be served and

the balance suspended, and he was

placed on probation for 2 years, and

Woodrow was sentenced to one year m

Jail, sentence suspended, and he was

placed on probation for one year. This

case IS significant as It resulted In convrctrons stemmmg from violations of

sections of the Investment Company Act

In United States v. Acton 67 four defendants were found gUilty of conspiracy,

secunties fraud, mall fraud and the sale

of unregistered stock rn connection with

the drstnbution of the common stock of

Pioneer Development Corp Three defendants pled gUilty and charges were drsmissed as to one of the defendants The

defendants were found to have acquired

control of thousands of unregistered

shares of Pioneer stock, created an

artificial market for the stock m the overthe-counter market through manipulative

devices and sold, pledged and otherwise

disposed of stock to the public All of the

defendants convicted at tnal received

sentences of at least two years impnsonment

118

Ira Femberg, former president of Manor

Nursmg Centers, Inc., was convicted after

a four week Jury tnal of 15 counts of an

indictment charging him with securrties

fraud, mall fraud and conspiracy. Another

defendant was acquttted.s" Previously,

four other defendants, rncludmq Ivan

Alan Eznne had pled guilty to conspiracy.

Eznne also pled gUilty to securities fraud,

mall fraud and making false statements

to the Commission As a result of his

gUilty plea, Eznne, an attorney, was drsbarred. The SIX defendants had been

rndrcted for their activities m connection

With the 1970 public offenng of the common stock of Manor Nursmg Centers,

Inc A previous Commission mjunctrve

action m this matter had resulted In a

landmark securrtres law decisron by the

United States Court of Appeals for the

Second Clrcult.fi9

Martin D. Nass was convicted of securities fraud m connection With hrs acuvities as vice-president and resident branch

office manager of Thomson & McKmnon,

Auctuncloss, Kohlmeyer, Inc ("Thomson

& McKmnon") a New York Stock Exchange member flrm.7U Nass pled gUilty

to two counts of a thirteen-count mdrctment chargmg him With removmg funds

and secunties from numerous customer

accounts at Thomson & McKmnon and

converting them to hrs own use. Nass

had engaged In this complicated fraudulent scheme to rrusappropnate at least

$1,000,000 In customer funds and secunties from these brokerage accounts.

He was sentenced to a prrson term of

two years and three years probation to be

serve consecutively.

After a SIX week trial, Bernard Deutsch

and Stanley DuBoff, two former registered

representatives With a New York brokerdealer, and Milton Cohen, a St Paul,

Mmnesota, businessrnan and President of

Richard Packmg Company, were found

gUilty of all four counts of an mtorrnatron

filed by the United States Attorney's

Office rn the Southern Drstnct of New

York" Deutsch and DuBoff were sentenced to three year prison terms and

Cohen received a SIX month sentence.

The convictions were affirmed by the

United States Court of Appeals for the

Second Oircurt
Deutsch and DuBoff are currently

under indictment in three other cases

involving violations of the conspiracy,

mall fraud and Federal securities laws In

connection with transactions In the securities of Acnte Industnes, Inc, Frlgltemp

Corp., and Integrated Medical Services

as well as an indictment for evasion, filing

false tax returns and aiding and abetting

the filing of false tax returns for the

penod 1968 to 1972

As a result of the Oornrmssron's referral

of part of ItS investigative files to the

Department of Justice In the Stirling

Homex Corporation matter, a 28 count

Indictment was returned on December

11, 1974 In the Western Drstnct of New

York charging David Stirling, Jr., and

Harold M. Yanowrtch with vrolations of

provisions of the Federal labor statutes In

connecnon with their arranging for union

offlcrals to purchase Stirling Homex

Corp stock."- Stirling was formerly chief

executive officer of Stirling Homex, and

Yanowrtch was formerly ItS executive vice

president and general counsel.

The indictment alleged that Sttrlmq

arranged for seven otncrals of the United

Brotherhood of Carpenters and JOiners

of Amenca, which represented Stirling

Homex employees, to purchase Stirling

Homex stock substantially below the

prevailing market price and that Stirling

and Yanowitch arranged the trnancmq of

those purchases The indictment further

alleges Yanowrtch arranged for some of

the union officials to sell their stock at

$10 a share above the prevailing market

pnce. Both Yanowitch and StIrling

pled not guilty to all counts. A trial IS

expected In the fall of 1975

On May 2, 1975, Charles Erb and

Franklin DeBoer, both former managing

partners of the defunct firm of Baerwald

& DeBoer, were convicted of, among

other things, violating the Federal securities laws In connection with the offer and

sale of the common stock of XPnnt

Corporatron.t> Erb and DeBoer were

convicted on ten counts and one count

respectively, with each count carrying a

possibte prison sentence of five years.

The Indictment alleged that these two

partners used nominees to conceal their

ownership of XPnnt stock at a time when

their firm was underwnting the offering,

and that they caused false and rrusleadmq

documents to be nred with the Commission and disseminated false and misleadIng prospectuses to the public.

On May 9, 1975, Charles Fischer, a

money manager who specialized In purchasinq and seiling government and commercial paper, was sentenced to one year

trnpnsonrnent and fined $1,000 The jail

sentence was suspended except for one

month. Fischer pled gUilty to an information which charged him with making

payments to an officer of the Neuwirth

Fund to purchase mtllrons of dollars

worth of certificates of deposrt In the

banks and In the amounts desiqnated by

Fischer 74

On April 2, 1974, James W White was

prelrmrnanly enjoined from further Violations of the anti-fraud and registration

provrsrons of the Federal securHies laws

and was prohibited from serving as an

officer or director of a public corporation

as a result of the Cornmisaron's action.

Subsequently, the Cornrrussron sought to

have White held In Criminal contempt of

the court's preliminary injunction because It found that White had promoted

two shell corporatrons-e-Nortn American

Kemcore Inc, and Engineered Construction Industries Inc White was arrested

but was released on hts own recognizance Dunng the interim between

White's arrest and mal, the Cornrrussron

discovered and reported to the court that

White had Violated the terms of hrs release and was Involved In stili another

promotion of the corporation named the

Garden Doc, Inc.

After a trial, White was convicted and

sentenced to a SIXmonth sentence.>

Organized Crime Program

The prosecution of secunties cases IS

often based pnrnarrly on crrcurnstantral

evidence requiring extensive investigation by highly trained personnel. The difficulties In such rnvestiqatrons and

prosecutions are compounded when

elements of organized crime are involved. Witnesses are usually reluctant

to cooperate because of threats or fear of

physrcat harm Books, records, and other

119
documentary evidence essential to the

investigation and to a successful prosecution may be destroyed or nonexistent

The organized crime element IS adept at

dtsquistnq ItS partrcipatron In transactions, through the use of aliases and

nominee accounts, by operating across

international boundaries, and by taking

advantage of foreign bank secrecy laws

It frequently operates through "fronts"

and infiltrates legitimate business concerns Organized crime also has an extensive network of affiliates throughout

this country In all walks of life, and In

many foreign nations As a result of these

problems, civu and criminal htrqatron involvmq organized crime can result In

unusually lengthy proceedings. Despite

these difficulties, the Commrsston, workIng In cooperation With other enforcement

agencies, has been able to make major

contributions to the fight against

organized crime

DUring fiscal year 1975, the organized

crime program focused pnncipally on two

ends (1) increasing the Commission's

effectiveness In obtaining current reliable

information relating to organized criminal

activity In the securitres Industry; and

(2) aggressively pursuing to completion

investigations of srtuations brought to the

Commission's attention as potentially involvmq the mnltratron of elements of

organized crime Into the Industry.

In order to Increase the flow of reliable

data, an intelligence unit was established

last year In the Drvtsron of Enforcement.

Its pnncipal function IS to maintain channels of communication With state, local

and other Federal agencies, as well as

comparable agencies of foreign governments, which might have information on

organized criminal activity In the securities Industry Information received by this

unit IS correlated With other available

information and evaluated In light of the

Commission's responsrbrutres under the

Federal secunties laws Information indicating possible secunties law Violations

by organized criminal elements IS relayed

by the intelligence unit to those other

members of the staff whose pnncipal

duties are to investigate activity by organized crime This program has already

120

generated a significant number of new

cases, as well as contributing new sources

of information to ongoing investigations

In furtherance of the intelligence function, members of the staff have continued

to participate In seminars and lectures

sponsored by state and local governments

and their representatives have been included In the Commission's training

programs This has alerted local authorrties to the role of the Commission In

curtailing organized criminal activity In

the secuntres Industry. Members of the

Commission staff are also assiqnad on a

full time basts to certain of the Justice

Department's Organized Crime Strike

Forces. Both the Strike Forces and the

Commission staff have thereby benefited

In learning more about organized criminal

activity In the secuntres Industry.

As a result of the organized crime unit's

enforcement efforts dunnq the past fiscal

year, there has been an Increase In the

number and Importance of actions in this

area In the past year, In cases where

members of organized crime were involved, the Oornrrussron filed Injunctive

actions naming 47 persons and contributed to the return of indictments namIng 47 individuals and the convrctron of

34 of them. Three persons considered to

be Important members of organized crime

were indicted and three such members

were convicted on indictments returned

In prior years. The Comrnlssron presently

has 54 matters under investigation

rnvolvmq organized crime

As a result of an intensive Oornrmssron

investigation and the efforts of the Organized Cnme Stnke Force in Manhattan,

a Federal grand jury In the Southern DIstrict of New York on August 9, 1974 indicted 15 individuals, including John J

Santiago a/k/a Sonny Santini, nine past

or present brokers and an attorney, for

consprrary to Violate and substantive

Violations of the antifraud provrsions of

the secuntres laws, together With mall

fraud In the case of U.S. v Baron, et al 71>

Eight defendants pled gUilty before trial

and four more were convicted on March

5, 1975 after a five week Jury tnal One

defendant was acquitted and two remain

to be tned The case Involved Issuance of
unregistered shares of common stock In

Elmvest, Inc. and the subsequent sale of

this stock to the public at artificially

Inflated prices.

In another significant case, Sidney

Stein and 9 others were indicted In June

1974 In the Southern District of New York

In connection With a widespread fraudulent drstnbution of Stern-Haskell, Inc.

stock They were charged With sales of

unregistered stock, secunnes fraud, mall

fraud and conspiracy In the case of U.S. v.

Rubinson, et al.'i. On March 23, 1975,

Stein and 6 other defendants were convicted of these charges. As a result of

Stein's role In ttus fraud and hrs long

history of secuines Violations, he was

sentenced to 10 years Imprisonment and

fined $20,000.

Cooperation with Other

Enforcement Agencies

In recent years the Commission has

given Increased ernphasis to cooperation

and coordination With other enforcement

agencies, Including the self-regulatory

orqaruzattons, enforcement agencies at

the state and local level, and certain foreign agencies. Its programs In thiS area

cover a broad range. For example, the

Commission believes that certain cases

are more appropriately enforced at the

local rather than the Federal level where

the actrvrtres, while perhaps Violating the

Federal secunties laws, are essentially of

a local nature. In these Instances, the

Commission authorrzes the referral of the

case to the appropriate state or local

agency, and members of the staff familiar

With It are made available for direct assistance to that agency in ItS enforcement

action. A member of the staff has been

specrfically desrqnated as a liaison with

state enforcement and regulatory

autnonnes.

The Commission has also fostered

programs designed to provide a comprehensive exchange of information concerning mutual enforcement problems

and posstble securities Violations. DUring

the fiscal year, It continued ItS program

of annual regional enforcement con-.

ferences. These conferences are attended

by personnel from state secunties agencies, the U.S. Postal Service, Federal,

state and local prosecutors' offices and

local offices of self-regulatory associations, such as the NASD. They provide a

forum for the exchange of information on

current enforcement problems and new

methods of enforcement cooperation. One

result of these conferences has been the

establishment of programs for JOint investigations. Although the conferences

were initially hosted by the Commission's

regional offices, many state and local

agencies are now serving as sponsors or

co-sponsors. During the past several

years, the Commission's DIVISion of Enforcement has conducted Enforcement

Training Seminars to which were mvrted

representatives of all the state secunnes

ag~ncles and their counterparts In the

Canadian provinces lnvitatrons were also

extended to other Federal agencies havIng investigative or enforcement responsibrhtres involvrnq laws relating to the

Issuance of or transactions In securities

A shortage of funds In fiscal 1975 resulted

In a determination not to conduct this

seminar In the past year.

The Commission's Proceedings and

litigation Records Branch continues to

provide one means for cooperation on a

continuing basis With other agencies havIng securities enforcement responsibilities.

The Branch acts as a clearinghouse for

information regarding enforcement actions In securities matters that have been

taken by state and Canadian authontres,

other governmental and self-regulatory

agencies, and the Oornrnrssron itself It

answers requests for speciftc information and In addition publishes a penodrc

bulletin which IS sent to contributing

agencies and to other enforcement and

regulatory bodies During fiscal 1975, the

branch received 2,992 letters either proViding or requesting information, and sent

out 2,233 cornrnunrcatrons to cooperating

aqencies. Records maintained by the

Branch reflect a steady Increase In recent years In the number of enforcement

actions taken by state and Canadian

authonties. The data In the SV (Securities

Violations) Files, which IS computerized,

IS useful In screening Issuers and ap121
I 

!1 

! plicants for registration as securities or 

i, 

commodities brokers or dealers or investment advisers, as well as applicants 

for loans from such agencies as the Small 

Business Administration. 

SWISS TREATY 

As previously reported.'* the United 

States and Switzerland signed a treaty 

on Mutual Assistance in Criminal Matters 

in May of 1973. The treaty ratified by the 

lower house of the Swiss Parliment in 

December, 1974, and by the upper house 

in May of 1973. The treaty was ratified by 

the lower house of the Swiss Parliment in 

passed by the two houses are expected 

to be resolved in the pariimentary session 

starting in September, with consideration 

by the United States anticipated shortly 

thereafter. 

The treaty should be of assistance to 

the Commission where Swiss financial 

institutions are utilized to engage in securities transactions in the United States, 

or where funds resulting from illegal 

acfivities are secreted in such institutions. 

A representative of the Commission has 

participated in the negotiations since they 

began early in 1969. 

il FOREIGN RESTRICTED LIST 

The Commission maintains and publishes a Foreign Restricted List which is 

designed to put broker-dealers, financial 

institutions, investors and others on notice of unlawful distributions of foreign 

securities in the United States. The list 

consists of names of foreign companies 

whose securities the Commission has 

reason to believe have recently been, or 

are currently being offered for public sale 

in the United States in violation of the 

registration requirement of Section 5 of 

the Securities Act of 1933. While most 

broker-dealers refuse to effect transactions in securities issued by companies 

on the Foreign Restricted List, this does 

not necessarily prevent promoters from 

illegally offering such securities directly 

to investors in the Unite'd States. During 

the past fiscal year, the following corporations were added to the Foreign Restricted List, bringing the total number 

of corporations on the list to 84: 

Finansbanken al~.~~-This is a bank in 

Denmark subject to supervision by Danish 

government bank regulatory authorities. 

it has been advertising in newspapers 

and periodicals in the United States for 

the purpose of publicly offering its savings accounts and its shares of stock to 

United States investors. These advertisements offered 8 percent interest on savings accounts of depositors not owning 

shares of stock of the bank and 10 percent intsrest to savings account depositors owlping shares of its stock. The 

advertisements also offered 14 percent 

interest on savings accounts not withdrawable except on 18 months notice, if 

the depositor also purchases shares of 

stock directly from the bank. 

It has been judicially recognized that 

the offer of a bank savings account constitutes the offer of a security as that 

term is defined in the Securities Act."" 

Although such accounts in United States 

banks are exempt from Securities Act's 

registration requirements. those of a 

foreign bank are not exempt. Since neither the savings accounts nor the shares 

of Finanebanken als are so registered, 

the Commission has placed them on the 

Foreign Restricted List. 

Alan Mac Tavish, Lid.*'-This English 

corporation, has been advertising and 

mailing solicitations to prospective investors in tne United States to induce them 

to invest in Scotch malt whiskey in storage 

in casks in warehouses in Scotland for 

the purpose of aging the whiskey until it 

becomes more valuable. 

The Commission had previously obtained injunctions against similar offers 

because the offers included services to 

assist the investor in obtaining profits, 

thereby constituting the offer of an investment contract that is a sec~rity.~ 

These decisions sustained the position 

publicly announced by the Commission 

on November 4, 1969.X:' that the distribution of ownership interests in whiskey in 

this way ordinarily constitutes the offer 

of a security required to be registered 

under the Securities Act. 

Since Alan Mac Tavish, Ltd. was fol-
lowing substantially the same procedures 

in offering Scotch whiskey investments 

and had not filed a Securities Act registration statement with the Commission 

covering these securities, the Commission 

placed Alan Mac Tavish, Ltd. on the 

Foreign Restricted List. 

Silver Stack Mines Ltd.seThis Canadian company has been engaged in gold 

mining exploration in Quebec. In May of 

1974 it offered and sold in Canada 

1,000,000 new shares of its common 

stock at 60 cents per share. These shares 

were in addition to the 1,500.000 shares 

already outstanding. These shares were 

listed and traded on the Montreal Stock 

Exchange. Not long after the new shares 

were issued, an investment adviser in the 

United States began publishing a "Flash 

Buy Recommendation" to purchase shares 

of this stock, and investors in the United 

States were found to be carrying more 

than 200,000 shares of the stock in their 

brokerage accounts at leading broker's 

offices. 

No securities issued by Silver Stack 

Mines. Ltd. had ever been registered with 

the Commission under the provisions of 

the Securities Act. Due to the shortness 

of time following the issuance by the 

corporation of the 1,000,000 new shares, 

it appeared that the sales of shares to 

investors in the United States constituted 

a public offering of new shares that 

should have been registered under the 

Securities Act. Accordingly, the Commission placed Silver Stack Mines, Ltd. on 

the Foreign Restricted List. 

NOTES FOR PART 4 

' 391 FSupp. 438 (S.D.N.Y., 1975) 2 Id .-. at

-.ddn . . -, 

"Securities and Exchange Commission v. North American Research and Development Corp., 280 F.Supp. 106 (S.D.N.Y.. 

1968). affirmed in part and vacated in 

part, 424 F.2d 63 (C.A. 2, 1970). Securities 

and Exchange Commission v. North 

American Research and Development 

Corp., 375 F.Supp. 465 (S.D.N.Y., 1974). 'C.A. D.C.. No. 74-1947 

"4 Civ. 1097 (MP). 

'Securities Exchange Act Release No. 

11312 (March 24, 1975). 6 SEC Docket n'? 

'Securities Exchange Act Release No. 

11496(June26,1975), 7 SEC Docket 240. 

Securities Exchange Act Release No. 

11322 (March 28, 1975), 6 SEC Docket 

<a7 

j3 Securities Exchange Act Release No. 

11164 (January3, 1975). 6 SEC Docket lo. l4 Securlt~es Exchange Act Release No. 

11366 (April 22,1975), 6 SEC Docket 725. 

'"See Litlgatlon Release Nos. 6522, 

6552, 6576, 6592, 6749, 6750 6832, 6864, 

6880.6909. 691 7. , 6932 and fi~b6

'"ee iitigation Release NOS. 6732, 

681 9 and 6915. 

"Litigation Release No. 6831 (April 11, 

1975), 6 SEC Docket 708. 

'915 F. 2d 801 (C.A. 2. 19751. Is See 40th Annual Report. p.'79. 

The complaint also alleged violations 

of the marain reouiremenis - of 

. Section .... .. .. 7

of the SecLirities ~xchange Act by a registered representative of a brokerage-firm 

and bv an emolovee ,~- of 

~~ 

Gann hnth nf 

- whom' consenied to injunctive relief 

anlinrt them -a -..-....-, , .. 2' The district court's opinion is reported 

at 381 F. Supp. 1063 (S.D. N.Y., 1974). 22 Litigation Release No. 6898 (May 21, 

1975). 7 SE,C Docket 53. /

Litigatlon Release No. 6588 (Navember 15, 1974), 5 SEC Docket 496. "Litigatlon Release No. 6794 (March 

19.1975), 6 SEC Docket 473. es Civil Action No. 75-0520 (D.D.C., 1975): Litigation Release No. 6829 (April 

1,1975). 6 SEC Docket 707. 

x6 Litigatlon Release No. 5711 (January 31.1975). 6 SEC - Docket 

~ ~- 247 Z'~ivii.Action No. 7441844 (D.D.C., 

1974); Litgation Release No. 6646 (December 19,1974). 5 SEC Docket 765. ZX 74 Civ. 3779 (CES). Litigation Release 


No. 6502 (September 3, 1974) 5 SEC 


Oockef 

---. . -. d
., 

*VD. C. Mass. 1974), Civil Action 74- 

425C-M, CCH Fed. Sec. L. Rep. (i 94, 

860, 388 F. Supp. 1294: Litigation Release 

Nos. 6543 (October 10, 1974) and 6587 

(November 14, 1974), 5 SEC Docket 268, *OE 

7.7". 

J"Civii Action 74-580GM (D. Mass), 

Litigation Release No. 6676 (January 10, 

1975), 6 SEC Docket 70. :I' Liti ation Release No. 6687 (January 

15, 19757, 6SEC Docket 95, z2 Litigation Release No. 6850 (April 

23, 1975). 6 SEC Docket 740. '"lcurrent Transfer Binder] CCH Fed. 

Sec. L. Rep. 194,980 (S.D.N.Y. 1975). 
Release No. 6929, (June 11, 1975), 7 SEC 

Docket 176. "Litigation Release No. 6674 (January 

10, 1974), 6 SEC Docket 69, 

Litigation Release No. 6948 (June 

24,1975). 7 SEC Docket 279. 

Litigation Release No. 6953 (June 

30, 1975),7 SEC Docket 368. 

'W.S. v. Gary J. Awad, Litigation

Release No. 6947 (June 24, 1975), 7 SEC 

Docket 774 


INVESTMENT COMPANIES 


Under the investment Company Act of 

1940 and the lnvestment Advisers Act of 

1940, the Commission is charged with 

extensive regulatory and supervisory 

responsibilitiesoverinvestmentcompanies 

and investment advisers.The responsibility 

for discharging these duties lies with the 

Division of lnvestment Management 

Regulation. 

Unlike other Federal securities taws. 

which emphasize disclosure, the lnvestment Company Act provides a regulatory 

framework within which investment companies must operate. Among other things 

the Act: (1) prohibits changes in the 

nature of an investment comoanv's busi- . , 

ness or its investment policies without 

shareholder approval: (2) protects against . . . . . 

management self-dealing, embezzlement 

or abuse of trust; (3) provides specific 

controls to eliminate or mitigate inequitable capital structures; (4) requires that 

an investment company disclose its financial condition and investment policies; 

(5) provides that management contracts 

be submitted to shareholders for approval and that provision be made for 

the safekeeping of assets; and (6) sets 

controls to protect against unfair transactions between an investment company 

and its affiliates. 

Persons advising others on their securities transactions for compensation must 

register with the Commission under the 

lnvestment Advisers Act. This requirement was extended by the investment 

Company Amendments Act of 1970 to 

include advisers to registered investment 

AND ACV:SEi2S 


companies. The Advisers Act, among 

other things, prohibits performance fee 

contracts which do not meet certain requirements, fraudulent, deceptive or 

manipulative practices, and advertising 

which does not comply with certain re 

strictions. 

lnvestment companies and assets 

under the management of investment 

advisers constitute important resources 

for investment in the nation's capital 

markets. in order to continue their role of 

channeling individual savings into capital 

needed for industrial develd~ment, in;estment companies and investment advisers 

must have the confidence of investors. 

and the safeguards provided by the 

Investment Company and lnvestment 

Advisers Acts contribute to sustaining 

such confidence. 

NUMBER OF REGISTRANTS 

As of June 30. 1975. there were 1,301 

active investment companies registered 

under the lnvestment Company Act, with 

assets having an aggregate market value 

of over $74 billion. Those figures represent an increase of 13 in the number of 

registered companies and an increase of 

nearly $12 billion in the market value of 

assets since June 30. 1974. Further data 

is presented in the statistical section of 

this Report. At June 30, 1975, 3.420 investment advisers were registered with 

the Commission, representing an increase 

of 406 from a year before. 

During the fiscal year, the Division's 
staff conducted exarrunations of 244 investment companies and 404 Investment

advisers, 76 and 121, respectively, more

than dunng fiscal 1974. It IS the Commission's ultimate objective to examine all

Investment company registrants within

the first year after reqistranon, and to

examine each reqistered Investment

company and registered Investment

adviser every other year This should

provide effective regulatory oversight. As

a result of the Commission's examination

and investigation program In 1975, numerous violations of the Investment Company Act and of the Investment Advisers

Act were uncovered, and approximately

$4,248,976 was returned to Investment

companies and their shareholders. Sixteen Investment company and twenty

Investment adviser matters were referred

to the Drvrsion of Enforcement for possible action

LEGISLATION

Securities Acts Amendments of

1975

A recent amendment of the Investment

Advisers Act now requires affirmative

Comrmssion action on an application for

registratIOn as an Investment adviser, instead of the prevrous procedure where a

registration automatically became effectrve thirty days after receipt by the Comrrnssron unless a proceeding to deny

registration was recommended. This new

procedure conforms with that adopted for

broker-dealer registratIOns under the

Exchange Act, as amended. Section

203(c)(2) of the Advisers Act now provides

that, within forty-five days from the date

of filing of an application for reqrstranon

(unless the applicant consents to a longer

penod), the Commission shall either

grant registration by order or institute

proceedings to determine whether registration should be denied. The types of

crimes, conviction for which registration

may be denied or revoked under Section

203(e)(2), were expanded under the new

amendments. Section 204 was broadened

to give the Commission authority to prescnbe rules for the making and dissemination of such reports and records

128

deemed necessary or appropriate In the

public Interest.

RULES

Amendments to Rule 17d-1

Section 17(d) of the Investment Company Act prohibits any affiliated person of

or pnncipal underwriter for a registered

Investment company from effecting any

transactron In which the registered company, or a company controlled by It, is a

participant with the affiliated person or

prrncipal underwrrter, In contravention of

any rule prescnbed by the Commission

for the purpose of limiting or preventing

partrcipatron by the regIstered or controlled company on a baSIS different from

or less advantageous than that of other

partrctpants. Rule 17d-1 prohibits affiliated

persons of and principal underwriters for

registered Investment companies from

effecting any transactron In connection

with any JOint enterpnse or other JOint

arrangement or profit-sharing plan In

which any such registered company, or a

company controlled by such registered

company, IS a partrcipant unless an applrcatron regarding such Joint enterprise

has been flied with, and granted by, the

Commission

In October 1974, the Commission

adopted an amendment to Rule 17d-1 I to

enable certain affiliated companies and

persons affiliated with such cornparues to

partrcrpate In JOint transactions with

registered Investment companies and

companies controlled by registered investment companies without an order of

the Commission, provided certain conditions are met. The primary condition is

that the principal underwnter and certain

described "upstream" affiliated persons

of the registered Investment company

would not partrcipate or have a financial

Interest In the transaction The Commission was persuaded that the conditions

of the exemption are such that there IS

little likelihood of unfair or drsadvantageous treatment to the Investment company or ItS controlled companies. The

amendment also provides that certain

registered small busmess Investment

company ("S6IC") stock option plans
may become operative without an order

of the Commission.

Amendment of Rule 17a-7

Section 17{a) of the Investment Company Act generally prohibits purchases

or sales of secunnes between Investment

companies and affiliated persons. Exemptions are provided In Rules 17a-1 through

17a-7 Rule 17a-7 exempted from the

prohibitions of Section 17{a) of the Act

purchase and sale transactions between

affiliated Investment companies If, among

other things, the security involved was

traded principally on a national securities

exchange and the price used In the transaction was the current market price on

that exchange. In September 1974, Rule

17a-7 was amended to expand ItS exemptive relief to transactions In securtties

which are Included In an mterdealer

quotation system, such as NASDAQ,

which IS sponsored and governed by the

rules of a national securities association

registered pursuant to Section 15A of the

Securrties Exchange Act of 1934 and

which displays quotations for such security on a current and continuous baSIS

provided (1) the transaction IS effected

at the average of the highest current

Independent bid and the lowest current

Independent offer for such security as

quoted on such quotation system, and

(2) at the time of such transaction, such

quotation system carries at least two

Independent current bids and offers furnished or submitted by at least two brokers or dealers with respect to such

security 2

In addition, an amendment was adopted

to the annual report form of all management investment companies requiring

registrants to describe all Rule 17a-7

transactions and to Identify the persons

involved and the nature of their affiliation

with the registrant. The amendment requires the registrant to state also the

reasons why It was appropriate for one

investment company to purchase securities which an affiliated Investment company wished to sell.

Temporary Rule 6c-2(T) and

Proposed Rule 6c-2

In February 1974, the Commission

adopted Temporary Rule 6c-2{T) and

proposed for public comment a permanent measure, Rule 6c-2.1 to provide

corporations organized pursuant to the

Alaska Native Claims Settlement Act of

19714 ("Settlement Act corporations")

blanket exemptive relief from a substantial number of provrsrons of the Investment Company Act

The Settlement Act corporations, over

200 In number, were created to receive,

hold, and administer the land, minerai

rights and cash awarded by the United

States Government to Alaska's Native

Indian, Aleut and Eskimo population In

settlement of their abonprnal claims to

land In the State of Alaska. DUring the

first few years of the exrstence of the

Settlement Act corporations, only the

cash portion of the award has actually

been distributed to the companies, and

many of the Settlement Act companies

have Invested the cash in securities.

Hence, a substantial number of these

entities have become investment companies Within the meaning of the Act, and

to date thirty-five Settlement Act corporations have registered pursuant to Section

ala) of the Act and are covered by Rule

6c-2{T).'i

The staff analyzed the public comments

received on proposed Rule 6c-2 and

revised the proposal in accordance With

such comments and with views expressed

by other members of the staff and the

Commission Itself. After the close of the

fiscal year, such a revised rule was published for comment." The revised version

would Impose additional responsibilities

upon the large Settlement Act corporations (I e., those haVing 500 or more

shareholders and total assets exceeding

$1,000,000) by requiring them to comply

With the proxy sotrcrtatron, penodic reporting and financial recordkeeping

provrsrons of the Act On the other hand

the revrsed proposal would slgnlflcantl;

decrease the burden of compliance upon

all Settlement Act corporations registerIng under Section ala) by instituting certain limited exemptions from Section 17

of the Act for affiliated transactions involvrnq Settlement Act corporanons The

simpler temporary version of the rule,

129
Rule 6c-2(T), will remain In effect until

the Commission either adopts Rule 6c-2

or rescinds the temporary measure

Investment Company

Confirmation Requirements

In September 1974, the Commission

amended RuIe 15c1-4 under the Exchange Act to permit, subject to certain

conditions, the substitution of quarterly

account statements for Immediate connrrnanons In connection with the purchase

of mutual fund shares Issued pursuant to

tax qualified individual pension plans or

any group plans 7 The adoption of this

rule amendment was significant In light

of the enactment of the Employee Retirement Income Security Act of 1974, which

reflects Congressional efforts to reform

and extend pension benefits to retired

persons and which permits the use of

mutual funds as an Investment media for

certain tax qualified individual and group

pension plans The relaxatron of the

Exchange Act confirmation requirements

will help make It economically feasible

for mutual funds to be sold to such plans

In accordance with Congressional policy.

During the fiscal year, a number of

significant rules were also proposed

under the Investment Advisers Act of

1940 which were designed to Improve the

regulation of Investment advisers and to

respond to changes In the market place

brought about by the elimination of fixed

cornrrussion rates on securrtres transactions.

Brochure Rule

On March 5, 1975, the Commission

proposed the adoption of new Rule

206(4)-4 and new paragraph (14) of Rule

204-2(a) under the Investment Advisers

Act' The proposed rules are Intended to

assure that existrnq and prospective

clients of an Investment adviser obtain

written disclosure of material rntormanon

which would enable such persons to

evaluate, among other things, the adviser's qualifications, methods, services.

and fees They generally would require

that Investment advisers furnish a written

130

disclosure statement to every client and

prospective client (other than a registered

Investment company) upon entering Into,

extending or renewing an advrsory contract With such client and that copies of

each such disclosure statement be maintained by Investment advrsers as part of

their record keeping obligations under the

Advisers Act. The proposed written statement would Include, among other things,

a descripnon of the types of services

offered, length of time the investment

adviser has been in such business, investment techniques, sources of information used, general standards of education

and business background required of

advisory personnel and the basis of fee

charges. There are addmonal disclosure

requirements for advisers providinq

Investment supervisory services or managing Investment advisory accounts. As

of the end of the trscal year, the staff was

anatyzmq the comments received on thrs

proposal.

Investment Adviser RecordKeeping Requirements

In order to strengthen the protections

afforded by the Advisers Act to investment advisory clients, one amendment to

the record keeping rule was made and

another proposed. Rule 204-2 requires

Investment advisers to maintain such

books and records as the Comrnrssron

may presence as necessary or appropriate

In the public Interest or for the protection

of Investors The record keeping requirements of Rule 204-2 serve as an Important

safeguard against fraudulent securities

trading practices. Rule 204-2(a)(12) requires Investment advisers to maintain

records of secu ntres transactions for certain persons connected With the investment adviser. In furtherance of thrs

purpose, on February 21, 1975, the rule

was amended '. to Include a requirement

for the maintenance of such records for

affiliated persons of controlling persons

of Investment advisers and affiliated

persons of such affiliated persons In

addition, the rule was amended to provide

for a slrrular recordkeeping requirement

for Investment advisers primarily engaged

In non-advisory businesses
Rule 204-2(e) requires that books and

records be maintained and preserved "In

an easily accessible place" and that

partnership articles and corporate books

and records be maintained at the investment adviser's principal office. The Commrssron expressed doubt as to whether

certain places outside of the territorial

United States are "easily accessible,"

and, In order to tacuitate the inspection

of books and records as contemplated

by Section 204, on May 30, 1975, the

Commission announced that It was considering the adoption of new paragraph

(J) under Rule 204-2 under the Advisers

Act 10 The proposed rule would require a

non-resident Investment adviser (1) to

maintain and preserve copies of the requrred books and records at a place

within the United States and to file with

the Commission a written notice specifyIng such place, or (2) In lieu thereof, to

file with the Commission an undertaking

to furnish copies of such books and

records upon demand by the Commission.

The proposed rule IS substantially similar

to Rule 17a-7 under the Securities Exchange Act of 1934

Regulatory Safeguards-- The

NASD Maximum Sales Load Rule

The 1970 Amendments to Section 22(b)

of the Investment Company Act of 1940

gave the NASD the authonty, with Comrmssron oversight, to promulgate and enforce rules preventing sales charges

which are "excessive." Under the statute,

such sales charges must allow for "reasonable" compensation for sales personnel, broker-dealers, and underwriters and

for "reasonable" sales loads to Investors.

In 1972 the NASD submitted ItS proposed

"full service" maximum sales load rule to

the Commission As proposed, the rule,

which IS designed to prevent excessive

sales loads, taking Into account all relevant circumstances, permits mutual funds

or single payment contractual plans to

charge a maximum sales load of 8.50%

(declining to 6.25% for larger purchases),

but conditions the nght to charge the

maximum on the fund's offering (1) drvrdend reinvestment at net asset value, (2)

rights of accumulatron, and (3) volume

discounts, as defined In the rule. A specific reduction from the maximum IS

associated with the failure to provide

. each of the services. The proposed rule

also provides maximum sales loads rangIng from 8.50% down to 650% on sinqtepayment variable annurtres, and a maximum

of 8 50% of total payments as of a date

not later than the twelfth year after purchase for multiple payment variable

annuity contracts

The rule was adopted by the NASD's

Board of Governors on January 28, 1975,

and subsequently approved by the NASD

membership, and was submitted to the

Commission for approval under Section

15A(J) of the Securities Exchange Act of

1934 on April 28, 1975. Subsequent to

that date, the Securities Act Amendments

of 1975 substituted the procedure provided

by Section 15A(J) with a new procedure

for Commission approval of rules promulgated by self-regulatory organizations

under Section 19(b) of the 1934 Act.

Therefore, at year end, the staff had

requested that the NASD reflle the proposed rule In accordance with the new

procedure Shortly thereafter It was

published for comrnent.u

APPLICATIONS

One of the Commission's principal

actrvrties In the regulation of Investment

companies and Investment advisers IS

the consrderanon of applications for

exemptions from various provisions of

the Investment Company and Investment

Advisers Acts or for certain other relief

under these Acts. Applicants may also

seek determinations of the status of persons or companies DUring the fiscal year,

241 applrcatrons were filed under both

Acts, and final action was taken on 241

applications. As of the end of the year,

178 apptrcanons were pending under

both Acts Of the totals descnbed, the

predominant number were appucanons

trled under the Investment Company Act

With respect to the Advisers Act, two applications were filed, final action was

taken on three and three were pending at

the end of the year.

131
Under Section 6(c) of the Investment

Company Act, the Commission, by order

upon application, may exempt any person, security or transaction from any

provrsron 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 provrsrons of the Act. Under Section

206A of the Advisers Act, the Commission

has Identical authority with regard to

provrsrons of that Act. Under Section 17

of the Investment Company Act, affiliates

of a registered Investment company cannot participate In a JOint arrangement

with the registered company and cannot

sell to or purchase from the registered

company unless they first obtain an order

from the Commission Many of the applrcattons filed with the Commission relate

to these sections.

Among the appucatrons disposed of

during the fiscal year, the tollowinq were

of particular Interest.

The Commission Issued an opinion and

order under the Investment Company Act

allowinq the proposed merger of Christiana

Securities Company and E I du Pont de

Nemours and Company (Du Pont).12 As

previously reported, Christiana, a closedend Investment company with assets In

excess of $2.2 billion and the owner of 28

per cent of Du Pont's common stock had,

together with Du Pont, filed an application with respect to the merger proposal

since the affiliations of the parties would

preclude such a transaction without

Commission approval. The Commission

order, which was issued after an adrrurustrative hearing before a Judge and an

oral argument before the Commission

In which certain objecting Du Pont shareholders participated, permits the ISSUance of Du Pont common stock to the

Christiana common shareholders at 97 5

per cent of the net asset value of the

Christiana common stock, with Du Pont

the survrvinq corporation.

The Commission's oprruon In the matter

noted that "The Act's requrrernent that

the transaction be reasonable, fair, and

free from overreaching, does not mean

that the benefits to the parties must be

nicely balanced Such a reading would

132

be wholly Impractical and would frustrate

legitimate arrangements." 13 As of the

end of the fiscal year, the merger was

not yet consummated since the objecting

Du Pont shareholders who had participated In the Commission proceeding have

filed an appeal of the Commission deersion which is pending before the United

States Court of Appeals for the Eighth

circurt.«

In the past fiscal year, the complex of

eleven Investment companies, which

were advised, distributed and managed

by Wellington Management Company and

which have Identical boards of directors,

proposed to internalize their corporate

administrative functions by capitalizing

and operating a service company to be

known as The Vanguard Group, Inc.

("Vanguard"). No officer or employee of

Vanguard could own any secunties or

have any Interests In any external investment adviser or distributor. By organizing

such a wholly-owned, Independent company, the funds, headed by Wellington

Fund, Inc., hoped to Increase their ability

to evaluate the performance of their advrser, distributor and administrative service agents. In addrtron, each fund hoped

to decrease ItS expenses, and pursuant

to a new advisory contract With Wellington

Management Company reflecting the

proposed change In responsibilities

whereby Wellington Management Company would serve solely as adviser and

distributor of the funds, the funds expected to realize a reduction of $300,000

to $500,000 In their aggregate expenses

for the year.

Because of the attilratrons among the

eleven funds, an applicanon was filed by

Vanguard and Wellington Management

Company seeking a Commission order

pursuant to Section 17(b) of the Act and

Rule 17d-1 permitting the consummation

of such transactions The Commission

thereafter Issued such an order.!" On

May 1, 1975, after obtaining the approval

of the shareholders of each fund, now

collectrvely known as the Vanguard Funds,

Vanguard began ItS operations.

Subsequent to the Cornrnisston announcement of ItS program to revise the

laws and regulations affecting mutual

fund drstnbutron, an applicatron was filed
by Putnam Investors Fund, Inc., and Its

pnncipal underwnter and by two Unit investment trusts and Merrill Lynch, Pierce,

Fenner & Smith, Inc., their sponsor and

prrncrpal underwnter. The applicants

sought an order exempting them from

Section 22(d) of the Act which prohibits

an Investment company and Its principal

underwnter from seiling Its secuntres to

the publiC except at the current public

offering pnce, Applicants proposed to

offer, on a combmatron baSIS, units of

the bond funds along With shares of

Putnam Investors Fund, Inc. The sales

charges for such combined unit represented a reduction from the sales charge

applicable to the securities when offered

separately. The Commission granted such

exemptton.is since the reduced charge

seemed to reflect reduced costs of drstnbution, and the standards of Section 6(c)

of the Act were satisfied. At the close of

the fiscal year, a Similar applrcatron was

pending.

OTHER DEVELOPMENTS

"Money Market" Funds

A recent mnovatron In the Investment

company Industry ISthe so-called "money

market" fund, an Investment company

whose poucy IS to Invest prtrnanly In

short term debt securities (e.g., Treasury

bills, commercial paper, certificates of

deposit). Such funds seek to allow investors to take advantage of higher short

term rates earned on large Investments

by pooling their capital to permit the

purchase of larger denomination instruments than could normally be bought by

the average small Investor. These funds

have also attracted Significant investments from corporations and non-profit

institutions.

Money market funds have been one of

the fastest growing segments of the

mutual fund Industry. At June 30, 1974,

only 10 money market funds, With total

assets of approximately $454 million, had

effective reqrstratron statements By June

3D, 1975, the number of money market

funds With effective registration statements had grown to 38 As of that date

total money market fund assets had

climbed to almost $3.8 billion which

amounted to approximately 7% of the

assets of the mutual fund Industry

Money market funds, because of their

short term nature and the secuntres In

which they Invest, pose unique regulatory

questions. For example, these funds are

sold generally on the baSISof "Yield", but

since they have not adhered to a uniform

method of valumq their assets or calculatIng their yields, It IS difficult to make

accurate Yield comparisons among them.

In connection With this problem, the

Oornrnissron published for comment two

proposed guidelines 17 deSigned to standardize valuation of short-term debt

securities and money market fund yield

quotations. At year end, comments on

these proposals were stili being received.

Sale of Participations in

Certificates of Deposit

A number of inquiries were received

dunng the year concerning the status of

publicly solicrted partrcrpatrons In large

denomination certificates of deposit and

In other money market Instruments which

offered relatively high Interest rates The

staff took the position that the offer and

sale to the public of partrcrpatrons In such

certificates Involves the offer and sale of

a separate secunty and that the Issuer of

such securities may be an Investment

company which must register under the

Act, unless some specrtic exception or

exemption ISavailable.

Assignments of Investment

Advisory Contracts

Among the 1975 amendments, Section

15(f) of the Investment Company Act 18

permits an Investment adviser, or an

affiliated person of an adviser, to obtain

a profit In connection With a transaction

which results In an assignment of the

advisory contract If certain conditions

are met. These conditions are desiqned

to prevent an Investment adviser or an

affiliate from receiving any payment or

other benefit In connection With the sale

of Its busmess which Includes any amount

reflecting ItS assurance that the Invest13a
ment advisory contract will be continued

Specifically, It IS required that for the

succeeding three years at least 75% of the

board of directors of the Investment company not be comprised of "interested

persons" of the Investment adviser or ItS

predecessor and that the transaction

does not Impose an unfair burden on the

Investment company, such as an arrangement whereby an adviser or an Interested

person of an adviser IS entitled to receive

compensation from the company for brokerage, other than bona fide compensation as pnncrpal underwriter, or for other

than bona fide advisory or other services

Registration of foreign

investment companies

Foreign Investment companies, which

generally are prohibited from seiling their

secuntres In this country, offer an opportunity for Investing In drversmed pools of

securities Issued by companies In foreign

countries On December 2, 1974, the

Cornrrusston Issued a release I" prepared

by the Drvisron of Investment Management Regulation requesting public comments on whether foreign Investment

companies should be permitted to register

under the Investment Company Act and

allowed to sell their shares in this country

and, If so, under what conditions. The

Issues raised In this release were consistent With a recent recommendation of the

Orqaruzatron for Economic Co-operation

and Development supported by representatives of the Cornrnrsston, that member

countries review their requtation of investment companies and when decrdrnq

whether to permit a foreign Investment

company to operate In their country, give

substantial weight to whether such company IS dorrucrled In a country which

complies With the OECD's rules on operanon of Investment companies The Commrssion also sought comments on related

Issues, including whether such companies

could be allowed to register and sell

shares In this country Without sacnncmq

the high level of Investor protection

embodied In the Act In response to the

release, the DIVISion received approxrmately fifty comments, including comments

134

from domestic and foreign Investment

companies, representatives of the United

States and foreign government agencies,

and United States Investors. The DIVISion

has reviewed these comments and Intends

to recommend to the Commission definitive action on this Issue In the next fiscal

year.

NASD Anti-Reciprocal Rule

Recrprocal sales practices, allocations

of portfolio brokerage busmess by mutual

funds to broker-dealers as a reward for

their sales of fund shares, have been a

subject of Cornrmsston concern for more

than ten years. The reciprocal use of

portfolio brokerage has been Viewed by

the Cornmrssron as creating hidden influences behind recommendations to

customers by retail sellers of fund shares,

rnducmq Improper portfolio management

practices and creating undesirable anticompetitive effects.2u In ItS Statement on

the Future Structure of the Securtttes

Markets the Oornrnrssron announced that

reciprocal sales practices must be terminated, and, effective July 15, 1973, the

National ASSOCiation of Securities Dealers,

Inc. ("NASD") adopted a rule prohibiting

these arranqements.>'

During the prior fiscal year, the Commission announced that public hearings

would be held to consider suggested

interpretatrons of and amendments to the

NASD Anti-Reciprocal Rule.22 Prior to the

hearings, 42 letters of comment were

received, and at the hearings held on

September 10-12, 1974, 14 witnesses

appeared Subsequently, representatives

of the NASD indicated that the NASD

would submit a revised proposal to meet

some of the objections raised by the

Commission staff.

Under the proposal as revised, a

broker-dealer would be prohibited from

demanding or requinnq any brokerage

commissions or soucrtinq a promise of

such ccrnrnrssrons as a condition to the

sale of fund shares A pnncipal underwriter would be prohibited from offering

or promising any cornmrssrons to a brokerdealer for the sale of fund shares, but

would be permitted to request or arrange
for some (but not a specrfrc amount or

percentage of) brokerage to be paid to a

broker-dealer for the sale of fund shares.

The revrsions would specifically allow an

NASD member to sell fund shares or act

as a principal underwriter for an investment company which follows a policy,

described In ItS prospectus, of considerIng sales of ItS shares as a factor In the

selection of broker-dealers to execute Its

portfolio transactions, when such brokerdealers are qualified to provide best

execution, provided that the member

compiles with the specific provrsions of

the Rule and any published interpretation

of it. At the end of the fiscal year, the staff

was In the process of reviewing the NASD

proposal.

Two-Tier Real Estate Companies

A two-tier real estate company IS a

company which Invests In companies

which In turn Invest In real estate The

question of the applicability of the Investment Company Act to such companies

has arisen most often In connection with

limited partnerships which Invest, as

limited partners, In limited partnerships

engaged In the real estate business

Under Section 3(a) of the Investment

Company Act, an Issuer IS an Investment

company If it IS, or holds Itself out as

being, engaged primarily in the business

of investing, reinvesting or trading in

securities or If It IS engaged or proposes

to engage In the business of Investing,

reinvesting, owning, holding or trading In

secuntres, and owns or proposes to acquire Investment secunties having a value

exceeding 40% of the value of such Issuer's

total assets (exclusive of government

secunties and cash Items) on an unconsolidated basts. Generally, an Issuer that

Invests In real estate can rely upon Section 3(c)(5) of the Act which excludes

from the denrutron of Investment company

persons purchasing or otherwise acquirrng

mortgages and other 'lens on and Interests

In real estate.

In August 1974, a release was Issued 23

setting forth the positron of the DIvision

with respect to the status under the Investment Company Act of two-tier real

estate companies The staff believes that

no action by the Commission IS warranted

If a two-tier real estate limited partnership

does not register under the Investment

Company Act, In reliance upon an opinion

of counsel, If certain cntena are satisfied.

These cntena relate to the primary bustness of the limited partnership, the nature

of the limited partnership's Investments,

the rrghts of the limited partners In the

partnership and the duties of the general

partner to the partnership

The staff further believes that certain

two-tier real estate limited partnerships

which do not qualify for the above "noactron" positron may nevertheless, upon

application to the Commission, be exempted from reqrstratron under the Investment Company Act, pursuant to Section

3(b)(2) or Section 6(c) of the Act, If (1)

the partnership IS, In fact, engaged In the

real estate business through control of

the underlying partnerships or (2) If the

partnership Invests In limited partnerships

engaged In the development and burldrnq

of housrnq for low and moderate Income

persons and certain requirements regardIng Investor surtabrlrty and fair dealing

by the general partner are satisfied

Variable Annuity Illustrations

The Commission adopted an amendment to the Statement of Policy under the

Securities Act of 1933,24 which permits

Investment companies ISSUing variable

annuity contracts to employ standardized

Illustrations based upon hypothetical Investment results in sales literature and

prospectuses. The amendment sets forth

standards for permissible illustrations

including (1) a presentation of effective

rates of return which should permit an

evaluation of aggregate costs (including

hidden charges), and (2) uniformity of

presentation to enable the Investor to

make accurate comparisons between

issuers of such contracts Thus the Illustrations serve as a valuable disclosure

device provrdrnq meaningful cost information to Investors about a contract

which IS currently little understood They

could foster greater cornpetrtron, which

should encourage a more rational pricing

135
system than presently exrsts In the sale

of variable annuity contracts.

Shortly thereafter, the Commission

published for comment proposed amendments under the Securities Act of 19332;

which would require prospectuses of

variable annuity separate accounts to

Include Illustrations which are In accordance With the Statement of Poucy as

amended. At year end, comments on thrs

proposal were being consrdered by the

staff

Employee Retirement Income

Security Act

In connection With the Implementation

of the trducrary and disclosure provrsions

of the Employee Retirement Income

Security Act of 1974,20 the Commission

offered the technical assistance of ItS

staff to the Department of Labor ("Labor")

and the Internal Revenue Service ("IRS")

The Drvrsron was appointed as the Comrmsston's liaison with Labor and IRS. This

became an Important function, when In

early 1975, the Commission was concerned that the Immediate effectiveness

of certain sections of the Act proscribing

certain types of transactions would adversely affect the nation's securities

markets. The staff of the DIVision offered

drafting and interpretive assistance with

respect to these provisions of ERISA in

connection with the various applications

for exemption filed by members of the

securities industry In order to avoid such

adverse Impact.

Securities Depository System

DUring the past fiscal year, the DIVISion

studied the Impact of partrcrpatron In a

secuntres depository by registered management companies either directly or

through their custodians Section 17(f) of

the Investment Company Act defines

"secuntres deposrtory" as "a system for

the central handling of securities established by a national secunties exchange

or national secunnes associatron registered With the Commission" pursuant to

which securities are treated as fungible

and may be transferred or pledged by

136

bookkeeping entry without physical delivery of such securities. The Drvlsron's

study has Included VISitS to banks and

securities deposrtones, and the DIVISion

IS presently Involved In formulating a

questionnaire which will be sent to interested persons In order to gain additional

mtormatron concerning whether rules may

be necessary or appropriate In order to

Insure adequate Investor protection A

letter issued by the DIVISion took the

POSition that the Act did not preclude

partrcipatron In a depository by an investment company

NOTES TO PART 5

I Investment Company Act Release No

8542 (October 11, 1974), 5 SEC Docket

300.

2 Investment Company Act Release No.

8494 (September 13,1974),5 SEC Docket

140

I Investment Company Act Release No.

8251 (February 26, 1974), 3 SEC Docket

631

443 U.S C. 1601, et seq.

'i For a description of Rule 6c-2(T) and

Rule 6c-2 as Originally proposed, see

40th Annual Report, p 106.

o Investment Company Act Release No.

8902 (August 22,1974), 7 SEC Docket 733.

7 Investment Company Act Release No

8514 (September 24, 1974),5 SEC Docket

184.

H Inv. Adv Act ReI. No 442 (March 5,

1975),6 SEC Docket 414

q Inv. Adv Act ReI. No. 436 (February

21, 1975), 6 SEC Docket 327

III Inv. Adv. Act Rei No. 460 (May 30,

1975),7 SEC Docket 128

II Securities Exchange Act ReI. No.

11593, Investment Company Act ReI. No.

8893 (August 14, 1975), 7 SEC Docket

570.

iz Investment Company Act Release

No 8615 (December 13, 1974), 5 SEC

Docket 745

1'1 5 SEC Docket at 750.

14 Collms v. SEC No 75-1100; Murtaugh

v. SEC Nos. 75-1262, 75-1263.

I; Investment Company Act Release No.

8676 (February 18, 1975), 6 SEC Docket

325.

I" Investment Company Act Release No.

8741 (April 3, 1975), 6 SEC Docket 582.

17 Investment Company Act Rei No

8757, (April 15, 1975), 6 SEC Docket 703

and Investment Company Act Rei No.

8816. (June 12, 1975), 7 SEC Docket 141

18 Securities Acts Admendments of

1975, Section 28(1).

I" Investment Company Act Release No.
8596 (December 2, 1974), 5 SEC Docket

640.

20 SEC, Public Policy Implications of

Investment Company Growth, H Rep. No

2337, 89th Cong., 2d Sess., at 172-182

(1966)

21 Article III, Section 26(k) of the NASD

Rules of Fair Practice.

22 Investment Company Act Release No.

8393, Secuntres Exchange Act ReI. No

137

10867 (June 20, 1974),4 SEC Docket 474

23 Investment Company Act Release No.

8456 (August 9, 1974),4 SEC Docket 721

24 Investment Company Act Rei No.

8772 (Apn128, 1975). 6 SEC Docket 761.

25 Investment Company Act ReI. No.

8784 (May 9, 1975). 6 SEC Docket 832.

26 Pub. L. No 93-406 (September 2,

1974) (codified In 29 U.S.C 1001 et seq

and In scattered sections of 26 U S.C.).

PART 6

PUBLIC UTiliTY

HOLDING COMPANIES

PART 6

PUBLIC UTILITY

HOLDING COMPANIES

Under the Public Utility Holding Company Act of 1935, the Commission regulates Interstate public utility holding

company systems engaged In the electric

utility business and/or retail distribution

of gas. The Commission's junsdrcnon

also covers natural gas pipeline companies and other non-utility companies

which are subsidiary companies of registered holding companies. There are three

principal areas of regulation under the

Act. (1) the physical integration of public

utility companies and tunctronally related

properties of holding company systems,

and the simplification of Intercorporate

relationships and financial structures of

such systems, (2) the financing operations

of registered holding companies and their

subsidiary companies, the acquisruon

and drsposrtron of securitres and properties and certain accounting practices,

servicmp arrangements, and Intercompany

transactions, (3) exemptive provrsrons

relating to the status under the Act of

persons and companies, and provrsions

regulating the right of persons affiliated

with a publrc-utrlity company to become

affiliated with another such company

through acqursitron of secuntres.

COMPOSITION

At the end of calendar 1974, there were

22 holding companies registered under

the Act. There were 20 registered holding

companies within the 17 "active" registered holding-company systems I The

remaining two registered holding companies, which are relatively small, are not

Included among the "active" systems.' In

the 17 active systems, there were 71

electric and/or gas utility Subsidiaries,

68 non-utility Subsidiaries, and 16 inactive

companies, or a total of 175 system comholding companies. Table 30 in Part 9

lists the active systems and their aggregate assets.

PROCEEDINGS

New England Electric System. I The

court of appeals affirmed the Cornrrussron's approval of the sale by New

England Electnc System ("NEES") of

Lawrence Gas Company to Bay State

Gas Company and ItS denial of a request

for hearing by the Associatron of Massachusetts Consumers, Inc ("Association")'

The Association has flied a petition for a

Writ of certioran

In a related proceeding, the Commission sought enforcement of ItS order approving a plan for the retirement of the

minority stock Interest In Lawrence Gas

Company in the United States District

Court for the District of Massachusetts.'

On September 15, 1975, the court entered

an order enforcing the Commission's

order

In a separate proceeding," the Commission denied the JOint applicatton of NEES,

Eastern Utilities Associates, also a reqistered holding company, and Boston

Edison Company, an operating electrrc

141

~

"
utility not subject to the Act, for authority

to form a new holding company 'J

Union Electflc Company. III The court of

appeals affirmed without opinion II the

Commission's order granting Union Electnc Company, an exempt holding company, permission to acquire the common

stock of MIssouri Utilities Company.t> At

that time the Commission declined to

order divestiture of the gas properties of

both companies, taking note of the adverse

developments In gas supply, and reserved

junsdrction to reexamine the retarnabilrty

of the gas properties

Amencen Etectrtc Power Company,

tnc.' I The Commission heard oral argument on the application of American

Electric Power, a registered holding company, to acquire by a tender offer the

stock of Columbus and Southern Ohio

Electric Company, a non associate electric

utility company. In light of problems encountered by the electric utility Industry

since the record In this proceeding was

closed In January 1972, the Commission,

by supplemental order.':' has requested

that all parties In Interest submit briefs In

response to questions specified In that

order.

Northeast Utilities. Northeast Utilities

("Northeast") and ItS Connecticut subsidiaries, The Connecticut light & Power

Company ("CL&P") and The Hartford

Electric light Company ("HELCO") have

filed a JOint application under Section

11(e) of the Act pursuant to which they

propose to sell all of the gas properties

owned by CL&P and HELCO, together

With those of The Connecticut Gas Company, a subsidiary of CL&P, to the

Connecticut Natural Gas Corporation

("CNG"), a nonaffiliated gas utility company, and to the Town of Wallingford,

Connecticut l'i The proposed sale IS intended to bring Northeast Into compliance

With the integration provrsions of section

11(b)(1)

In Northeast's Judgment, CNG and the

Town of Wallingford were the highest

bidders for the gas properties, having

offered about 120-125% of the net book

value of the properties as of December

31, 1972, subject to adjustment. After the

close of the fiscal year, a hearing was

142

held and several parties appeared In opPOSition to the plan alleging, among other

things, that Northeast did not maintain

competitive conditions In soliciting bids

and that the sale IS not In the Interest of

consumers. The matter IS pending

Empire State Power Resources, Inc.

Consolidated Edison Company of New

York, Inc., Long Island lighting Company,

New York State Electric and Gas Corporatron, Niagara Mohawk Power Corporation and Rochester Gas and Electric

Corporation, five of the seven sponsors

of Empire State Power Resources, Inc.

("ESPRI") have filed a JOint applicatron

for the acquisrtron of their stock interest

In ESPRI under Section 10 of the Act

and for exemptions as holding companies

pursuant to Section 3(a).16

ESPRI will be JOintly owned by ItS

sponsors It will construct and own generating tacilrtres throughout New York

State to supply energy to its sponsors.

It IS proposed that ESPRI will construct

13 nuclear and 3 coal-fired baseload Units

With a rated capacity of 18,600 MW.

Construction costs dunnq the period

1980-1991 are estimated to be In excess

of $20 billion No action had been taken

With respect to the application and no

hearing had been scheduled at the close

of the fiscal year.

General Public Uttl) ties Corporation."

The Commission permitted Metropolitan

Edison Company ("Met Ed"), a subsidiary

of General Public Utilities Corporation, to

make certain amendments to ItS first

mortgage bond Indenture and authorized

the sotrcitanon of proxies for bondholder

consent to the amendments lR The

Commission rejected arguments raised by

a Met-Ed bondholder, Walplan and Company, who opposed the proposal and

solrcttatron

In a related case.w the court of appeals

affirmed the district court order dismissIng a SUit for an Injunction brought by

Walplan of Met Ed alleging that the proxy

statement was false and misleading 20

Americen Natural Gas Company. The

Comrrusston authorized American Natural

Gas Company ("American Natural"), a

registered holding company incorporated

under Delaware law, to distribute to ItS
stockholders all of the stock of Wisconsin

Gas Company ("WIsconsin") 21 The distribution left American Natural with one

gas utility subsrdrary, Michigan Consolidated Gas Company, a Michigan

corporation.

The same order also granted American

Natural an exernption under Section

3(a)(1) of the Act to be effective upon

dtstrtbution of the Wisconsin stock and

remcorporanon of American Natural under MIchigan law. The order of exernpnon

became effective on June 30, 1975.

Utah Power and Light Company 22 The

Cornrnrsston approved the plan of Utah

Power and light Company ("Utah"), filed

under Section 11(e) of the Act, which

provided for the sale by Utah of the utility

assets of The Western Colorado Power

Company, its only electnc utrlrty subsrdrary 2 I When Utah completed the sale,

the Commission Issued a supplemental

order declaring that Utah ceased to be

a holding company and that ItS reqistranon as such was terminated 24

John H Ware--Penn Fuel Gas, Inc 2;

After representatives of minority stockholders of North Penn Gas Company

("North Penn") objected to the plan filed

by Penn Fuel Gas, Inc ("Penn Fuel").

pursuant to Section 11(e) of the Act, a

new plan was negotiated and filed 2h The

object of the plan IS the retirement of the

minority stock of North Penn Ware IS the

controlling stockholder of North Penn and

Penn Fuel

Under the plan, a new holding company,

Penn Fuel System. Inc., ("System"), has

been organized to carry out the plan

System proposes to acquire about 243,000

shares of North Penn common stock at

$1850 per share, payable $310 in cash

and the balance of $1540 In 10% serial

Installment notes on wtncn the final payment Will be due on December 31. 1979.

System also WIll Issue ItS common stock

to Ware and members of ms family In

exchange for about 207,000 shares of

North Penn common stock and up to 93%

of the outstanding common stock of

Penn Fuel owned by them System requests an exernptron pursuant to Section

3(a)(1) of the Act.

A hearing was held, and the matter

was pending at the close of the fiscal

year

FINANCING

Volume

DUring fiscal 1975, a total of 15 active

registered holding company systems ISsued and sold 56 Issues of long-term debt

and capital stock aggregating $279 billion pursuant to authonzatrons by the

Commission under Sections 6 and 7 of

the Act. Table 31 In Part 9 presents the

amount and types of secunnes Issued

and sold by these holding company

systems

The dollar volume of these tmancrnqs

represents an 11 percent Increase over

the previous year Bonds Issued and sold

decreased 24 percent, and preferred

stock 11 percent However, the amount

of common stock and debentures Issued

and sold Increased 148 percent and 78

percent, respectively

Financing of Fuel and

Gas Supplies

Due to curtailments of fuel supplies,

etectnc and gas utilities have found It

rncreasmqly necessary to finance substantial portions of their energy requirements by capital Investment In sources

of supply and transportation 2. DUring

ftscal 1975, approval was given to 8 reqistered systems to Invest In the aggregate

over $500 rrullron In these activrnes.

Competitive Bidding

The Cornrnlssion's Rule 50, adopted in

1941, requires competitive bidding In

the sale of secunues by registered publrc

utility holding companies and their subsrdranes.> A temporary suspension of the

competitive bidding requirements of Rule

50 as applied to common stock of registered holding companies was authorrzed

from November 7, 1974, to March 31,

19752'1 Thrs action was taken because it

appeared to the Commission that, under

market condttions then prevailing, competitive bidding might not assure a sutncient number of potential purchasers

143
given the volume of common stock Issues

that utilities were offering for sale. A

heanng also was ordered to develop

information as to whether the suspension

should be continued beyond March 31,

1975.

The Commission did not extend the

temporary suspension beyond March 31,

1975, except that contemplated sales of

common stock publicly announced by

January 31 could be sold without competitive bidding no later than April 30,

1975 30 Based upon the record developed

at the heanng and the expenence with

offerings of debt and equity securities of

utility companies, whether sold by negotiation or competitive bidding, the

Commission was persuaded that common stocks of registered holding companies again could be marketed In the

manner required by Rule 50. It also noted

that the exemptive provrsrons of the Rule

provide sufficient flexibility for Issuers

who encounter difficulties In seiling their

common stock by competitive bidding

Of the 56 Issues of long-term debt and

capital stock sold by registered systems

referred to above, 18 were sold by negotiation. The negotiated underwrinnqs

totaled about $1.2 billion and consisted

of one bond offenng,31 3 preferred stock .12

and 14 common stock 11 Issues Nine

of the common stock offenngs were sold

dunng the penod of the temporary suspension The remaining nine Issues were

sold pursuant to exceptions from the Rule

granted by order. Table 32 In Part 9 sets

forth statistical data with respect to all

of these Issues

NOTES TO PART 6

1Three of the 20 are subhotdmq utility

companies In these systems. They are

The Potomac Edison Company and

Monongahela Power Company, public

utility subsrdianes of Allegheny Power

System, Inc., and Southwestern Electnc

Power Company, a public utility subsrdrary of Central and South West Corporanon

2 These holding companies are Bntish

Amencan Utilities Corporation and Kmzua

011 & Gas Corporation

1 Previously reported In 40th Annual

Report, p 115. 39th Annual Report, p. 110.

144

4 Holding Company Act Release Nos.

18149 (October 31, 1973), 2 SEC Docket

680, and 18254 (January 11,1974),3 SEC

Docket 373.

5 Associetton of Massachusetts Consumers, Inc. v. Securiues and Exchange

Commission, 516 F. 2d 711 (C.A. D.C.,

1975).

6 No. 75-607 (October 22, 1975).

7 CiVil Action No. 74-2466-M.

H Previously reported in 38th Annual

Report, p. 108, 37th Annual Report, p. 170;

36th Annual Report, p. 160; 35th Annual

Report, p. 149; 34th Annual Report, p. 138.

9 Holding Company Act Release No.

18801 (February 4, 1975), 6 SEC Docket

225.

10Previously reported In 40th Annual

Report, p. 116; 39th Annual Report, p. 110;

38th Annual Report, p. 109; 37th Annual

Report, pp, 172-173.

11 City of Cape Gtrerdeeu v. Securities

and Exchange Cotnrmsston, No. 74-1590

(C A D.C.) (September 22,1975).

12Holding Company Act Release No.

18368 (ApnI10,1974), 4 SEC Docket 89.

13Previously reported In 39th Annual

Report, p 110, 38th Annual Report, p.

108; 37th Annual Report, p. 170; 36th

Annual Report, p 160; 35th Annual Report, p 149; 34th Annual Report, p. 138.

14Holding Company Act Release No

19145 (August 27, 1975), 7 SEC Docket

731.

15Holding Company Act Release No.

18874 (March 19, 1975), 6 SEC Docket

484.

16Holding Company Act Release No.

18994 (May 19, 1975), 7 SEC Docket 39.

Only Rochester Gas and Electnc and

Niagara Mohawk require approval under

Section 10. All five applicants seek an

exemption order.

17Prevrously reported In 40th Annual

Report, p 116.

Ih Holding Company Act Release No.

18993 (May 20,1975),7 SEC Docket 32.

19Previously reported In 40th Annual

Report, p. 117.

20 Walplan and Company v. MetropolItan

EdIson Company, 506 F. 2d 1053 (C.A. 3,

1974)

21Holding Company Act Release No.

19038 (June 12,1975),7 SEC Docket 164.

22Previously reported 40th Annual Report, p. 116.

23Holding Company Act Release No.

18794 (January 31, 1975), 6 SEC Docket

217.

24Holding Company Act Release No.

19155 (September 3, 1975), 7 SEC Docket

793.

2'\ Previously reported In 40th Annual

Report, p. 117.

26 Holding Company Act Release No

18879 (March 19,1975),6 SEC Docket 488.
27 See, e.g., Public Servtce Company of

Oklahoma, Holding Company Act Release

No. 19090 (July 17, 1975), 7 SEC Docket

413; lndtene & MIchIgan Electric Company, Holding Company Act Release No.

19064 (June 26, 1975), 7 SEC Docket 346;

otuo Power Company, Holding Company

Act Release No. 19036 (June 12, 1975),

7 SEC Docket 163; AppalachIan Power

Company, Holding Company Act Release

No 18971 (May 7, 1975), 6 SEC Docket

868, and No. 18363 (April 3, 1974),4 SEC

Docket 50; MIddle South Uttlmes, Inc.,

Holding Company Act Release No 18966

(May 2, 1975), 6 SEC Docket 806, No.

18785 (January 23, 1975), 6 SEC Docket

172, and No. 18221 (December 17, 1973),

3 SEC Docket 258; Transok PIpe Line

Company, Holding Company Act Release

No. 18933 (April 14, 1975), 6 SEC Docket

691 Columbte Gas System, Inc., HoldIng Company Act Release No 18749

(December 31, 1974), 6 SEC Docket 22

The need for Commission approval of

such non utilrty businesses has been well

established. See, e.g., Columbte Gas &

Electnc Corporatron 17 S E.C. 494 (1944);

AppalachIan Electrtc Power Company,

27 SEC 1029 (1948); General Pubttc

Uuttues Oorporeuon, 32 S.E C. 807 (1951),

cotumtue Hydrocarbon Corpotetton, 38

S E.C 149 (1957), Arkansas Power & LIght

Company, Holding Company Act Release

No 17400 (December 17, 1971).

2" Holding Company Act Release No.

2676 (April 7, 1941). Prevrously reported

In 40th Annual Report, p. 118, 7th Annual

Report, pp. 98-102

2~ Holding Company Act Release No

18646 (November 7, 1974), 5 SEC Docket

417.

'w Holding Company Act Release No.

18898 (March 28, 1975), 6 SEC Docket

564

11 Georgia Power Company.

12 Jersey Central Power & Light Company (2); Ohio Power Company.

.n Southern Company (2); Northeast

Utilities (2), Utah Power & LIght Company

(2); Delmarva Power & LIght Company;

Middle South Utilities, Inc., Central and

South West Corporation; American Natural

Gas Company; General Public Utilities

Corporatron: American Electric Power

Company, Inc; New England Electric

System; Ohio Edison Company.

145

~

PART 7

CORPORATE

R NIZATIONS

PART 7

CORPORATE

REORGANIZATIONS

The Commission's role under Chapter

X of the Bankruptcy Act, which provides

a procedure for reorganizing corporations

In the United States district courts, differs

from that under the various other statutes

wtuch 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 to provide Independent, expert

assistance to the courts, participants, and

Investors In a hIghly complex area of

corporate law and finance. It pays special

attention to the interests of public secunty holders who may not otherwise be

represented effectIvely.

Where the scheduled indebtedness of

a debtor corporation exceeds $3 rrullron,

Section 172 of Chapter X requires the

judge, before approving any plan of

reorganization, to submit it to the Comrnrssron for its examination and report.

If the Indebtedness does not exceed $3

million, the Judge may, If he deems It

advrsaole to do so, submit the plan to

the Cornrmssron before decrdmq whether

to approve It. When the Commission files

a report, copies of summaries must be

sent to all security holders and creditors

when they are asked to vote on the plan

The Commission has no authority to veto

a plan of reorganization or to require

ItS adoption.

The Commission has not considered it

necessary or appropriate to participate In

every Chapter X case Apart from the excessive administrative burden, many of

the cases Involve only trade or bank

creditors and few public Investors. The

Commission seeks to participate prtncipally In those proceedings in which a

substantrat 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 provisrons of the Act, the facts

rndicate that the Cornrrussron can perform

a useful service, or the Judge requests

the Commission's participation.

The Oornrmssron in its Chapter X activrtres has divrded the country Into five

geographical areas The New York,

Chicago, Los Angeles and Seattle regional

offices of the Commission each have

rasponslbttity for one of these areas

Supervision and review of the regional

offices' Chapter X work IS the responsibility of the Drvrsron of Corporate

Regulation of the Commission, wtuch,

through ItS Branch of Reorganization,

also serves as a field office for the

southeastern area of the United States.

CHAPTER X RULES

The Advisory commutee on Rules of

Practrce and Procedure of the Judicial

Conference of the United States proposed

new Chapter X Rules. The Commission,

In response to a general lnvitanon for

comment, submitted a comprehensive

149
report generally entreat of many aspects

of the proposed Rules. In the Cornrrussron's view the Rules repeatedly abolrshed, without comment, carefully

devised Congressional safeguards for

public Investors Also, the Rules do not

adequately reflect the differences between

procedures needed to bring about the

reorganization of an enterpnse under

Chapter X In order that It may continue

as a gOing-concern and procedures

necessary to accomplish liquidation In

ordinary bankruptcy proceedings.

As a result of the Oornrmssron's comments, substantial changes were made

and some rules were deleted or redrafted. Thereafter the Chapter X Rules

and ottrcial forms were submitted to the

Supreme Court which by order dated

Apnl 28, 1975, transmitted the Rules and

Forms to Congress pursuant to Section

2075, Title 28, United States Code

The Cornrrussron continued to disagree

With a number of proposed rules and

submitted a memorandum to Congress

objecting to four proposed rules. They

are: Rule 1~01 dealing With stay of

actions against debtors and lien enforcement; Rules 10-117 and 10-308(a), dealIng With the transfer of a Chapter X

proceeding to Chapter XI and conversely,

and Rule 10-215(c)(4), dealing With secunty transactrons by nducranes The

Cornrrusston opposed these rules because

they made substantial changes In exrstIng law With little or no explanation and

If adopted, would Impair the effective

adrnrrustratron of Chapter X. The Rules

became effective Without amendment on

August 1, 1975.

SUMMARY OF ACTIVITIES

In fiscal year 1975, the Commrsstcn

entered 14 new Chapter X proceedings

mvolvrnq companies With aggregate

stated assets of approximately $657 million and aggregate Indebtedness of approximately $686 million. Including the

new proceedings, the Comrrussron was a

party 10 a total of 129 reorqaruzatron

proceedings dunnq the fiscal year I The

stated assets of the companies Involved

In these proceedings totaled approxr150

mately $3.8 billion and their indebtedness

about $3.4 billion.

DUring the fiscal year, 9 proceedings

were closed, leavmq 120 In which the

Commission was a party at fiscal-year

end

ADMINISTRATIVE MAnERS

In Chapter X proceedings, the Commission seeks to protect the procedural

and substantive safeguards afforded

parties In such proceedings. The Commission also attempts to secure judrcral

uniformity In the construction of Chapter

X and the procedures thereunder.

Kmg Resources compenv» The Commrssron supported the trustee In urging

atnrmatron of the distnct court's ruling

which rejected a claim by unsecured

senior creditor banks for post-petrtron

Interest from funds which would otherwise have been available to holders of

subordinated debentures under terms

of the subordmatron agreements.

Since the debtor was found Insolvent,

the case was governed by the general

rule that Interest on unsecured claims

ceases to accrue as of the date the petition IS filed 3 Therefore, to establish the

nght of sernor creditors to post-petition

Interest, the subordination agreement

must unambiguously show that the general rule was Intended to be suspended 4

Since no reference to payment of postpetition Interest was contained In the

subordination agreements, the senior

creditors presumably have no nght to

poet-pennon Interest The matter was stili

pending as of the close of the fiscal year

Investors Fundmg Corporetton of New

York ;-Voluntary Chapter X petitions

filed by the company and 33 whollyowned subsrdranes were approved and

a trustee was appointed. These debtors

were engaged pnmanly In the busmess

of owning, operating, managing, purchasmq, seiling and leasmq comrnercial and

residentral real estate Consolidated assets and liabilities were reported at $380

million and $340 million, respectively. The

parent company has outstanding about

1 6 rmllron shares of stock held by over

5,000 persons and, together With IFC
Collateral Corporation, a Subsidiary, has

outstanding over $140 million In subordinated debentures held by over 27,000

persons.

The Commission objected to the

trustee's relation of a certain law firm

as his general counsel on the ground

that It was not disinterested under Section 158 as required by Section 157, since

It was concurrently representing a separately operated non-banking dlvlsron of

a large bank creditor. Prior to the hearing

on drsrnterestedness held under Section

161, the law firm advised the court that It

would terminate ItS representation of that

divrsron, and the Comrnrssron Withdrew

ItS objection.

Calvin cnnsuen Retirement Home, Inc

and Pralfe, tnc," The court approved an

Involuntary petition for reorganization of

the debtors. The debtors had sold unregistered securities In the form of promissory notes and passbook deposits to

over 800 persons, on which the debtors

were allegedly In default

The attorney for the petitioning creditors was appointed as general counsel for

the trustee. The Commission petitioned

for his disqualification on the ground that

he was not drsmterested by reason of hrs

representation of the petition Ing cred itors.

The order finding the attorney drsmterested and appointing him as general

counsel to the trustee was Withdrawn.

However, that same lawyer was retained

as specral counsel to assist the trustee In

performing duties that would not conflict with the statutory proscriptions The

Oomrrussron did not object to such speoral appointment. SUbsequently, a new

general counsel to the trustee was

appointed.

Dolly Madison tndustrtes, Inc 7_ The

debtor's certificate of authorrty to do

business In Virginia was revoked by that

state's corporation commission for failure

to file annual reports With the state and

for failure to pay required registratIOn

fees. The reorganization court ordered

the state agency to reinstate the debtor's

certificate of authonty, On appeal, the

court of appeals reversed, holding that,

while property of the debtor may have

been affected by the action of the state

agency, the revocation of the certificate

did not constitute a "claim" -against the

debtor's "property" and the reorganrzanon court lacked summary JUrisdiction to

order ItS reinstatement 6

R. Hoe & Co, Inc 9 Early In these proceedings the trustee renegotiated certain

of debtor's contracts for the manufacture

and sale of printing presses. The trustee,

pursuant to court approval. required payment by the debtor's customers of a

premium over the Original contract price.

A customer, who had paid the premium,

filed a claim for ItS recovery asserting an

admmrstratron claim or, alternatively, a

general unsecured claim for the rejection

of an executory contract. The reorganization court disallowed the claim entirely

On appeal, the court of appeals rejected

the administration claim and held that the

customer was entitled to a general unsecured claim In the amount of the

premium It had pard.!v

East Moltne Downs, Inc 11 The plan of

reorganization, which was approved by

the court dUring the pendency of an appeal from the court's finding that the petition was filed In "good faith", failed to

receive the reqursite number of acceptances from unsecured creditors and

stockholders. After the hearing required

by Section 236, the debtor was adjudqed

a bankrupt. As a result, the parties consented to the dismissal of the pending

appeal as moot. 12

TRUSTEE'S INVESTIGATION

AND STATEMENTS

A complete accounting for the stewardShip of corporate affairs by the prior

management IS a reqursite 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, rncludmq claims

against officers, directors, or controlling

persons who may have mismanaged the

debtor's affairs The staff of the Commission often aids the trustee 10 his investrgatlon.

Famngton Manufacturing Company, et

et, J.l-As a result of facts uncovered durIng the course of rus extensive lnvestrqa151
non of the debtors, the trustee brought a

plenary action In the federal court In New

York to recover for Famngton Manufactunng Company ("Manufactunng") about

$800,000 In profits allegedly made by a

retired officer and director who sold

shares while In possession of matenal

adverse mtorrnatron which was not publicly disclosed or was disclosed In a

misleading manner The court held that

the complaint stated a cause of action

under Delaware law for common law

breach of a director's fiduciary duty to a

corporation to refrain from making personal profit through the use of inside

corporate information, but that the trustee

had no standing to sue under Section

10(b) of the Securities Exchange Act,

since neither he nor the corporation was

a defrauded purchaser or setler.':'

The reorganization judge dismissed the

trustee and directed the successor trustee

to petition the New York court to transfer

the case to the Eastern Distnct of Virginia

"for hearing and determination." Subsequently, upon JOint motion of the successor trustee and the defendant, the

complaint was dismissed without prejudice pursuant to Rule 41 of the Federal

Rules of CIVil Procedure I>

In his report, the trustee concluded

that, inter alia, the offermg circular used

In connection with the offer and sale of

$10,000,000 In Euro-dollar debentures

Issued by Farrington Overseas Corporation ("Overseas"), guaranteed by Manufacturing, contained false statements of

matenal facts and failed to disclose other

matenal rntormatron. Based upon the

mtorrnatron developed dunng the Investigation, a debenture holder filed an action

rn the federal court rn New York on behalf of Itself and other ongmal purchasers

agamst the accountants, underwriters and

officers and directors of Overseas and

Manufactunng alleging violations of Section 17(a) of the Secuntles Act of 1933

and Section 10(b) of the Securities Exchange Act of 1934 and the Commission's

rules promulgated thereunder.!" The

plaintiff JOined the trustee as an involuntary plaintiff pursuant to Rule 19 of the

Federal Rules of CIVil Procedure, claimIng he was an indispensable party be152

cause he had all of the documentary

evidence and Overseas had causes of

action against the defendants based on

the same facts

The reorganization judge ordered the

trustee "to torthwrth pennon the New

York court for leave to withdraw as party

plaintiff .. In an accompanYing memorandum, the judge stated that" .. [the

trustee and his counsel) worked up the

SUit, developed the evidence and drafted

the complaint and forwarded It to New

York for fllmg." Upon learnmg of tms

memorandum opinion and order, the

judge iiI ths New York action requested

the parties to address themselves to the

Issue of vhether It ISa coltusrve action."

The Commission was prepared to argue

emtcus curiae that such an action is not

coltusrve merely because the Chapter X

trustee shares the trurts of his rnvestiqanon with a party to the reorganization

proceeding. Ttus argument became unnecessary when the judge ruled at the

outset of the hearing that the Euro-dollar

debenture holder could remain as a party

plaintiff. The purpose of a trustee's investigation IS to enable him to convey to

the court and all parties In Interest the

information he has discovered. The Supreme Court, while holding a Chapter X

trustee did not have standmg to assert a

claim on behalf of debenture holders,

stated that public mvestors "would be

able to take advantage of any information

obtained by the trustee In reorganization

as a result of the investigation which the

statute requires that he make." 17 For a

court to hold that a trustee cannot share

facts uncovered during ms investigation

with a representative of a class that

allegedly has been Injured would erode

an Important investor safeguard of

Chapter X

Subsequent to the withdrawal of the

Overseas' trustee as a party, the drstnct

court ordered the dismissal of the debenture holders' action for lack of subjectmatter junsdrction after finding that the

purchase was "predominantly foreign"

and that the antifraud provrsrons of the

Federal secunties laws were not intended to apply to such a purchase.!" The

court further found that the debenture

"

"
holders that commenced the action, a

Canadian corporation, was not within the

group of Intended or lawful offerees since

the offering circular Involved earned a

proviso that the debentures were not to

be sold to United States or Canadian

nationals or residents and that the

purchasers had signed a covenant to

that effect

Arlan's Department Store, Inc.19

Prior to the proceeding, f' shareholder

commenced a derivative acnon against

the company's manaqernent.w About four

months after the appointment of the

Chapter X trustee, the court approved,

over the Commission's objection, a

$150,000 cash settlement of the lawsurt

in exchange for general releases from

the defendants, because the trustee

needed the cash to operate the business

The trustee had had little or no time to

conduct the required investigation of the

debtor's attarrs or possible causes of action that existed against former management. The Commission urged that the

investigation be made so that the trustee

could present facts from which an informed Judgment could be reached on the

overall merits of the settlement. In the

Commission's view the cash was not

significant In light of the debtor's overall

needs to warrant relinquishing possible

claims.

About six months after the settlement

was approved, the trustee ceased operations and announced his intention to

propose a plan of orderly lrqurdatron. At

the close of the fiscal year, neither a plan

nor the report of the trustee's investigation had been filed.

PLANS OF REORGANIZATION

Generally, the Cornrrussron files a formal advisory report only in a case which

Involves substantial public Investor interest and presents Significant problems.

When no such formal report IS filed, the

Comrnrssron may state ItS views briefly by

letter, or autnorrze ItS counsel to make

an oral or written presentation DUring

the fiscal year the Commission published

no formal advisory repo~t, but ItS views

on 12 plans of reorganization were presented to the courts either orally or by

written rnernoranda.u

Dolly Madison lruiustnes 22_At the

conclusron of plan hearings the court

found the debtor Insolvent and referred

an Internal plan of reorqaruzanon proposed by the trustee and a plan of orderly

lrqurdanon proposed by a major creditor

to the Commission for ItS report. The

trustee's plan provided for, among other

things, the Issuance of stock to creditors

and warrants to shareholders The

trustee's plan appeared teasrble, but the

Commission was unable to determine

whether It was "fair and equitable" because of the Inadequacy of the record.

In ItS report, the Commission objected to

the proposed Issuance of warrants,23

pointed out that the warrants and underlying secunties, If Issued, would not be

exempt from the registration provrsrons of

the Securities Act, recommended a more

Simplified capital structure for the reorganized company than the one proposed,24 and urged that provrsions for

the Issuance of non-voting stock which

Violate Section 216(12)(a) be deleted. The

Commission also advised the court that

the plan of orderly lrqurdatton was premature. At the close of the fiscal year,

the court had not rendered a decrsion

regarding approval of either plan.

Diverstned Mountaineer Corp, et al.2>

Four plans of reorqaruzatron were proposed for thrs West VirgInia industrial

savings and loan business which, through

seven offices, had about $30 million In

uninsured deposits and $6.8 rmllron In

subordinated debentures to over 20,000

persons.

Three plans were fIled by outside

proponents and provided for either the

purchase of the debtor's assets or an

acqursmon of the company which contemplated the connnuatron of the debtor's

busrness The trustee proposed an internal plan calling for the debtor's reentry Into the industrial loan busrness but

Without accepting savings deposits. Under

the trustee's plan creditors would receive

cash and securities of the reorganized

company

The trustee proposed a form of consolrdatron which treated the parent cor153

-
poration separately from Its subsidianes.

The subsidranes' assets would be pooled

and all creditors of these subsidianes

including depositors would be treated

as equally entitled to the pooled assets

As a result, the parent estate was separately valued with recoqrntron given to

the subsrdranes' claims totaling almost

$6 million, which represent advances to

the parent.w The court as urged by the

Commission adopted thrs form of consolidation

Holders of the debtor's common stock

would be excluded from participation under all plans In accordance With the

court's finding of Insolvency, whether

treated separately or combined With ItS

subsrdranes Lrkewise the subordinated

debenture holders, due to their subordination, were accorded no participation

as such In the trustee's plan The plan

provides that to the extent that debenture

holders can establish claims based on

alleged Violations of the Federal securrtres

laws, they Will participate on a panty With

depositors as unsecured creditors

The Commission suggested that the

trustee's proposed claim procedure for

subordinated debenture holders provrdIng for a separate determination of each

claim be consolidated for trral on a class

action basis and that a lead counsel be

appointed Shortly thereafter a class action was filed on behalf of the debenture

holders claiming that sales were made In

Violation of the antifraud provrsions of

Federal secunties laws

In ItS onqinal memorandum, the Comrrussron found the three outside plans

either unfair and/or unfeasible and concluded that the trustee's plan was fair,

equitable and teasible but indicated that

the creditors would receive more In value

If the estates were liquidated. The bankruptcy judge acting as special master

agreed With the Commission and recommended that the trustee amend hrs plan

to provide for the orderly lrqurdatron of

the estate The estate was valued at about

$23 million on a gOing-concern baSIS and

about $32 million under an orderly

lrqurdatron.

Thereafter the trustee amended his

plan to provide for the orderly liquidation

154

of the estates continuing the form of consolidatron and treatment of debentures

as previously approved by the court An

outside proponent amended rns previous

plan to provide more consrderatron to the

creditors In light of the $32 million uqurdanon value. The Commission's supplemental memorandum concluded that the

orderly liqurdatron was fair to creditors

but stili found the creditor's plan to be

unfair Amendments necessary to make

the proponent's plan fair havmq not been

made, the court approved the trustee's

plan of orderly liquidation. After the close

of the fiscal year, the court confirmed

the trustee's plan.

North Western Mortgage Investors

Corp 27_ The debtor was engaged in the

busmess of buyrnq and seiling Interests

In vanous types of real estate ApprOXImately 1,700 publiC Investors purchased

about $11 million of promissory notes,

secured by tractional Interests in real

estate mortgages and contracts

The trustee's mvestrqatron disclosed

that the selection of secunty for the particular Investors was made In a fortuitous

manner by the debtor subsequent to payment by the Investor Thus, he concluded

that the actual value of the secunty assigned to Investors vaned greatly. The

trustee therefore proposed an Internal

plan of reorganization embodying a compromise among the public creditors.

Under the plan each Investor would receive a non-Interest bearing debenture

In the principal amount equal to 50 percent of the secunty he holds In addition,

the Investor would receive common stock

of the reorganized company In exchange

for the remaining portion of hrs claim,

including the other 50 percent of the value

of the claimed secunty Unsecured creditors would receive the balance of the

common stock except that up to 50 percent of the stock may be retained for

Issuance to new management The plan

excludes the two present stockholders

from participation since the debtor was

Insolvent.

In ItS report the Commission pointed

out that while compromises are "a normal part of the process of reorqaruzanon," 2" the court has a duty to scrutinize
the merits of the proposed compromise

and apply Its informed Independent judgment.29 Thus, since further hearings on

objection to the compromise were scheduled which could result In evidence that

would controvert the trustee's findings,

the Commission did not take a position

with respect to the fairness of the compromise and urged the court to hear the

objecnons before approving the compromise.

The plan was defrcient In leaving for

future determinations the maturity date of

the debentures and provisrons for payments Into the sinking fund,3o thus preventing the Commission from analyzing

the feasibility and fairness of the trustee's

plan.

The Commission also objected to the

reservation of common stock for compensation to new management, noting that

the Supreme Court has held that because

certain persons can provide management,

Without more, "IS no legal [usntrcanon for

the Issuance of stock to them" under a

Chapter X reorqaruzation 31The Commission pointed out that stock cornpensanon

for new management IS a matter more

appropriate for consideration by the new

board of directors of the reorganized

company.

In accordance With the Oomrrusston's

View, the court ISconducting further hearrnqs on the fairness of the compromise.

As of the end of the fiscal year the court

had not approved the plan.

Air/Industrial Research, Inc.32 The

debtor sold limited partnersrup Interests

to public Investors to finance real estate

acqulsrtrons The properties are encumbered, generating a negative cash flow,

primarily from agricultural leases. The

trustee's proposed plan of reorqaruzatron

substantially consolidated the limited

partnership's assets With those of the

debtor, the general partner,"? and offered common stock of the reorganized

corporation In exchange for the limited

partners' interests.s- The plan also contemplated the sale of stock to the pubhc

to provide a source of capital to enable

the reorganized company to service Its

secured debt and pay 'ItS operating expenses for a short time after emerging

from Chapter X. The Commission objected

to approval of the plan and pointed out

the senous teasrbrlrty problems; It took

the POSition that It was Incumbent on the

court to disapprove plans of reorganization that would perpetuate "corporate

Cripples" ,n It also noted that the sale

of stock would not be Within the exemption provided by Section 264a(2) from the

reqrstratron provrsrons of the Securities

Act, since It was not offered In exchange

for claims against or Interests In the

debtor The trustee requested the court

to defer consrderation of the proposed

plan pending the resolutron of these

problems.

Pan American Ftnancial,lb-The court,

as recommended by the Commission, deferred approval of the trustee's plan of

reorganization for lack of adequate nnancral records to support proposals to

sell the debtor's subdrvrsron lots. The

trustee then filed an amended plan proViding for the sale of all unsold lots In a

large Hawauan subdrvrsron. which were

encumbered by first mortgages exceeding

$10 rrulllon held by 2,000 publrc investors.

The proponent, a local real estate

broker, was to sell the remaining lots at

retail and pay the mortgage principal to

the Investors from the sale proceeds. The

Comrmsston advised the court that there

was a question whether there would be

suffrcrent funds to complete required

subdrvrsron Improvements It characterized

the broker's proposal as nothing more

than a best efforts marketing program

which could be abandoned at any time

without recourse. In the event of default,

the plan provided that the lots would be

deeded to the Investor-mortgagee In lieu

of foreclosure or, at his option, sold on

hIS behalf In either case, an administrative surcharge would be assessed

The Commission pointed out that an

orderly drsposrtron of the lots through a

Chapter X plan was better for the Investorcreditors than foreclosures or forced sales

In straight bankruptcy '17 While the Comrnrssion urged the court not to approve

the amended plan until the Ieasrbrtrty

problems concerning the marketing proposal were resolved, the plan was approved, accepted, and confirmed, but

155
not consummated when the purchaser

defaulted on the down payment The agreement was terminated and the trustee

proceeded to formulate the alternate

deed-out program In compliance with

provrsions of the Interstate Land Sales

Full Disclosure Act !X

Atlanta International Raceway, tnc.vi-«

The Court of Appeals for the Fifth Crrcurt,

as urged by the Commission, affirmed the

district court's order confirming the

trustee's amended plan of reorganization ~" The district court held that the opportunity to receive cash In excess of the

per share value of the stock as found by

the court provided "more than 'adequate

protection' pursuant to Section 216(8)"

for dissenting stockholders

The Supreme Court denied a petition

for a Writ of certiorari filed by a shareholder who also was a proponent of a

competing plan.:' The petrnoner contended that Section 216(8) does not apply

where a debtor has only one class of

stockholders and that class rejects the

reorqanrzatron plan. The Cornrrusston,

In ItS brief opposing the pennon, noted

both that petitioner did not challenge the

adequacy of the cash offer and that payment In cash "IS the perfect realization of

a money chose In action" H It urged that

In the absence of reported decrsrons involvrnq a cram-down to dissenting stockholders the principle of the parallel

provrsron In Section 216(7), dealing with

dissenting creditors, IS equally applicable

to shareholders

Continental Vending Machine Corp ~!

The district court approved an amended

plan of reorganization based on substantive consolrdatron of a parent corporation and ItS Subsidiary, which provided that no secured creditor's claim

shall be Improved as a result of the consolidation Since the plan treated unsecured claims as consolidated and secured

claims as unconsolidated, a secured

creditor appealed contending that the

plan was not "fair and equitable" The

court of appeals, as urged by the Commission and the trustee, affirmed the approval order and held that the secured

creditor's right to specific assets pledged

to It In connection With loans to the two

156

corporations was preserved and that the

Bankruptcy Act does not require consolidation to be complete for all purposes.«

Lyntex Cotporetion ~'-The trustee filed

plans of reorganization contemplating the

orderly liquidation of the debtor and ItS

Subsidiaries Under the plans, costs and

expenses of administration In the superseded Chapter XI proceedings were to

be treated subordinate to those Incurred

In the Chapter X proceedings. The Comrrussron advised the court that the plans

would be "fair and equitable" if amended

to accord equal treatment for costs and

expenses of administration of both proceedings. Under Section 328 when a case

IS transferred to Chapter X from Chapter

XI, It IS deemed to be a Chapter X proceeding from the inception of the Chapter

XI proceeding. In addition, case authority

supports equal treatment for administration costs of both proceedings ~6 At the

close of the fiscal year, the court had not

rendered ItS decrsion regarding approval

of the plans.

ACTIVITIES WITH REGARD TO

ALLOWANCES

Every reorganization case ultimately

presents the difficult problem of determinIng the 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 Act may not receive any allowance for the service It

renders, has sought to assist the courts

in assuring economy of administration

and In allocating compensation equitably

on the basts of the claimants' contributions to the administration of estates

and the formulation of plans DUring the

fiscal year 411 applications for compensation totaling about $21.1 rmllion

were reviewed

Famngton Manufacturing Company,

et al 4'-Seventeen applicants sought

compensation and reimbursement of expenses aggregating about $1.3 million

(including amounts previously paid) for

the period January 1971 through June

1973 These requests amounted to about

28% of the assets of $4,625,000 In the

'
combined debtor estates. The Commrssron

recommended fees and reimbursements

totaling about $927,000, while the special

master recommended about $781,000. In

November 1974, the drstnct JUdge awarded

fees and reimbursements aggregating

about $670,000 for the entire proceeding,

including addrtionat requests aggregating

about $215,900 for services and expenses

subsequent to June 30, 1973. Two appeals

were pending at the close of the trscal

year, wrtn the Cornmtssron partrcrpatinq

In both.

Counsel to the trustee requested an allowance for services rendered through

June 1973 of $673,200 (including an

interim payment) and retmbursement of

about $36,100 In expenses The CommISSIon recommended $575,000 compensation and the retmbursernent of their

expenses without regard to additional

services whrch would be performed. The

specral master recommended that their

fee for the period be $450,000 plus expenses. The drstnct judge awarded

$350,000 for all services rendered and

expenses Incurred to November 1974

plus $10,000 for services and expenses

In closinq the estate but gave no indicanon how much was being awarded

through June 1973 and how much was

for the subsequent period for whrch counsel sought a total of about $140,300.

Counsel, supported by the Oomrmssron,

appealed from the order 48 which it calculated amounted to an award of about

$17 per hour The Cornrrussron urged that

trustee's counsel IS a court appointee

wrth certain dunes and responsrbtlrnes

for which It IS entitled to "reasonable

compensation" under Section 241 and

IS not a volunteer who IS compensated

on the basis of benent to the estate In

the Oornmrssron's VIew, the drstnct JUdge

tarled to balance three factors against the

needs of economy. (1) that compensation

should be reasonable When, as In these

cases, the standard of counsel's performance IS not questioned, so that

competent counsel WIll be encouraged

to participate In increasingly more complex reorganizatIon proceedings, (2) that

the Section 167 rnvestrqafron is one of the

most Important steps in a reorqamzanon

and IS one of the protections that Chapter

X IS designed to provide for' public investors to which the same court of

appeals addressed Itself over 30 years

ago In Committee v. Kent; 49 and (3) that,

as a result of the mvestrqanon, a class of

Farnngton stockholders were accorded

a modest partrcrpatron under the plan

of reorqaruzatton even though the debtor

was Insolvent, and the trustee was involved In several lawsuits which, If successful, would have Increased the estates

and consequently the drstributron to

creditors, including publrc investors.

The other pending matter related to the

amount and manner In which fees and

expenses to the Indenture trustee were

awarded Both the Cornmrssron and the

special master recommended that ItS

pre-Chapter X expenses be paid from

proceeds available for drstnbution to

debenture holders In accordance WIth

terms of the Indenture rather than as a

cost of adrrurustration. The drstrict JUdge

agreed WIth the manner of payment but,

WIthout explanation, reduced the amount

by 50%. WIth respect to cornpensatron for

services that were of benefit to the estate

dunnq the Chapter X proceeding and

expenses Incurred therewith. both the

Comrrussron and the special master made

clear that their recomrnendatrons were to

be considered costs of adrmrustratron

The drstnct judge, aqarn WIthout explananon, directed that tnrs award, like the

pre-Chapter X expenses, be borne by

the debenture holders.

The Indenture trustee, supported by the

Oomrrussron, appealed >II The Oomrmssron urged that (1) In the absence of a

finding that the pre-Chapter X expenses

were not properly Incurred, the Indenture

trustee is entitled to reimbursement In

full under the Indenture, and (2) compensanon from the estate to an Indenture

trustee for benetrcral services In connection WIth a reorganization proceeding

ISappropriate under Sectron 242.;1

Interstate Stores, Inc. ;2_ The independent trustee sought an interim allowance of $24,000 for services rendered

durrnq a 4V2 month penod and the

additronal trustee requested a $25,000

Increase In hts annual salary to $100,000

157
Since the trustee only spent about 45%

of his time on estate matters, the Commission recommended an award of

$11,500 for the period. It opposed any

Increase In the additronal trustee's salary

The special master reported to the district judge that In his view the applications

should be granted In full.

The district Judge In an unreported decrsron stated that the Commission's

recommendations should be followed In

the absence of contrary reasons based

on specrtrc ftndmqs.>" Since the special

master had not made the necessary findrnqs, the district judge awarded the

amounts suggested by the Commission.

INiERVENTION IN CHAPTER XI

Chapter XI of the Bankruptcy Act provides a procedure by which debtors can

effect arrangements with respect to their

unsecured debts under court supervisron

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 and Rule

11-15 of the Rules of Bankruptcy Procedure authorize the Commission or any

other party In Interest to make application

to the court to transfer the Chapter XI

proceeding to Chapter X

Under thrs Rule, which became effective

as of July 1, 1974, the Commission as

well as other parties In Interest, except

the debtor, have 120 days from the first

date set for the first meeting of creditors

to file a motion. The time may be extended for good cause. A motion made by

the debtor for transfer, however, may be

made at any time The Rule requires a

showinq that a Chapter X reorganization

IS teasible. This In effect means that a

motion can be granted only If the court

finds both that Chapter XI IS Inadequate

and reorganization under Chapter X IS

possible The prior procedure for filing

a Chapter X petition after the granting of

the motion and a separate hearing on the

pennon has been abolished.

Attempts are sometimes made to misuse Chapter XI so as to deprive Investors

of the protection which the Securities

Act of 1933 and the Securities Exchange

Act of 1934 are designed to provide ',~ In

158

such cases the Commission's staff normally attempts to resolve the problem by

Informal neqottations. If thrs proves fruitless, the Commission Intervenes In the

Chapter XI proceeding to develop an

adequate record and to direct the court's

attention to the applicable provrsrons of

the Federal securrtres laws and their

bearing upon the particular case.

Omega-Alpha, Inc." The debtor is a

publicly held holding company which

wholly owns one operating subsidrary,

The Okirute Company Since ItS orqaruzation In 1970, debtor InCUrred agg regate

losses of approximately $115 million. At

the inception of the Chapter XI proceedmqs, the company's financial statements

reflected a dencrt net worth of about $50

million. The company's capitalization includes about $42 million In two Issues of

debentures held by about 3,000 public

Investors The Commission In ItS motion

to transfer the proceeding to Chapter X

urged, among other things, that there

was the need for a thorough rnvestrqatron

by an Independent trustee and that rehabilitation of the company required a

substantial adjustment of Widely held

public debt. Both Indenture trustees for

the two Issues of debentures also filed

transfer motions. The court granted the

motions and transferred the proceeding

to Chapter X whereupon two trustees

were appointed

U S. Ftnenciet, Inc. ,b The Commission

and certain creditor banks filed Section

328 motions to transfer to Chapter X the

proceedings mvolvmq trus real estate

conglomerate. The debtor's capitalization Includes $35 rrulhon In convertible

subordinated debentures, $11 million

principal amount of bearer bonds and

$10 million In common stock, all publrclyheld A hearing on the Commission's

motion was deferred when the debtor

obtained a stipulation from the moving

banks that It would be allowed a reasonable time to attempt to formulate an

acceptable arrangement, the debtor agreeIng to consent to Chapter X If It could

not Subsequently, however, the debtor's

motion for relief from the stipulation was

granted by the court, and It continued In

Chapter XI
The Oommrssron, which was not a

party to the stipulation, had pornted out

that the debtor's potential lrabulty on

pending collateral secunties fraud class

SUitSfiled against the debtor might prove

to be Insurmountable under the hrruted

scope of Chapter XL.>' Pending the

debtor's attempt to propose an acceptable

arrangement, the Commission formally

appeared In the Chapter XI proceeding

Somewhat later, the banks moved for an

adjudicatron, the debtor then filed a motion to have the case proceed under

Chapter X,.>H asserting, mter alia, that

"serious obstacles" to confrrmation of an

arrangement existed and that It would

be In the best Interest of creditors to

proceed under Chapter X "wherein the

problems of bars to discharge and nondischarqeabrlity of claims are not present." The banks contested the debtor's

motions; because of the lapse of time

and changed crrcumstances the Commissron took no positron. After the close

of the fiscal year, the court granted the

debtor's motion and appointed a trustee.

Esgro, Inc.>9 The debtor is a pubuclyheld holding company whose prrmary

asset IS a wholesale electrrcal products

business not In Chapter XI. About 60

percent of some $10 million of unsecured

debt IS represented by subordinated

convertible debentures held by approxrmately 700 Investors.

The debtor offered ItS creditors $1

million In cash at conftrrnanon, an addinonal $1 rrullron within one year but only

to the extent realized from the sales of

certain assets, and a 49 percent equity

Interest. In connection with the sotrcitanon of acceptances from debenture holders, the debtor was requrred to comply

with the proxy provrsrons of Sectron 14(a)

of the Secuntres Exchange Act and the

rules tnereunoer.w

The Commission moved to transfer

the case to Chapter X urging that the

proposed materral moditrcatron of

pubucly-netd debt must be accomplished

under that chapter 61 The debtor strenuously reststed the transfer motion and

sought extensive discovery After lengthy

hearings, the bankruptcy Judge denred

the Oornrrnssron's motion without prejudice, porntmq out the effort and progress

toward contrrrnatron of the Ghapter XI

plan made by the debtor In ItS appeal

to the drstrict JUdge, which was pending

at the end of the fiscal year, the Cornrrussion argued that where the rrghts of public

Investors will be materially affected, It is

Improper to deny a motion to transfer

the proceeding to Chapter X on the

grounds that the debtor has exerted efforts, Incurred expenses and made

progress toward the connrrnatron of a

Chapter XI arrangemenl.62

Pocono Downs, Inc.,6J-Thls publicly

held company, whrch owns and operates

a horse race track, has outstanding approximately $850,000 In subordinated

convertible debentures held by about 800

public Investors. The Commission intervened in the Chapter XI proceeding to

support a motion by the Indenture trustee

to transfer the proceeding to Chapter X.

The Commission urged, among other

things, that a dismterested trustee was

needed to conduct the debtor's operations, investrqate ItS past acnvitres and

ascertain ItS present financial condition

An order enjoining the voting of about

65 percent of the debtor's outstanding

stock had been entered as a result of a

myrrad of transactions involving that

stock. No stockholders' meeting had been

held since October 1973, and It was unclear who had actual authorrty to act on

behalf of the debtor. In addrtron, certain

officers of the debtor had Interests In

some of ItS major creditors, which gave

nse to substantial conflicts of mterest

Further, the Oommrssron urged that the

rehatnhtatron of tms debtor IS likely to

mvolve more than a mrnor adjustment to

the rrghts of the public debenture holders.

SUbsequent to the end of the fiscal year,

the bankruptcy court granted the motion,

transferred the proceed 109 to Chapter X

and appointed a trustee.vEqUitable Mortgage Investment Corp,

et al.b<O The debtor IS a regIstered retail

land developer under the Interstate Land

Sales Full Disclosure Act bb and markets

recreational land 10 Iowa. It financed ItS

operations through four Intrastate public

offerrngs of debt secunnes totalling $5

rmllron purchased by approximately 1,300

159
Investors Equitable's common stock IS

held by American Recreation & Land

Company ("American"), which operates

the same busmess In MIssouri under the

same management Substantial mtercompany activity between the two. corporations was responsible for placmg

most of the liabilities In Equitable and

most of the assets rn American.

American caused Equitable to file a

Chapter XI petition. Under Equitable's

proposed arrangement, preferred stock

would have been exchanged for public

debt, and American would have retained

ItS equity Interest. In addrtion, accounts

receivable from American of over $1

million would not have to be repaid.

The Commission In Its transfer motion

urged, among other things, that there was

a need for a thorough investigation by

an mdependent trustee, that Equ rtabte's

rehabilitation required a substantial adjustrnent of publicly held debt and that a

close scrutiny of debtor's relationship

With ItS parent, American, was necessary

The Commission also noted that the

spectre of federal secunties laws Violations In the sale of debtor's debt secuntres

raised the question of whether these

contingent claims could be discharged

In a Chapter XI proceeding. The court

granted the Commission's motion, transferred the proceedmgs to Chapter X and

appointed a trustee.

"U" Dtstrtct BUilding Corporetton » Public debenture holders, supported by

the Commission, were successful In obtammg the transfer to Chapter X of the

proceedings mvolvrnq this owner of a

seven-story office burldmq. The debtor

proposed the sale of the office bUilding

and a plan of uqurdation In Chapter XI

The Commission questioned the fairness

of the price and objected on the grounds

that Chapter XI was not a proper vehicle for a nqurdatron.':" In addition,

questions had been raised concerning

the conduct of management which indicated the need for the safeguards of

Chapter X.

An Insurance company, which was

attempting to foreclose ItS first mortgage

on the debtor's sole asset, argued that

under Rule 11-44(d) the court was re160

qurred to reach a determination on the

reclamation petition prior to holdmg a

hearing on the motion to transfer the

proceedings to Chapter X. The court

disregarded the Insurance company's

argument, notmg the anomaly mvolved

In asserting that a sole asset could be

reclaimed from a debtor In Chapter XI

when there had been no determination of

whether Chapter XI or Chapter X was the

proper avenue of relief. After a hearing,

the court transferred the proceedmgs to

Chapter X and appointed a trustee

Amencan Beef Packers, Inc.69 The

Commission mtervened In thrs Chapter

XI proceeding and Joined With the States

of Iowa and Nebraska rn seekmg the

appointment of a receiver for the debtors.

American Beef, which IS publicly held,

has assets of about $110 million and

liabilities of over $92 million The application alleged, among other things, that

preferential transfers of money were

made to affiliates of American Beef before and after the Chapter XI filing, that

certain officers and directors were subjects of investigations by various state

and federal agencies, and that American

Beef was mismanaged by ItS officers and

directors In that It diverted funds from

ItS pnncipal creditors, Issued checks

drawn on accounts msuttrcrent to pay

the checks, and applied funds necessary

for ItS continued operations for capital

Improvements.

The hearing on the application was

continued several times and, as of the

end of the fiscal year, had not been heard.

The debtor's proposed arrangement contemplates that new management would

take over the operation of the business

Should It be confirmed, the appointment

of a receiver would become moot.

Investors EqUity of Iowa, Inc 7(, Debtor,

a publicly held land development corporation With two wholly owned subsidranes, had Issued thrift certificates

totalling about $1.5 million to approximately 375 holders The Comrmsston filed

a motion to Intervene In the proceeding to

seek the appointment of a receiver. In

ItS motion the Commission alleged, among

other things, that the thrift certificates

were Issued In vrolatron of the antifraud
provrsons of the federal securities laws,

that the management of the debtor continued to make false statements to

securities holders subsequent to the

termination of the offering and that the

debtor had been mismanaged.

The debtor resisted the Commission's

application and specifically objected to

ItS standing to make such an application.

The bankruptcy judge, citing S.E.C. v.

Amencen Trailer Rentals CO.,71 concluded that the Commission does have

the right to Intervene as a party in interest In a Chapter XI proceeding and

granted the Ccrnrnissron's applrcatron

for the appointment of a receiver

Superior Mortgage Co. and omntvest.r»

-These debtors and five other affiliated

corporations are In the business of selling

real estate to Investors Interested In gains

from apprscranon In land values or tax

shelters. After the State of California filed

a complaint against the debtors seeking

injunctive and other relief, alleging violations of the State's laws regarding subdlvislOns,73 credit evaporated and relief

was sought under Chapter XI.

Debtors' scheduled assets of more than

$41 million, included almost $23 million

of land sales contracts from about 3,500

lot purchasers who had the right to

terminate. Liabilities aggregated about

$34.5 million, of which almost $16 million

may have been secured and were owed

to some 1,500 investors. A plan of arrangement was proposed which provided

that creditors, including lot purchasers

who terminate their contracts and investors, would be paid in full over a period

of years from a trust fund created from

remaining land sales contracts receivable

plus 10% of future land sales contracts.

The Commission moved to Intervene In

the Interest of public Investors, since It

believed that the proposed arrangement

raised a number of questions under the

Federal securities laws.74 It was concerned, among other things, with the

adequacy of disclosure to be made to

investor-creditors and lot purchasers and

whether the proposed partrctpatron In

the trust fund was an evidence of indebtedness requmnq quautrcatron under

the Trust Indenture Act.> The debtors

then disclosed additional data to investors; the staff reviewed the materials

to be used In soucrtinq consents to the

arrangement and changes were made In

response to comments, and accommodations also were reached on other Issues.

Since the Commission effectively obtained the relief It sought, It withdrew Its

motion to Intervene without prejudice.

Cavanagh Communities coraoretton.i«

-Shortly after the commencement of

these Chapter XI proceedings, the New

York Stock Exchange advised the debtor

of Its decrslon to file an application with

the Commission to dehst the debtor's

common stock and convertible subordinated debentures. Upon appllcatron of

the debtor, the bankruptcy judge, holdIng that the stock exchange listing constitutes "property" of the debtor and thus

within the JUrisdiction of the bankruptcy

court, entered an order enjoining the

Exchange from making such application

The Exchange appealed to the distnct

court The Commission filed an smtcus

curtee brief urging that the order of the

bankruptcy JUdge be reversed because of

lack of [urrsdrcnon to grant the injunctive

relief sought against the Exchange. The

baSIS for the Commission's posrtion was

that the Securities Exchange Act of 1934

embodies a comprehensive statutory

scheme whereby national securities exchanges registered with the Commission

are placed under ItS regulatory control,

and that Section 12(d) of that Act vests

exclusive jurrsdictron over the exchange

delisting process In the Commission, subject to judrcral review of Oornrnlssion orders only by Federal courts of appeal.

The Commission did not address itself to

whether exchange listing IS "property"

of the debtor because of ItS belief that,

even assuming arguendo that It IS property, a bankruptcy court's junsdrcnon

over stock exchange listings IS preempted

by the grant of exclusive [unsdrctron In

Section 12 of the Securities Exchange

Act of 1934. At the end of the fiscal year

no decrsron had been rendered on trus

appeal.

Puts & Calls, Inc.7T-Whlle the Comrrussron, which had intervened specially

to enforce the Federal securities laws,

161
was developing the record as to the adequacy of the disclosure of material facts,

the nondebtor proponent withdrew ItS

proposed arrangement. Since there was

no qoinq business to rehabilitate, there

was no need for a debtor-relief proceedmq, The debtor was adjudicated a bankrupt, and ItS more than 4,000 creditors,

mostly Investors, were entitled to receive

a distnbutron of a substantial portion of

ttie cash fund which exceeded $600,000.

Longchamps, Inc 7k The debtor sought

court authority to retain a law firm, which

asserted a substantial secured claim for

services rendered prior to the Chapter XI

proceeding, as Its counsel In the proceeding After denying the application

without prejudice, the court sought the

Commission's views with respect to this

matter, since the debtor IS a publicly held

company The Commission concurred

with the court's decrsion disqualifying the

law firm It pointed out that questions may

arise with respect to the amount of the

law firm's claim and the validity of ItS

security Interest An attorney for a general

creditor IS not disqualified from such

representation under Section 44c of the

Bankruptcy Act and Bankruptcy Rule

215(c), but these provrsions clearly do not

apply where a creditor IS secured or has

a Priority. Subsequently, the court appointed another law firm

NOTES TO PART 7

1 A table listing all reorganization

proceedings In which the Commission

was a party dunnq the year IS contained

In Part 9.

2 D. Colo., No 71-8-2921 Previously

reported In 40th Annual Report, p. 127

and 39th Annual Report, pp 121-122.

I Vanston Bondholders Protective Committee v Green, 329 U.S 156 (1946),

umtea States v Edens, 189 F 2d 876

(C A 4, 1951), aff'd per curtem, 342 U S

912 (1952) (on basts of New York v.

Saper, 336 US. 328 (1949) as controlling

In Chapter X), Urutea States v. General

Engmeermg & Manufacturmg Co, 188

F 2d 80 (CA 8, 1951), aff'd per curtem,

342 US. 912 (1952) See also, Sexton v

Dreyfus, 219 U S 339,344 (1910)

, In re Times Sales Fmance Corp, 491

F 2d 841 (C.A 3, 1974) and In re Kmgsboro Mortgage Corp., 379 F.Supp. 227

162

(S.D.N.Y, 1974), aff'd per cunem, No.

74--2177 (C A. 2, April 3, 1975).

, S D N.Y, No. 74--8-1454, 1455 and

74-8-1511-1542, mclustva.

b W.D. MICh, Nos G-74-1113-8-1 and

G-74-1114--8-1.

7 E D Pa No. 70-354 Previously reported In 39th Annual Report, p. 122.

"In re Doll)' Madison Industries, Inc.,

504 F. 2d 499 (C A 3,1974).

9 S D.N.Y., No. 69-8-461. Prevrously

reported In 40th Annual Report, pp. 128-

129, 37th Annual Report, pp. 183, 194-195;

36th Annual Report, p 179

III Abarta Corp v. Knsttetmer, 508 F

2d 1126 (C.A. 2, 1975).

II S.D. III., No RI-Bk-73-295 Prevrously reported In 40th Annual Report, p.

124

12 In the Matter of East Molme Downs,

Inc. C.A. 7, No. 74-1298, (May 27,1975)

1 I E.D. Va., Nos. 17-71-A, 256-71-A,

and 257-71-A Prevrously reported In 39th

Annual Report, pp. 123-124; 38th Annual

Report, p 118.

14 Davidge v. White, 377 F Supp. 1084

(S D N.Y. 1974).

I' Davidge v. White, No 72-CIV.-4333,

S D.N.Y ,July 15, 1975

Ib F.G F Proprtetary Funds, Ltd. v

Arthur Young & Company, S D.N Y. No.

73-Clv.-3262.

17 Caplm v. Martne Midland Grace Trust

Co, 406 US 416,434, (1972). In Webb &

Knapp, Inc., SDNY, No 65-8-365, the

case In which Cap ltn arose, an order was

entered on October 14, 1974, granting

plaintiffs' and defendant's counsel In a

class action on behalf of debenture holders against the Indenture trustee access

to the debtor's records

Ik The dismissal was based on two recent decrsions of the Court of Appeals

for the Second Crrcutt Bersch v Drexel

Firestone, Inc., 519 F.2d 974 (1975), and

ITT v Vencap, Ltd, 519 F.2d 1001 (1975).

I" S.D NY, No. 73-8-468. Previousty

reported In 40th Annual Report, p 131

211 Vmar v Cohen, et et., S.D N.Y., 72

CIV 1602

21 In re Air Industnal Research, Inc.,

N D. Calif., No 3-74-328-0JC; In re

Diversified Mountameer Corp, S.D. W Va ,

No 74-71-CH, In re Dolly Madison Industries, ED Pa., No 70-354, In re Lyntex

Corporation, S.D NY., No 73-8-75, In re

North Western Mortgage Investors Corp.,

W D Wash., No 642-73-8-2; In re Pan

Amencan Finenctet Corporation, D. Hawau, No 72-280. After the close of the

fiscal year the Commission published one

advisory report (In re Kmg Resources

Company, Corporate Heorqaruz atron Release No 316 (August 13, 1975), 7 SEC

Docket 615), and supplemented a prior

advisory report (In re tmperiet '400'

National, Inc, Corporate Reorganization
Release No. 315 (July 30, 1975), 7 S.E.C

Docket 604).

22 E D. Pa. No. 70--354 Previously reported in 39th Annual Report, p, 122.

23 The Commission historically has opposed the Issuance of warrants as an

unsound financial device and as contravening the feasibility requirement,

ctutas Company, 24 SEC 85, 120--122

(1946). See also Sections 216(12)(a)

and (b).

24 See Consottdeted Rock Products Co.

v, DuBoIS, 312 U.S. 510, 528,531 (1941).

2'; S D. W. Va, No 74-71-CH, 74-73-

CH, 74-75-81-GH Prevrously reported

in 40th Annual Report, p 127.

26 ConsolIdated Rock Products Co. v. DuBois, 312 U.S. 510 (1941).

27 W.D Wash., No. 642-73-B-2

28 Case v. Los Angeles Lumber Products

Co., 308 U S. 106, 130 (1939).

29 Section 216(12) requires, Inter alia,

that the plan contains fair and equitable

provrsion for the retirement of any secuntres issued pursuant to a plan.

30 Protective Committee v. Anderson,

390 U S. 414, 424-425 (1968), Neuonet

Secunty Co. v. Oortett, 289 U.S. 426, 436

(1933).

31 Case V Los Angeles Lumber Products

Co., supra, at 122.

32 N.D Calif., No 3-74-328-0JC

33 Ct. In re lmpenet '400' National, Inc.,

429 F.2d 671 (C.A 3, 1970).

34 Since the California Attorney General

had brought an action alleging Violations

of the State's Corporate Securities Act in

the Issuance of the limited partnership

Interests, the trustee considered the

limited partners as holding rescrssion

claims. See In re Los Angeles Land &

Investments, Ltd., 282 F.Supp. 448 (D.

Hawau, 1968).

35 Price v. Spokane Silver & Lead Co , 97 F.2d 237 (C A 8,1938)

36 D.C Hawau, No. Bk 72-280.

37 See In re Pettsedes-on-theDesplames, 89 F. 2d 214 (C A. 7, 1937);

In re Los Angeles Land & Investments,

Ltd., 282 F. Supp 488 (D Hawau 1968),

previously reported In 37th Annual Report

p.187. 3815 U S.C. *1701, etseq

39 N.D. Ga, No. 70556 Previously reported In 40th Annual Report, P 128.

40 In re Atlanta tnternetionet Raceway,

Inc, 505 F. 2d 732 (C.A. 5,1974) (Mem)

41 Prtce V Cotton,421 US. 976 (1975)

42 Texas Hotel Securtties Corp. V Waco

Development Co., 87 F 2d 395, 400 (C.A

5, 1936), cetttorert dented sub nom. Waco

Development Co. V Rupe, 300 U S. 679

(1937). Accord, Gross v. Bush Termtnel

Co., 105 F. 2d, 930, 932 (C.A 2, 1939)

See also Country Life Ap'.artments v.

Buckley, 145 F 2d 935, 938 (C A. 2,1944).

43 E.D.N. Y., No. 63-B-663. Previously

reported In 36th Annual Report, p, 90;

35th Annual Report, p. 163, :33rd Annual

Report, p. 134; 32nd Annual Report, p 90.

44 James Talcott, Inc. v. trvtnq L.

Wharton, 517 F.2d 997, (C.A. 2, 1975)

45 S.D.N. Y., No. 73-B-751. Previously

reported In 40th Annual Report, p. 131.

4h In re Arlington D,scount Company,

408 F. 2d 490 (C.A 6, 1969), In re Barchns Construction Corp., (1966-1967

Transfer Binder) Banker. L. Rep. c: 61,793

(S.D.N Y. 1966).

47 E.D. Va., Nos. 17-71-A, 256-71-A

and 257-71-A. Previously reported in

39th Annual Report, pp. 123-124; 38th

Annual Report, p, 118. .

48 In re Famngton Manutactunng Company (Robert E. McLaughlin and Steptoe

& Johnson, Appellants), C.A. 4, No. 75-

135549143 F. 2d 685 (1944).

';0 In re Farrington Manufactunng Company (New England Merchants National

Bank, Appellant), C.A 4, No 75-1354.

51 The terms of Section 242(1) are

desrqned to carry out the Congressional

Intent of encouraging Indenture trustees

to partrcrpate actively In the reorqaruzatron process on behalf of those whom

they represent House Hearings before

Judrcrary Committee on H R. 6439 (reintroduced as H. R. 8046 and enacted In

1935), 75th Can g., tst Sess (1937) 186

52 S.D.N Y No. 74 B 614-802, lnclusrve

.';3 See Scrtbner & MII/er v. Conway,

238 F. 2d 905, 907 (C A 2, 1956); Securiues Investor Protection Corp v. Charisma

Securtues Corp., 506 F. 2d 1191, 1196

(C.A. 2, 1974)

54 See 40th Annual Report, p. 130; 39th

Annual Report, p. 127; 38th Annual Report, p. 126, 37th Annual Report, p 138.

';';N.D Texas, No. Bk-3-74-454-G.

';6 S D. canr., No 17007-K.

57 Under Section 17a(2) of the Bankruptcy Act, fraud claims are not dischargeable In Chapter XI. Since they are

unliquidated and contingent, they also

are not provable (Section 57d)

58 While the SEC or any other party

must make a transfer motion Within 120

days after the first date set for the first

meeting of creditors, Rule 11-15(a) proVides that a debtor may make a transfer

motion "at any time."

59 C.D Calif, No 73-02510.

61) Debentures convertible into common

stock are "aqurty secunties" as that

term IS defined In Section 3(a)( 11) of the

Secunties Exchange Act. When held by

more than 500 persons at the end of a

fiscal year, they are subject to registration

under Section 12 of that Act which In

turn SUbjects them to the provisrons of

Section 14.

hl The Supreme Court held In SEC V

Amencan Tretter Rentals Company, 379

163
US 594, 613 (1965), that" as a general rule Chapter X IS the appropriate

proceeding for adjustment of publiclyheld debt"

"2 Cf In re Peoples Loan & Investment

Company of Fort Smith, 410 F.2d 851

(C A. 8, 1969)

..\ M.O Pa., No. Bk-74-437

"4 First Pocono Corp v L P Properties,

No 878. January Term, 1975 (Alleghany

County Court of Common Pleas, order

dated February 18,1975).

... S 0 Iowa, Nos 74-509-C, 74-528-C,

74-537-C

....15 USC l< 1701, et seq

.., W.O Wash, No. 8-74-11098

... See In re Northern tttmots Development Corp., 324 F 2d 104, 106-108 (C.A

7,1963), cert dented, 376 U.S 938 (1964),

In re Pure Penn Petroleum Co, 188 F.2d

851 (C A 2,1951)

..', 0 Nebraska, No. Bk-75-Q-17 Beefland International, Inc, a wholly-owned

subsidrary, also filed a Chapter XI petinon No. Bk-75-Q-18

S 0 Iowa, No. 74-464-C

379 U S 594 (1965). The Court stated,

at p 613, that ". we hold that, under

the statutory scheme, while not charged

with express statutory rights and responsrbthtres as In Chapter X, the SEC IS entitled to Intervene and be heard In a

Chapter XI proceeding"

164

72 C 0 Cal, Nos 74-9406-AAH and

74-941 Q-AAH ,lPeople of Celttotme v Exceptional

Properties Co., et ai, No. C-90080 (Superior Court of the State of California

for the County of Los Angeles, June 3,

1974)

74 The Supreme Court has held that

the Commission's right to intervene in

Chapter XI proceedings IS not limited

solely to moving for a transfer to Chapter

X Securities and Exchange Commission

v. Amencen Trailer Rentals Co, 379 U.S

594, 612-613 (1965). See also Fed. R

CIV P 24 .

.. An exchange of an evidence of indebtedness for unsecured claims against

a debtor IS exempt from registration under Section 5 of the Securities Act pursuant to Section 393a(2) of Chapter XI,

but It IS not exempt from qualification

under the Trust Indenture Act Cf Trust

Indenture Act Release No 30 (August 28,

1944), which deals with the issuance of

debt secunties pursuant to a similar

provrsion found In Section 264a(2) of

Chapter X

", S.O.N Y. No 75-8-243.

"C.O Cal, No. 73-03706 Prevrously

reported In 40th Annual Report, pp 131-

132

S.O NY, No. 75-8-953.

"

'"

"

'"
PART 8

SEC MANACEMENT

OPERATIONS

PART 8

SEC MANAGEMENT

OPERATIONS

A number of Important developments

occurred In 1975, contributing to Increased

operating etncrency, Improved service to

the publrc, and ettective use of the Comrrussion's resources.

ORGAN~AnONALCHANGES

One major change was aimed at

strengthening the Commrssron's capacity

for economic research and ensuring

critical support to the new National

Market Advisory Board. Towards this

end, the Commission has grouped ItS

Offices of Econornrc Research and Policy

Planning under a Directorate of Economic

and Polley Research. The new urut IS

responsible for, among other things, collecting and processing reports on the

holdings and trading of institutional investors called for by the Securities Acts

Amendments of 1975 and Improving the

Comrrussrcn's ability to develop timely

and accurate data on the capital markets,

In order to Identify fundamental changes

affecting the markets and to help

formulate Cornmrssron polley reflecting

awareness of such changes. It IS expected that the consoudanon of uruts

under a Single offrce will enable the Commrssion to better define problems and

collect the empirical evidence needed

to regulate effectively the various components of the securities Industry for

which It IS responsible.

Shortly after the close of the fiscal

year, the Office of RegistratIons and Reports and the Otnce of Records were

merged to form a new Oftrce of Reports

and Information Services, ("ORIS") The

new Offrce's responstbrlrtres encompass

a/l of the duties of the two former offices,

includrnq the receipt, initial examrnatron,

drstribunon and storage of all the Commission's otncral frlrnqs: the control of

Commission records and correspondence;

the management of the Cornrnrssron's

public reference services; the coordination of responses to Investor inquiries

and complaints, the substantive examination of certain reports and applications,

and the maintenance of numerous computer records In addttion, ORIS assumed

primary responstbihty for Implementing

the provisrons of the amended Freedom

of tntorrnatron Act (FOIA), and the Privacy

Act of 1974, as they relate to rnatenal

tiled WIth the Cornrnrsaron FOIA requests

were formerly handled by the Office of

PubliC Intorrnatron. Due to the Increase In

the number of requests and new demands

created by the Privacy Act of 1974, the

Comrmssron decreed to centralize all

operations In these areas In ORIS. A

special section has been set up Within

ORIS to coordinate the processing of

these requests.

INFORMATION HANDLING

Significant progress was made durinq

the year to Improve the SEC's information

processing capabihnes.

In recoqruzrnq the need for an orderly

167
extension of ItS use of advanced technology, the Commission, with the assistance of consulting support services.

completed an agency-wide information

systems review. As a result of this review, the Commission initiated the preparation of five-year plan for developing

more comprehensive information processIng systems and enhancing ItS overall

computer support capability. In addmon,

the Office of Data Processing, having

determined that an Immediate requirement existed for drastically Improving

the method by which computer-based

information IS processed, explored the

feasibility of utilizing telecommurucanons 1 for accessing and maintaining the

Commission's mtorrnatron systems. This

exploration process consisted of the

introduction, on a very limited and experimental basts, of telecommunications

equiprnent and techniques to two of the

Cornrrussron'a most widely utilized information systems, and the preparation

and cornpletron of a feasibility study

report This report sets forth recommended

courses of action for the Comrrusston to

follow In proceeding with the expansion

and further development of telecommunications for Internal Information processing

The recommendations are clearly consistent with the short-term phases of the

atorernennoned five-year plan that IS

being developed

The Office of Data Processing also expended a coasrderable amount of time

In modifying and Improving many of ItS

existrnq information systems and the manner In which rntorrnauon IS processed

These rnodrtrcations and Improvements

were made possible by the additional

equipment Installed In the latter part of

fiscal year 1974,2 and resulted In a substantial Increase In the number and timeliness of Jobs processed through the

computer

A most Important new system was developed durrnq the year Ttus system was

desiqned to facilitate the Comrnrssron's

morutonnq of negotiated cornrrussron rates

and the Impact that such rates Will have

on the securities Industry

In the area of new legislation, the Office

of Data Processing was and continues to

168

be heavrly Involved In the torrnulatron of

Commission policy and procedures, as

they relate to automated Information systems, to carry-out the provrsrons of the

Freedom of Information Act Amendments

and the Privacy Act In addrtron, preliminary work was cam eo-out dunnq the

latter part of the year to determine what

computer and analytical support would

be required In meeting the provrsrons of

the Securities Acts Amendments of 1975.

CONSUMER SERVICES

The Cornmtsston took several Important

steps In the development of a comprehensrve consumer education program

The program IS Intended to result In the

creation of written matenals and audioVisual aids that Will enhance effective

communication between the Commission

and the various constituencies It serves.

The first product of thrs program was

the production, In conjunction with a

prominent orqaruzatron for continuing

legal education, of a 3D-minute color

sound film of an actual Comrrussron meetIng. It IS believed to be the first such

record of an actual meeting by an independent regulatory agency. The film was

developed for, and has been shown to,

educational and legal organizations who

wish to have a better understanding of

how the Cornrmsston approaches, formulates and resolves problems tacinq It

On a more fundamental level, producnon was completed of a tz-mmute narrated color slide program entitled "Eagle

on the Street". Thrs program was deSigned to provide lay audiences With a

baSIC understanding of why the Oomrrussion was created, how It IS structured and

operates, what ItS rmssron IS, and how It

can be of assistance to the general public This program has been well received

by a number of educational and professional organizations. Plans are underway

to develop a broad drstribuuon to ensure

the program's availability to any Interested

groups

Finally, the Cornmtsston has undertaken

to write, publish and distribute a series

of consumer education booklets The first

such booklet, "Investigate Before You
Invest", was distributed In connection

with the Consumer Information Center.

More than 10,000 copies of the booklet

were requested by and distributed to

members of the public. A second booklet,

"The SEC and the FOIA", was designed

to provide answers to basic questions

concerning the Commission's administration of the Freedom of Information Act

It is available at the Commission's home,

regional and branch offices Other educatronal publications are currently in production and are expected to be completed

and distributed dUring the upcoming

fiscal year.

A new consumer brochure, "How To

Avoid Ponzi and Pyramid Schemes", has

been prepared and IS In the process of

being printed It cautions Investors about

these schemes and suggests some ways

of recognizing them. ThiS brochure

should be ready for distribution In early

1976.

Among these records are portions of the

Broker-Dealer and the entire [nvestment

Advrsers and Investment Company Inspection Manuals, the Summary of Administrative Interpretations under the

Securities Act of 1933 and the Commission's penodrc Securities Vrolatrons Bulletin Moreover, the Commission has

made available, pursuant to particular

FOIA requests, staff letters of comment

on registration statements or other filings

and Wells Committee submissions

Between February 19, 1975, when the

Commission revised ItS rules, and June

30, 1975, the close of the fiscal year, the

Commission received 267 requests for

information pursuant to the FOIA

PERSONNEL MANAGEMENT

The permanent personnel strength of

the Commission totalled 1,951 employees

on June 30, 1975, as shown below

With only a small Increase In staff, the

Commission did not pursue its normal

vigorous on-campus recrurtmq efforts,

although It did continue active efforts to

recruit secretarial and clerical employees.

For protessionat POSitions, the comrrnssion received an overwhelming number

of applications from extremely well qualified candidates for the vacancies that did

occur. The competition for all protessronal

Jobs has been extremely keen and the

credentials of the candidates outstanding.

Success of the Commission's Equal

Employment Opportunity affirmative actron program was most evident In Its

attorney staffing. At the close of the fiscal

year, minority attorney employment stood

at 33, up from 11 two years earlier, and

female attorney employment reached 55,

up from 24 at the end of fiscal year 1973

The CIVil Service Commission completed ItS nationwide review and rnspecACTIVITY UNDER FREEDOM OF

INFORMATION ACT

Amendments to the Freedom of Intorrnanon Act were enacted Into law on

December 19, 1974. From an operations

standpoint, the Commission had to qurckly

adjust ItS procedures and reassign manpower to cope with the flow of FOIA requests and the records administration

problems that accompany such requests

The Commission on February 19, 1975,

revised ItS own Freedom of Information

rules to conform to the December 1974

amendments

These revrsrons provide that the public

can Inspect or obtain copies of all records

maintained by the SEC with the exception

of certain specmed categories of information. Most financial and other inIorrnatron filed by registered companies

has always been available for mspection

or copying by the public However, the

public was denied access to certain categOries of material, notably investigatory

records Pursuant to various FOIA requests, during thrs fiscal year, the Comrrussron has made available for pubuc

inspection many records Which had traditionally been considered confidential

Commissioners .

Headquarters Office Staff

Regional Office Staff

Total Staff

Grand Total

Recruitment

5

1,223

723

1,946

1.951

169
non of the Commission's personnel management program with a VISit to the

Headquarters Offices during October and

November 1974 Their written evaluation

report had not been received by the end

of the fiscal year

The Commission's Internal personnel

management evaluation program was

revised and updated In October 1974 In

accordance with new civrl service requrrements As an Intergral part of that

program, the Office of Personnel also

initiated a quarterly management reportIng system, with statistical summaries

of personnel activities In each unit being

sent to the Regional Administrators and

the Directors of the operating drvrsion

and larger support offices

Training and Development

With the addition of a tun-tune Employee Development Specialist to ItS staff,

the Commission was able to expand ItS

training and development activities dunnq

FY 1975.

The TUItIOn Support Program, under

which employees who enroll In college

degree programs receive tumon assistance

for courses which relate to the Commission's work, was expanded, as were

counselling services for employees takIng courses under the program. The

Career Opportunities Program, a basic

skills program, graduated nine employees

who were ready to move Into typist pOSInons. By the end of the year, four employees had already been placed In

positions offering them greater career

advancement and opportunities to use

their new skills.

A 12-hour Personnel Procedure Class

was inauqerated to Introduce supervisors

and managers to Commission policies

and procedures as they pertain to personnel management This class will be

expanded next year Into a 40-hour basic

supervrsron class.

The emphasis on onsrte technical staff

training continued this year Under a contract with the American Institute of Certified Public Accountants, SIX accounting

courses were offered at the Headquarters

Office for SEC accountants and persons

170

In related fields. The Regional Offices

continued to offer 3-5 day seminars on

enforcement and regulatory matters for

their staffs and for those of Federal, State

and local law-enforcement agencies In

their areas An Integrated comprehensive

training program for securrnes compliance

examiners was instituted with developmental training programs for both SEC

examiners and the examiners of the selfregulatory organizations; the program

Includes self-study and periodic seminars

In regional offices. Seminars on investment company and Investment adviser

matters were held In two regional offices

and In the Headquarters. Training gUides

were developed for the staff during the

past year covering the taking of testimony

In investigative proceedings and sanctions

In SEC administrative proceedings.

An Executive Development program

was developed and Implemented to provide executive development training for

employees at grades GS-16 and above

and managerial training for employees at

GS-14 and GS-15 Executives (GS-16

and above) are expected to attend one

executive development course per year

Managers and their supervisors are expected to prepare Individual Development

Plans to Identify the on-the-Job and formal

training they need for performance on

their assigned position and to maintain

an overall high level of management

expertise throughout the Commission.

Funds also have been set aside for GS-14

and GS-15 employees who wish to apply

to receive additional training to develop

managerial skills

OFFICE SPACE

The Office of Administrative Services

provided assiStance to the Los Angeles,

Chicago and Atlanta Regional Offices and

to the Houston and Philadelphia Branch

Offices In gaining larger quarters, either

through relocation or expansion of existIng facilities

Some progress was made In Improving

the Commission's presently unsatisfactory

space arrangement In Washington, where

Commission staff are scattered In three

different locations and many offices are
severely overcrowded. Both houses of

Congress authorized the General Services

Administration to obtain a new headquarters location for the Commission,

but GSA's choice of an unsatisfactory

site resulted In a time-consuming appeal

to the Office of Management and Budget.

At the close of the year It appeared likely

that the Commission had successfulty

contested the selection of this proposed

siqht, but a decrsion as to an acceptable

alternative appeared to be some months

away.

FINANCIAL MANAGEMENT

Altogether, fees collected by the Comrrussion In fiscal 1975 amounted to 54

percent of funds appropriated by the

Congress for Commission operations. The

Commission IS required by law to collect

fees for (1) reqrstratron of securities ISsued; (2) qualification of trust rdentures,

(3) registration of exchanges; (4) registration of brokers and dealers who are

registered with the Commission but are

not members of the NASD; and (5) certincanon of documents filed with the

Commission. In addition, by fee schedule,

the Commission imposes fees for certain

filings and services such as the filing of

annual reports and proxy material

With reference to the fee schedule, on

March 29, 1974, the Commission announced the repeal of certain provisrons

of Rule 203-3 under the Investment Advisers Act of 1940, which required each

Investment adviser to pay an annual fee

to the Commission during the period of

ItS reqrstratron The Commission subsequently announced, In Release IA-486,

that all fees affected would be refunded

to those advisers and former advisers

who paid them In any of the years In

which the fee was Imposed. The action

was taken following the Commission's

consideration of recent decisions of the

United States Supreme Court J with respect to the Independent Offices Appropriation Act of 1952, 31 U.S C. 483(a),

which was thought to provide the statutory

baSISfor establishing these fees

NOTES TO PART 8

1 Telecommunications IS an on-line

technique whereby televrsron-lrke display

devices. called CRT terminals, are used

to directly communicate with the computer

tacruty,

2 40th Annual Report, p. 139

3 National Cable Televtston ASSOCiauon, Inc. v. United States, 415 U.S 336

(1974), Federal Power Commission v. New

England Power Co, 415 U S. 345 (1974).

171

PART 9

STATISTICS

THE SECURITIES INDUSTRY

Income and Expenses

Continuing the decline which began In

1973, gross revenues of broker-dealers

from all activities fell by approximately

four percent to $5.3 billion In 1974 from

$5.5 billion In 1973

All revenue sources except securities

commission business, Investment company secuntres, and commodities business

registered year-to-year Increases. The

13 percent decline In secuntres comrmssion business. however, overshadowed

PART 9

STATISTICS

the rise in the other revenue sources,

resulting In the unfavorable gross revenue

comparison between 1973 and 1974

Total expenses declined by 11 percent

to $49 billion In 1974 from $5.5 billion In

1973, and all expense Items, with the exceptron of occupancy and equipment

costs, registered year-to-year declines

The greater percentage decline In total

expenses over that for gross revenues

resulted In operating Income before taxes

showmq a marked Improvement In 1974,

$401.5 million, over that for 1973, $569

million

175
Table 1

REVENUE AND EXPENSES OF BROKER-DEALERS t

(Millions of Dollars)

Revenue 1970 1971 1972 1973 1974P

Securities Commission Business $21851 $3,405 1 $3.5330 $2.9538 $2.5825

Exchange Commission Business 1.7562 2.7607 2.7778 2,4288 2.1459

Floor Acnvrtres 741 944 944 694 537

Over-the-Counter Business 3548 5500 6608 4556 3829

Interest Income on Customers Acct 3796 364 0 5272 6214 6235

Dealer Business and/or Trading Activities 8465 11006 1.0388 6064 7438

Over-the-Counter Markel Makers 2887 4627 4931 2403 2982

MunIcipal and Government Bond Dealers 4349 4404 3496 3119 3151

Traders In Non-Exempted Securities 1223 1975 1961 542 1305

underwnunc Business 6252 9822 9389 5093 5112

Investment Company secunnes 2231 2339 1888 1785 1042

Investment Advrsory Fees 672 859 1015 862 933

Commodities Busmess 885 985 1251 1782 1685

Gain or Loss In Firm Investment 657 251 1 2096 134 326

Other Business 3191 3478 3589 3970 464 2

Gross Revenue $4.8000 $6.8691 $7021 8 $5.5442 $5.3238

Expenses

Commissions Paid to Other Brokers $ 1317 $ 1972 $ 2055 $ 2248 $ 1806

Floor Brokerage Clearance. Commission Fees 1914 2502 2569 2269 1982

Registered RepresentatIves Compensation 9029 1.2966 1.3633 1,0762 1.0075

Interest 5526 5283 6409 8096 7908

Clerical and Administrative Employees 1.3562 1.6505 1.7701 1.5171 1.1557

Communication 3888 4510 5042 4786 477 B

Occupancy and Equipment 2 3718 4338 4797 4528 4601

Promotional 1730 2012 2265 1988 1839

Other 4604 5814 5987 5025 4677

Total Expenses 4.5288 5.5902 6.0458 5.4873 4,9223

Operating Income or Loss Before Taxes' $ 271 2 $1.2789 $ 9760 $ 569 $ 4015

Number of Frrms 2.332 2.539 2 512 2,164 2.005

) Broker-dealers with gross sec, ..rrrnea Income 01 $20000 and over Excludes life insurance companies

with over $100 million In assets not related to the secunnes or commodities business

1. Includes depreciation and amortization

t Before Partners Compensatron P preliminary

Source X-17A-10 Reports

Securities Industry Dollar

Of each dollar received by brokerdealers in calendar year 1974, a total of

48.5 cents was derived from the securities

commission business, 13.9 cents from

trading activities, 9.6 cents from the underwriting business and the remaining

28 cents from secondary sources of revenue, such as Interest income on customers' accounts, sale of investment

176

company securities and gain or loss from

firm investments.

Total expenses amounted to 92.5 cents

of each securities industry dollar. The

two largest components of expenses were

clerical and administrative costs, 21.7

cents per dollar, and registered representatives' compensation, 18.9 cents per

dollar of revenue. Operating income before partners' compensation and taxes

accounted for 7.5 cents of the average

secunties Industry dollar.

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Assets and Liabilities

Broker-dealers reported total assets of

$25.2 billion at year-end 1974, as compared with $25.9 billion at year-end 1973.

This three percent decline occurred as

all but four asset components fell to levels

below that for 1973. Of the four components that showed an increase, one,

receivables from broker-dealers, registered an Increase primarily because of

accounting practice changes and the

addition of new business activities. The

decrease witnessed In the other asset

components may be explained primarily

by the decrease In the number of firms

reporting.

Total liabilities, not including subordinated borrowings, declined by one

percent between 1973 and 1974 to approximately $21 billion. As was the case

with assets, most liability components

registered declines, reflecting the decrease In the number of firms reporting.

The notable exceptions to the general

pattern of liability decline were money

borrowed, the Industry's largest single

liability component, which Increased

slightly to $10 7 billion, and payables to

other broker-dealers, which reflects

changes In accounting practices and

busmess activities.

Total capital aggregated $4.2 billion

at year-end 1974 compared With $47

billion at year-end 1973, a decline of 10

percent Subordinated borrowrnqs for

capital purposes-s-wtnch include subordinated loans, accounts covered by

equity or subordination agreements and

secured demand notes-e-dechned by 14

percent to $1.1 billion. Equity capital

declined by eight percent to $3.1 billion.

Broker-Dealers, Branch Office,

Employees

The number of broker-dealers Increased

In 1974, ending a series of successive declines beginning In 1970 Although the

number of broker-dealers Increased

slightly, the number of branch offices

operated by broker-dealers continued ItS

downward movement In 1974.

The number of broker-dealer employees

Increased between 1970 and 1971 and

again between 1971 and 1972. The trend

since 1972, however, has been downward

With the number of employees for 1974

being five percent below the 1972 peak

The number of registered representatives declined by five thousand between

1973 and 1974 Registered representatives, however, stili accounted for 60

percent of the Industry's total number of

employees.

179
Table 3

BROKERS AND DEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACT

OF 1934-EFFECTIVE REGISTRATIONS AS OF JUNE 3D, 1975 CLASSIFIED BY TYPE

OF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICE.

Number of Proprietors,

Number of Registrants Partners, Officers, Etc 1 1

location of Principal Offices Sole Sole

pro- Part- Cor- pro- Part- CorTotal prr- ner- pora- Total Prl- ner- poraetor- ships lions -I etor- ships lions -I

ships ships

Alabama 23 3 1 19 123 3 3 117

Alaska 1 1 0 0 1 1 0 0

Arizona 18 3 1 14 71 3 9 59

Arkansas 15 3 0 12 69 3 0 66

Cautorrua 392 67 30 295 2646 67 229 2350

Colorado 56 6 4 46 383 6 62 315

Connecticut 54 5 7 42 442 5 105 332

Delaware 12 2 1 9 33 2 2 29

District of Columbia 31 2 6 23 303 2 41 260

Flonda 92 10 4 78 358 10 g 339

Georgia 40 1 1 38 400 1 2 397

Hawau 21 1 0 20 105 1 0 104

Idaho 5 0 0 5 18 0 0 18

rumors 172 13 23 136 1282 13 231 1038

Indiana 50 8 1 41 278 8 2 268 Iowa 37 2 3 32 216 2 11 203 Kansas 21 2 2 17 134 2 9 123

Kentucky 12 3 0 9 72 3 0 69

t.oursrana 24 8 3 13 180' 8 14 158

Maine 12 1 3 8 501 1 19 30

Maryland 34 5 4 25 213 5 66 142

Massachusetts 153 31 14 108 1008 31 102 875

Michigan 56 8 4 44 386 8 105 273

Minnesota 70 2 1 67 611 2 2 607

MISSISSiPPi 13 2 5 6 57 2 13 42

MIssouri 66 4 7 55 753 4 145 604

Montana 4 2 0 2 21 2 0 19

Nebraska 19 1 0 18 156 1 0 155

Nevada 4 1 0 3 12 1 0 11

New Hampshire 3 1 0 2 11 1 0 10

New Jersey 155 33 19 103 509 33 49 427

New MeXICO 4 1 0 3 25 1 0 24

New York (excluding New York

City) 288 81 27 180 793 81 76 636

North Carolina 26 7 1 18 142 7 2 133 North Dakota 5 0 0 5 27 0 0 27

Ohio 93 5 15 73 772 5 218 549

Oklahoma 20 5 0 15 101 5 0 96

Oregon 25 3 1 21 105 3 3 99 Pennsylvania 172 18 31 123 1116 18 209 889 Rhode Island 18 5 2 11 42 5 8 29

South Carolina 14 0 2 12 72 0 9 63

South Dakota 2 1 0 1 12 1 0 11

Tennessee 37 2 1 34 238 2 27 209

Texas 143 21 5 117 1079 21 23 1035

Utah 39 3 4 32 164 3 12 149

Vermont 5 2 1 2 24 2 2 20 Vlrgln,a 42 7 5 30 360 7 17 336

Washington 59 7 2 50 289 7 6 276

West Virginia 6 2 0 4 23 2 0 21

WisconSin 36 2 0 34 359 2 0 357

Wyoming 6 2 0 4 19 2 0 17

Total (excluding New York

City) 2705 405 241 2059 16663 405 1842 14416

New York City 811 63 195 553 10686 63 2383 8240

Sub Total 3516 468 436 2612 27349 468 4225 22656 Foreign I 30 2 2 26 254 2 2 250

Grand Total 3546 470 438 2638 27603 470 4227 22906

I Registrants whose principal offices are located rn foreign countries or other JUriSdictions not listed

! Includes directors, officers trustees and all other persons occupymq similar status or performing

Similar tunctrons

Auocations made on the baSIS of tocanon of pnncrpat offices of registrants, not actual rocanons of

persons

I Includes all forms of organizations other than sole proprietorships and partnerships

180

l
1970

1971

1972

1973

1974

o

BROKER-DEALERS AND BRANCH OFFICES

3000

Broker-Dealers IBranch Offtces

Pv Prelunmorv Rv Revi scd

9000

o 100

EMPLOYEES

(Thousands)

200 300 400

1970

1971

1972

1973

1974

Registered

Representatives

p:- Prelumnarv

SOURCE X-17A-l0 QEPORTS

____IOther Employees

Rs Revi sed

05.5051

181

_

_
SECO Broker-Dealers

The number of broker-dealers who are

not members of a registered national secunties association Increased from 300 to

302 during the past fiscal year. This was

the second consecutive year In which the

number of SEeO broker-dealers Increased

by a small number despite an overall

contraction In the size of the total brokerdealer firm community. This Increase is

attributable primarily to the" continued

registration as broker-dealers of specialty firms, such as firms seiling real

estate-related securities, which attain

fewer competitive advantages in Joining

the NASD than do traditional brokerdealers. On the other hand, a substantial

decrease in the number of condominium

and put and call broker-dealers was

noted. (See attached Table).

Table 4

PRINCIPAL BUSINESS OF SECO BROKER-DEALERS

FIscal year-end

1971 1972 1973 1974 1975

Exchange member primarily engaged floor activities 16 15 17 17 21

Exchange member primarily engaged In

exchange cornrrussion business 37 33 28 20 19

Broker or dealer In general secunnes busmess 79 69 66 65 67 Mutual fund underwnter and distributor 27 27 24 18 19

Broker or dealer sell,"g variable annurtres 22 21 18 18 15 Sotrcrtor of savings and loan accounts 15 10 9 7 7

Real estate syndicator and mortgage

broker and banker 16 18 21 33 43 Broker or dealer sethnq 011and gas

Interests 4 3 3 6 4

Put and call broker or dealer or

option writer 23 22 20 15 7

Broker or dealer seiling securities of

only one Issuer or associated Issuers

(other than mutual funds) 15 17 18 19 20 Broker or dealer seiling church securities 21 15 16 17 16

Government bond dealer 4 3 3 7 8

Broker or dealer In other securities

business 19 30 26 31 42

Broker or dealer In Interests In

condominiums 14 6

Inactive 3 11 7 13 8

Total 301 294 276 300 302

"Not separately tabulated In prior years

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Stock Transactions of Selected

Financial Institutions

During 1974, private norunsured pension funds, open-end Investment companies, life insurance companies, and

property-liability Insurance companies

purchased $27.2 billion of common stock

and sold $24.4 billion, resulting In net

purchases of $2.8 billion This compares

with purchases of $46.9 billion, sales of

$39.4 billion, and net purchases of $7.5

billion In 1973. Their common stock activity rate, defined as the average of gross

purchases and sales divided by the average market value of holdings, fell to

19.1 percent from 23.9 percent a year

earlier.

Table 6

COMMON STOCK TRANSACTIONS AND ACTIVITY RATES OF

SELECTED FINANCIAL INSTITUTIONS

(Millions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Private Nonmsured Pension Funds I

Purchases 10,037 12,286 15,231 13,957 21,684 23,222 20324 11758

Sales 5656 7,815 10,271 9,370 12,800 15,651 14,790 9346

Net purchases (sales) 4,381 4,471 4,960 4,587 8884 7571 5,534 2412

Activity rate 172 187 213 205 221 197 173 141

Open-End Investment Cornparues !

Purchases 14,926 20,102 22,059 17128 21,556 20,943 15,561 9,085

Sales 13,325 18,496 19,852 15,901 21,175 22,552 17,504 9,372

Net purchases (sales) 1,601 1606 2,207 1,227 381 (1,609) (1,943) (287)

Acuvuy rate 407 484 510 456 482 448 390 305

Life Insurance Oornparues Purchases 1,683 2,932 3703 3,768 6,232 6,912 6,492 3,930

Sales 877 1725 2,184 1975 2,777 4,427 4,216 2439

Net purchases (sales) 806 1207 1,519 1,793 3,455 2,485 2,276 1,491

Acuvity rate 182 268 294 278 310 295 259 187

Property-liability Insurance Companies

Purchases 1,165 2,243 3,781 3613 4171 5,128 4519 2400

Sales 979 1,644 2,879 2,722 1,944 2,738 2,856 3,223

Net purchases (sales) 186 599 902 891 2,227 2,390 1,663 (823)

Activity rate 97 160 267 281 232 238 239 215

Total Selected Institutions

Purchases 27,811 37,563 44,774 38,466 53,643 56,205 46,896 27,173

Sales 20,837 29,680 35,186 29,968 38,696 45,368 39,366 24,380

Net purchases (sales) 6,974 7,883 9588 8,498 14947 10,837 7530 2,793

Activrty rate 247 294 324 298 308 278 239 191

Foreign Investors 1

Purchases 8,033 13,118 12,428 8,927 11,625 14,360 12,768 7,618

Sales 7,276 10,849 10,941 8,301 10,893 12,173 9,977 7,094

Net purchases (sales) 757 2,269 1,487 626 732 2,187 2,791 524

I Includes pension funds of corporations unions, rnutnemployer groups, and nonprofit orqaruzatrons.

also Includes deferred profit sharing funds

! Mutual funds reporting to the Investment Company Institute, a group whose assets constitute about

ninety percent of the assets of all open-end Investment companies

I Includes both general and separate accounts

I Transactions of foreign mdrvrduats and insutuuons In domestic common and preferred stocks Acnvrty

rates for foreign Investors are not calculable

NOTE Activity rate IS detrned as the average gross purchases and sates divrded by the average market

value of holdings

SOURCE PensIOn fundS and property-natnlrty insurance cornparues, SEC, Investment companies,

Investment Company Institute life msurance companies, Institute of life Insurance, foreign Investors,

Treasury Department

186

~
Stockholdings of Institutional

Investors and Others

At year-end 1974, the institutional

groups listed In the table below held $248

billion of the corporate stock, both common and preferred, versus $339 billion a

year earlier Even though the value of

stock held by these institutions declined

26.7 percent, their share of total stock

outstanding rose from 37.5 percent In

1973 to 389 percent at the close of 1974.

DUring the same period, the share held by

other domestic Investors, individuals and

instrtutrons not listed, declined from 584

percent to 57.0 percent, while the foreign

Investors share remained stable at 4 1

percent.

Table 7

MARKET VALUE OF STOCKHOLDINGS OF

INSTITUTIONAL INVESTORS AND OTHERS

(Buuons of Dollars End of Year)

1967 1968 1969 1970 1971 1972 1973 1974

1 Pnvate Nonmsured Pension Funds 51 1 615 614 671 887 1152 905 633 2 Open-End Investment Companies 428 509 450 439 526 580 433 303 3 Other Investment Companies 75 83 63 62 69 74 66 44

4 life Insurance Companies 109 132 137 154 206 268 263 222

5 Properly-liability Insurance

Companies 130 146 133 132 166 218 197 126

6 Common Trust Funds 39 48 46 46 58 74 66 53

7 Personal Trust Funds 759 836 796 786 941 1102 947 709

8 Mutual Savmqs Banks 25 28 27 31 4 1 54 44 33

9 State and Local Retirement Funds 39 58 73 101 154 222 206 168

10 Foundations 202 220 200 220 250 285 245 184

11 Educational Endowments 77 85 76 78 90 107 88 62

12 Subtotal 2393 2761 2616 2720 3387 4137 3460 2536

13 Less Institutional Holdings of

Investment Company Shares 28 34 40 49 60 67 67 57

14 Total Institutional Investors 2365 272 7 2575 267 1 332 7 4069 3393 2479

15 Foreign Investors J. 240 288 269 287 327 408 366 263

16 Other Domestic Investor s I 5634 6744 5749 5570 6305 6892 5285 3639

17 Total Slack Outstanding I 8239 9759 8593 8528 9959 11369 9044 6380

I Excludes holdings of insurance company stock

1. Includes esurnate of stock held as direct Investment

'Computed as residual (line 16= 17-14-15) Includes both mdrvrduats and Institutional groups not listed

above

I Includes both common and preferred stock Excludes Investment company shares but Includes foreign

Issues outstanding 10 the U S

187

J
Number and Assets of

Registered Investment

Companies

As of June 30, 1975, there were 1,301

active Investment companies registered

under the Investment Company Act, with

assets having an aggregate market value

of over $74 billion. Those figures represent an increase of 13 In the number of

registered companies and an increase of

nearly $12 billion in the market value of

assets since June 30, 1974. At June 30,

1975, 3,420 Investment advisers were

registered with the Commission, representing an Increase of 406 from a year

before.

Table 8

COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940 AS OF

JUNE 30,1975

Approximate

Market Value

of Assets of

Active

Number of RegIstered Companies Companies

Management open-end ("Mulual Funds")

Funds having no load Van able annuity-separate accounts

Capital Leverage Companies

All other load funds

Management closed-end

Small business Investment companies

Capital leverage companies All other closed-end companies

Unit Investment trusts

vanabre annurty-separate accounts

All other Unit Investment trusts

Face-amount certrncate companies

Total

Active

792

248

60

2 482

193

42

7 144

310

56

254

6

1.301

39

36

20

3

98

Total

831

229

330

9

1.399

(Millions)

55,475

10.826

1.220

33 43,416

8.953

281

297

8.374

8.685b

605

8.080

1.060

74.192

a "Inactive" refers to regIstered cornparues which as of June 30. 1975. were In the process of being

liquidated or merged. Or have filed an apphcation pursuant to Section 8(f) of the Act for dereqrstratton, or which have otherwise gone out 01 existence and remain registered only until such time as the Comrmssion Issues order under Section 8(1) terminating their registratIOn

b Includes about $48 billion of assets of trusts which Invest In secuntoes of other Investment companies. substantoally all of them mutual funds

188
Table 9

Number of companies Approximate

market value

Registration of assets of Registered Registered terminated Registered active

Fiscal year at beginning dUring durmq at end of companies ended June 30 of year year year year (millions)

1941 00 450 14 436 $ 2,500 1942 436 17 46 407 2,400 1943 407 14 31 390 2,300 1944 390 8 27 371 2,200 1945 371 14 19 366 3,250 1946 366 13 18 361 3.750 1947 361 12 21 352 3.600 1948 352 18 11 359 3.825 1949 359 12 13 358 3.700 1950 358 26 18 366 4.700 1951 366 12 10 368 5.600 1952 368 13 14 367 6.800 1953 367 17 15 369 7.000 1954 369 20 5 384 8,700 1955 384 37 34 387 12.000 1956 387 46 34 399 14.00(1 1957 399 49 16 432 15.000 1958 432 42 21 453 17,000 1959 453 70 11 512 20.000 1960 512 67 9 570 23.500 1961 570 118 25 663 29.000 1962 663 97 33 727 27.300 1963 727 48 48 727 36.000 1964 727 52 48

1

731 41.600 1965 731 50 54 727 44.600 1966 727 78 30 775 49.800 1967 775 108 41 842 58.197 1968 842 167 42 967 69.732 1969 967 222 22 1,167 72.465 1970 1.167 187 26 1,328 56,337 1971 1,328 121 98 1,351 78,109 1972 1,351 91 108 1,334 80,816 1973 1,334 91 64 1.361 73,149

1974 1.361 106 90 1.377 62,287

1975 1.377 88 66 1.399 74,192

Table 10

INVESTMENT COMPANY REGISTRATIONS TERMINATED

1975

Management open-end

No-loads 8 Variable anrnntres 2 All others 41

Sub-total 51

Management closed-end sarc:e 1 All others 11

Sub-total 12

Unit Investment trust

Variable annuities 0 All others 3

Sub-total 3 Face amount certificates 0

Total Terminated 66

189

-
Table 11

NEW INVESTMENT COMPANY REGISTRATIONS

1975

Management open-end

No-loads 31 Variable annuures 4 All others 22

Sub-total 57

Management closed-end SBIC's 4 All others 4

Sub-total 8

Unit investment trust

Variable annurtres 8 All others 14

Sub-total 22 Face amount certificates

Total Registered 88

Private Noninsured Pension

Funds: Assets

The assets of private noninsured pension funds totaled $133.7 billion at book

value and $111 7 billion at market value

on December 31, 1974. A year earlier

their comparable asset totals were $126 5

billion and $132.2 billion. The book value

of common stockholdings declined from

$80.6 billion at the end of 1973 to $79.3

billion last year. At market value, holdings

of common stock fell from $89.5 billion at

the end of 1973 to $62.6 billion last year,

the lowest level since year-end 1969.

Table 12

ASSETS OF PRIVATE NONINSURED PENSION FUNDS

Book Value, End of Year

(MIllions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Cash and Deposits 1,320 1,592 1,619 1,804 1,641 1,857 2,336 4,286 U S Government Securities 2,324 2,756 2,792 3,029 2,732 3,689 4,404 5,533

Corporate and Other Bonds 26,355 27,000 27,613 29,666 29,013 28,207 30,334 35,029 Preferred Stock 980 1,332 1,757 1,736 1,767 1,481 1,258 1,129

Common Stock 34,946 41,740 47,862 51,744 62,780 74,585 80,593 79,319

Own Company 2,563 2,836 3,062 3,330 3,608 3,868 4,098 NA Other Companoes 32,383 38,904 44,800 48,414 59,172 70,717 76,495 NA Mortgages 4,083 4,067 4,216 4,172 3,660 2,728 2,377 2,372

Other Assets 4,232 4585 4,720 4,860 4,826 4,983 5,229 6063

Total Assets 74,240 83,072 90,579 97,011 106,419 117,530 126,531 133,731

N A Not Available

NOTE Includes deferred profit sharing funds and pension funds of corporations, unoons, rnultiemployer

groups, and nonprofit orqaruzanons

190
Table 13

ASSETS OF PRIVATE NON INSURED PENSION FUNDS

Market Value, End of Year

(Millions of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Cash and Deposits 1,320 1,592 1,619 1804 1,641 1,857 2,336 4,286

U S Government secunnes 2,207 2,615 2,568 2,998 2,772 3,700 4,474 5,582

Corporate and Other Bonds 22,612 22,437 21,262 24,919 26,111 26,232 27,664 30,825 Preferred Stock 1,027 1.351 1.598 1.631 2.014 1.869 985 703 Common Stock 50.077 60,105 59,827 65.456 86,636 113.369 89.538 62,582 Own Company 5,000 5.764 5,775 6.038 7,691 8,750 6947 NA

Other Companees 45,077 54,341 54,052 59,418 78,945 104.619 82.591 NA

Mortgages 4.001 3,578 3,461 3.504 3.184 2,427 2.108 2.063 Other Assets 4,206 4332 4295 4422 4560 4 908 5140 5681

Total Assets 85.452 96.013 94,632 104.737 126.921 154,363 132,247 111.724

N A r~ot Available

NOTE Includes deferred profit sharing funds and pension funds of corporations, unions rnultrernployer

groups, and nonprofit orqaruzatrons

Private Noninsured Pension

Funds: Receipts and

Disbursement

Information on the receipts and drsbursements of private nonrnsured pension

funds for 1974 is not yet avauable In

1973, net receipts were $10.1 billion. Of

the $197 brlhon In total receipts. $14.4

billion was contributed by employers and

$1 3 billion by employees. Investment income (interest, dividends, and rent) and

net loss on sale of assets were $4 8 billion

and $0.9 billion, respectively. Of the $9.5

billion In total disbursements, $9,3 billion

was paid out to beneficiaries.

Table 14

RECEIPTS AND DISBURSEMENTS OF PRIVATE NONINSURED PENSION FUNDS

(MillIOns of Dollars)

1967 1968 1969 1970 1971 1972 1973 1974

Total ReceIpts 11825 13152 14 151 13.195 17545 20070 19673 21063

Employer Contributions 7.038 7702 8487 9717 11324 12745 14368 16971

Employee Contributions 790 893 1.011 1.074 1,120 1 199 1 273 1460

I nvestment Income 2937 3.193 3549 3866 4.102 4302 4843 5982

Net Profit (loss on

Sale of Assets 995 1265 991 (1 592) 904 1723 (924) (3477)

Other ReceIpts 65 99 113 130 95 101 113 127

Total Disbursements 3994 4621 5.428 6180 7.263 8493 9539 11030

Benefits Pard Out 3877 4503 5290 6030 7.083 8.297 9313 10740

Expenses and Other

Disbursements 117 118 138 150 180 196 226 290

Net Receipts 7831 8531 8723 7015 10282 11577 10134 10033

NOTE Includes deferred profit sharing funds and pension funds of corporations unions and multiemployer groups and nonprofit orqamzanons

191
SECURITIES ON EXCHANGES

Exchange Volume

Dollar volume of all securities transactions on registered exchanges totaled

$125.1 billion in 1974, down 33 percent

from the $1872 billion volume in 1973.

Of this total, $1183 billion represented

stock trading, $8.5 billion, bond trading,

and the balance, trading in rights and

warrants. The value of New York Stock

Exchange transactions was $105.6billion

in 1974.This figure represents a decline

of 31.7 percent from 1973. NYSE share

volume declined 11.8 percent from the

1973 total. On the American Stock Exchange, value of shares traded dropped

51 percent to $5.0 billion. The AMEX

share volume of 475 million shares was

off 35.3 percent from the 1973 figure.

Share volume on the regional exchanges

declined 16.9 percent from the 1973 figure to 541.9 million shares, valued at

$14.0billion.

Table 15

EXCHANGE VOLUME:1974

(Data In thousands)

Bonds Stocks Rights and warrants Total

dollar Dollar Principal Dollar Share Dollar Number

volume volume amount volume volume volume of Units

All registered exchanges 125,102,024 6,456,771 8.120,182 18.251,700 4,839.198 393,552 104,343

American 5,416,521 193.028 279.864 5.048,294 475.297 175.199 33,456

Boston 1.470.005 0 0 1,468.869 42.578 1,135 174

Chicago Board of Trade 0 0 0 0 0 0 0

Cincinnati 79.703 199 295 79,504 2,438 0 0

Detroit 268.902 0 0 268,900 9.596 2 1

Intermountain 1.284 0 0 1.284 5,100 0 0

Midwest 5,642.780 3,548 1.921 5.638.678 210,375 554 298

National 5,257 1 37 5.255 3.158 1 5

New York 105.566,489 6.194,092 7,740.993 99.180.709 3,822.021 191.688 62.966

Pacrfrc 4.228.174 65.615 96,792 4.139.771 165.615 22.788 6.679

Phlladelph ra-Bat IImoreWashington 2,411,049 288 280 2,408.576 89,478 2.185 764

Spokane 11,860 0 0 11860 13542 0 0

Exempted Exchange--

Honolulu 1.174 0 0 1.174 149 0 0

192
MARKET VALUE OF SECURITIES TRADED ON

ALL U. S. STOCK EXCHANGES Dollar. 811110ns

~-------------f\Jv-..

200

160

120

80

Stocks, "Ights r, & Worrant.

Bonds

40 "~ 'r ..

o

1964 65 66 67 68 69 70 71 72 73 1974 05 15070

193

•

~
NASDAQ Volume

NASDAQ share volume and price information for over-the-counter trading has

been reported on a dally basis since

November 1, 1971 At the end of 1974,

there were 2,593 Issues In the NASDAQ

system, a decrease of 11.6 percent from

the previous year-end figure. Volume for

1974 was 1.2 billion shares down 27 percent from 1973 This trading volume reflects the number of shares bought and

sold by market makers plus their net

Inventory changes

Table 16

SHARE VOLUME BY EXCHANGES ,

In Percentage

Total Share Volume

Year (Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others .!

1935 681971 7313 1242 191 269 1 10 96 85 03 691

1940 377.897 7544 1320 211 278 133 119 82 08 305 1945 769018 6587 2131 1 77 298 106 66 79 05 551

1950 893320 7632 1354 216 311 97 65 55 09 261

1955 1 321 401 6885 1919 209 308 85 48 39 05 502 1956 1.182487 6631 2101 232 325 83 47 49 05 527 1957 1.293022 7070 1814 233 273 111 40 39 06 414

1958 1 400579 71 31 1914 213 2991 84 45 35 05 274

1959 1.699697 6559 2450 200 i

97 37 31 04 341

1960 1 428552 6908 2246 222 89 39 34 05 141

1961 2.121 050 6566 2584 225 345 80 31 31 04 134

1962 1 699.346 71 84 2026 236 298 88 32 37 05 95 1963 1.874.718 7317 1890 234 283 84 30 47 04 111 1964 2.118.326 72 81 1942 244 265 93 29 55 04 86 1965 2663.495 7010 2260 264 234 82 27 53 05 64 1966 3306386 6954 2289 257 269 86 40 46 06 52 1967 4.641.215 6448 2845 236 246 88 43 33 03 58 1968 5406.582 6200 2975 263 265 90 79 32 01 96 1969 5.133.498 6318 2762 285 348 123 51 13 01 100 1970 4.834523 7129 1903 316 368 163 52 11 02 55 1971 6172 668 7134 1843 353 372 192 43 16 03 44 1972 6.518132 7048 1823 371 413 222 59 15 04 45

1973 5899.679 7493 1375 409 368 220 72 18 05 40

1974 4.943686 7858 1029 426 349 183 86 19 05 45

I Share Volume for Exchanges Includes Stocks Rights and Warrants

! Others Include Intermountain Stock Exchange Spokane Stock Exchange. National Stock Exchange

and Honolulu Stock Exchange

DOLLAR VOLUME BY EXCHANGES I

In Percentage

Dollar Volume

Year ($ Thousands) NYSE AMEX MIDW PCSE PBWE BOSE DTSE CNSE Others!

1935 $ 15.396139 8664 783 1 32 1 39 88 1 34 40 04 16

1940 8419.772 8517 7 £8 207 1 52 111 191 36 09 09 1945 16284 552 8275 1081 200 1 78 96 1 16 35 06 13

1950 21 808284 8591 685 235 219 1 g~1 112 39 11 05 1955 38039107 8631 698 244 1 90 78 39 09 08 1956 35 143 115 8495 777 275 208 108 80 42 08 07

1957 32214846 8551 733 269 202 1 12 76 42 08 07

19'8 38419.560 8542 745 271 211 1 10 71 37 08 05 H..:>~ 52001.255 8366 953 267 1 94 109 66 33 07 05 1960 45.276616 8387 936 273 1 95 104 60 34 08 04

1961 64.032924 8249 1072 276 200 104 50 38 07 05 1962 54823153 8638 682 276 200 105 46 42 07 05 1963 64403991 8524 752 273 240 107 42 52 06 04 1964 72415297 8355 846 316 249 1 15 43 67 06 04

1965 I 89.498711 8183 992 345 244 1 13 43 70 08 03

1966 123.643475 7981 1185 314 285 111 57 57 08 02

1967

I

162136387 77 32 1449 308 280 1 13 67 44 04 04 1968 197061 776 7358 1800 3 12 266 1 14 104 35 02 09 1969 176343 147 7351 1760 340 313 1 44 68 12 01 13 1970 131 708.7981 7845 1111 376 381 200 68 11 03 05 1971 i 186375172 7907 998 400 379 229 59 19 05 04 1972 205 956 263 77 77 1038 429 395 257 76 18 05 06 1973 I 178.863 622 82 07 606 455 356 246 100 21 07 02 1974 118646428 i 8375 440 475 351 203 124 23 07 02

I Dollar Volume for Exchanges Includes Stocks Rights and Warrants

.! Others Include Intermountain Stock Exchange Spokane Stock Exchange Nanonai Stock Exchange

and Honolulu Stock Exchange

194

~ ~~
Special Block Distributions

In 1974, the total number of special

block distributions declined 64.4 percent

The value of these distributions declined

87.3 percent to $157 million from $1 2

billion in 1974.

Secondary distributions accounted for

54.9 percent of the total number of special block distributions in 1974 and 85

percent of the total value of these

distributions.

The special offering method was employed 33 times accounting for 40 percent

of the total number of all special block

distributions In 1974, but with an aggregate value of $16.8 million, these

offerings accounted for only 10.7 percent

of the value of all special block distributions.

The exchange distribution method was

employed only 4 times In 1974. The value

of exchange distributions was $6.8 million, representing a decline of 25 2

percent from the 1973 figure.

Table 17

SPECIAL BLOCK DISTRIBUTIONS REPORTED BY EXCHANGES

(Value In thousands)

Secondary distributions Exchange distnbutrons Special ottermqs

Year Number Shares Value Number Shares Value Number Shares Value

sold sold sold

1942 116 2,397,454 $ 82,840 79 812,390 $22,694

1943 81 4,270,580 127.462 80 1,097,338 31,054

1944 94 4.097,298 135.760 87 1 053,667 32,454

1945 115 9,457,358 191,961 79 947,231 29,878

1946 100 6,481,291 232,398 23 308,134 11,002

1947 73 3,961.572 124.671 24 314270 9,133

1948 95 7,302,420 175991 21 238,879 5,466

1949 86 3,737249 104,062 32 500211 10,956

1950 77 4,280.681 88,743 20 150,308 4940

1951 88 5,193,756 146,459 27 323,013 10,751

1952 76 4,223,258 149,117 22 357897 9931

1953 68 6,906,017 108,229 17 380,680 10,486

1954 84 5,738,359 218490 57 705,781 $ 24,664 14 189,772 6,670

1955 116 6756,767 344,871 19 258,348 10,211 9 161850 7,223

1956 146 11,696,174 520,966 17 156,481 4,645 8 131755 4,557

1957 99 9,324,599 339,062 33 390,832 15,855 5 63,408 1,845

1958 122 9,508,505 361,886 38 619,876 29454 5 88,152 3,286

1959 148 17,330,941 822,336 28 545,038 26491 3 33,500 3,730

1960 92 11,439,065 424,688 20 441,644 11,108 3 63,663 5,439

1961 130 19.910,013 926,514 33 1,127266 58,072 2 35,000 1 504

1962 59 12,143,656 658.780 41 2,345,076 65459 2 48,200 588

1963 100 18937,935 814,984 72 2,892,233 107498 0 0 0

1964 110 19,462,343 909,821 68 2553237 97711 0 0 0

1965 142 31,153,319 1,603,107 57 2,334,277 86,479 0 0 0

1966 126 29,045,038 1,523,373 52 3,042,599 118,349 0 0 0

1967 143 30,783,604 1 154,479 51 3,452856 125,404 0 0 0

1968 174 36,110,489 1 571,600 35 2,669,938 93,528 1 3,352 63

1969 142 38,224.799 1244,186 32 1 706,572 52198 0 0 0

1970 72 17,830,008 504,562 35 2,066,590 48,218 0 0 0

1971 204 72.801,243 2,007,517 30 2,595,104 65,765 0 0 0

1972 229 82,365,749 3,216,126 26 1,469,666 30,156 0 0 0

1973 120 30,825,890 1,151,087 19 802,322 9,140 91 6,662111 79889

1974 45 7512200 133838 4 82,200 6,836 33 1 921 755 16,805

195
Value and Number of Securities

Listed on Exchanges

The market value of stocks and bonds

listed on U. S. Stock exchanges at yearend 1974 was $795 billion, a decrease of

10 percent over the previous year-end

figure of $888 billion. The total was compnsed of $537 billion In stocks and $258

billion In bonds. The value of listed stocks

declined by 30 percent In 1974 and the

value of listed bonds increased over 108

percent. Stocks with pnmary listing on

the New York Stock Exchange were

valued at $511 billion and represented 95

percent of the common and preferred

stock listed on all U. S stock exchanges.

The value of NYSE listed stocks declined

from their 1973 year-end total by $210

billion or 29 percent. Stocks with pnmary

listing on the AMEX accounted for 4 percent of the total and were valued at $23

billion. The value of AMEX stocks declined $15 billion or 40 percent in 1974.

Stocks with' primary listing on all other

exchanges were valued at $2.9 billion and

declined 30 percent over the 1973 total.

The net number of stocks and bonds

listed on exchanges Increased by 204

Issues or 3 percent In 1974. The largest

gain was recorded on the NYSE, where

listings Increased by 214 Issues. Data on

the number and value of foreign secunues

are In a footnote following Table 16.

Table 18

SECURITIES LISTED ON EXCHANGES I

(December 31, 1974)

Common Preferred Bonds Total Securities

Exchange Market Market Markel Market

Value Value Value Value

Number MIllions) Number Millions) Number Millions) Number Millions)

Re9,stered

American 1.222 $ 22,011 83 $ 1.303 202 $ 2.250 1.507 s 25.564

Boston 62 159 3 1 1 1 66 161

cmcinnan 6 11 4 52 7 67 17 130

Detrort 5 13 1 0 0 6 13

Midwest 28 208 8 79 1 13 37 300

National 102 145 0 0 3 2 105 147

New York 1,543 493.293 537 17,762 2.380 255,449 4.460 766,504

Pacific 62 1.089 8 31 22 373 92 1.493

P-B-W 28 87 100 644 5 28 133 759

Intermountain 34 20 0 0 0 0 34 20

Spokane 27 7 0 0 0 0 27 7

Exempted

Honolulu 19 $ 353 7 $ 7 5 $ 6 31 $ 366

Total 3.138 $517,396 751 $19.879 2,626 $258.189 6,515 $795,464

<Less than 5 million but greater than zero

I Excludes securities wtucf were suspended from trading at the end of the year, and secunties which

because of rnac ttvrty had no available Quotes Includes the followln9 forel9n stocks and bonds

Number Market Value Number Market Value

Exchange Stocks (Millions) Bonds (Millions)

New York 34 $12.385 148 $2,332 Amencan 70 9,237 4 85 Pacmc 5 89 0 0 National 4 61 0 0 Honolulu 2 8 0 0

Tolal 115 $21 780 152 $2417

196
Table 19

VALUE OF STOCKS LISTED ON EXCHANGES

(Dollars In billions)

New York Amencan Exclusively

Dec 31 Slack Stock on other Totats

Exchange Exchange Exchanges

1936 $ 599 $148 $ 747

1937 389 102 491

1938 475 108 583 1939 465 101 566

1940 419 86 505

1941 358 74 432

1942 388 78 466

1943 476 99 575

1944 555 112 667

1945 738 144 882

1946 686 132 818

1947 683 121 804

1948 670 119 $30 819

1949 763 122 31 916

1950 938 139 33 1110

1951 1095 165 32 1292

1952 1205 169 31 1405 1953 1173 153 28 1354 1954 1691 221 36 194 8 1955 2077 271 40 2388

1956 2192 310 38 2540

1957 1956 255 31 2242

1958 2767 31 7 43 3127

1959 3077 254 42 3373

1960 3070 242 41 3353

1961 3878 330 53 4261

1962 3458 244 40 3742

1963 4113 261 43 441 7

1964 4743 282 43 5068 1965 5375 309 47 5731

1966 4825 279 40 5144

1967 6058 430 39 6527

1968 6923 612 60 7595

1969 6295 477 54 6826

1970 6364 395 48 6807

1971 741 8 491 47 7956

1972 871 5 556 56 9327

1973 7210 387 41 7638

1974 511 1 233 29 5373

Securities on Exchanges

As of June 30, 1975, a total of 6,559

secuntres, representing 3,404 issuers,

were admitted to trading on securities

exchanges In the United States. Thrs compares With 6,459 Issues, mvolvrnq 3,482

Issuers, a year earlier Over 4,500 Issues

were listed and registered on the New

York Stock Exchange, accounting for 55.3

percent of the stock Issues and 90 percent of the bond Issues Data below on

"Securities Traded on Exchanges" involves some duplication since It Includes

both solely and dually listed securities.

197
Table 20

UN DUPLICATED COUNT OF SECURITIES ON EXCHANGES

(June 30 1975)

Registered exchanges Issuers

Stocks Bonds Total Involved

Registered and listed 3.832 2.642 6474 3349

Temporarily exempted from registration 3 2 5 2

Admitted to unlisted trading privileges 43 3 46 31

Exempted exchanges

Listed 22 5 27 15

Admitted to unusted trading privileges 7 0 7 7

Total 3907 2652 6559 3404

Table 21

SECURITIES TRADED ON EXCHANGES

Stocks

Issuers Bonds I

Temporarily

Registered exempted Unlisted Total

American 1 280 1292 1 45 1338 205

Boston 863 149 751 gOO 16

Chicago Board Optrons 1 1 1

Chicago Board of Trade 3 1 2 3

cincmnan 334 29 316 345 14

Detroit 381 66 334 400

Honolulu 2 36 45 5

Onter rnountam 55 53 2 55

Midwest 629 388 1 327 716 13

New York 1 892 2120 3 2.123 2.383

Pacruc Coast 881 852 1 198 1 051 85

PBS 970 317 835 1 152 61

Spokane 37 35 5 40

I Issues exempted under Section 3(a)(12) of the Act such as obuqatrons of U S Government. the

states and cities are not Included In this table

, Exempted exchange had 38 listed stocks and 7 admitted to unlisted trading

1933 ACT REGISTRATIONS

Effective Registrations

Statements Filed

DUring fiscal year 1975, 2,780 securities

registration statements valued at $77 billion became effective. While the number

of effective registrations declined nearly

4 percent from fiscal 1974, the dollar value

Increased 36 percent.

Although there were 2,912 registration

statements filed In fiscal 1975 as compared with 3,149 filed in the previous

year-an 8 percent declme-e--the dollar

value rose from $63 billion to $80 billion.

Among these statements, there were 507

Irrst-trrne registrants In fiscal 1975 as

compared with 731 In fiscal 1974. Thus,

198

almost all of the decline In the number

of filings IS accounted for In the drop-off

of nrst-trme registrants, whose issue size

IStypically smaller than average.

Purpose of Registration

Effective registrations for cash sale for

the account of Issuers rose 63 percent.

In this category there were substantial

differences In the rates of Increase as

between equity and debt offerings, I.e,

equity offerings Increased from $22 billion

In 1974 to $33 billion In fiscal 1975-a 48

percent nse-e-and debt offerings rose

from $21 billion to $38 blllion-a 79

percent Increase

Among the secunties registered for
cash sale, almost all debt Issues were for

Immediate offering, whereas three-fourths

of the equity registrations were for extended cash sale. Registrations of extended offerings totaled $24.8 billion with

Investment companies accounting for

$15.7 billion and employee plans $78

billion. Corporate equity registrations

accounted for only 19 percent of Immediate cash sale reqrstratrons, down from

40 percent In fiscal 1972, 48 percent In

1973, and 29 percent In 1974

Securities registered for the account

of the Issuer for other than cash sale are

primarily common stock Issues relating to

exchange offers, mergers and consolidations In fiscal 1975 common stock effectively registered for this purpose

totaled $3 billion, or only one-third as

much as a year earlier

Registrations for the purpose of secondary offerings (proceeds gOing to seilIng security holders) typically concern

sales of common stock. In fiscal 1975

these registrations amounted to $1 3

billion, representing a decline of 22

percent from fiscal 1974

Table 22

EFFECTIVE REGISTRATIONS

(Dollars In millions)

Cash sale for account of issuers

Total Bonds

Common debentures Preferred

Fiscal year ended June 30 Number Value stock and notes stock Total

1935 284 $ 913 $ 168 S 490 S 28 $ 686

1936 689 4835 531 3153 252 3936

1937 840 4851 802 2426 406 3635

1938 412 2101 474 666 209 1349

1939 344 2579 318 1593 109 2020

1940 306 1 787 210 1112 110 1 433

1941 313 2611 196 1721 164 2081

1942 193 2003 263 1041 162 1465

1943 123 659 137 316 32 486

1944 221 1 760 272 732 343 1 347

1945 340 3225 456 1851 407 2715

1946 661 7073 1 331 3102 991 5424

1947 493 6732 1 150 2937 787 4874

1948 435 6405 1 678 2817 537 5032

1949 429 5333 1083 2795 326 4204

1950 487 5307 1 786 2 127 468 4381

1951 487 6459 1 904 2838 427 5169

1952 635 9500 3332 3346 851 7529

1953 593 7 507 2808 3093 424 6326

1954 631 9174 2610 4240 531 7381

1955 779 10960 3864 3951 462 8277

1956 906 13096 4544 4 123 539 9206

1957 876 14,624 5858 5689 472 12019

1958 813 16490 5998 6857 427 13281

1959 1070 15657 6387 5265 443 12095

1960 1 426 14367 7260 4,224 253 11 738

1961 1 550 19070 9850 6162 248 16260

1962 1 844 19547 11 521 4512 253 16286

1963 1 157 14790 7227 4372 270 11869

1964 1 121 16860 10006 4554 224 14784

1965 1 266 19437 10638 3710 307 14656

1966 1 523 30109 18218 7061 444 25 723

1967 1649 34216 15083 12309 558 27950

1968 2417 54 076 22092 14036 1 140 37269

1969 3645 86810 39614 11674 751 52039

1970 3389 59137 28939 18436 823 48198

1971 2989 69562 27455 27637 3360 58452

1972 3712 62487 26518 20127 3237 49882

1973 3285 59310 26615 14841 2578 44034

1974 2890 56924 19811 20997 2274 43082

1975 2780 77 457 30502 37557 2201 70260

Cumulative Total 50003 855802 359509 280490 28828 668833

I For 10 months ended June 30 1935

.! Includes registered lease obnqat.ons related to industrial revenue bonds

199

'
Dollars Billions

90

75

60

45

30

15

30

20

SECURITIES EFFECTIVELY REGISTERED WITH S.E.C.

1935 1975

BILLIONS OF DOLLARS

200

1935 40 45 50 55

(F.scal Years)

60 65 70 1975

05 A737 11I.7S1

-
Table 23

EFFECTIVE REGISTRATIONS BY PURPOSE AND TYPE OF SECURITY:

FISCAL 1975

(Dollars In millions)

Type of security

Bonds

debentures Preferred Common

Purpose of regIstratIOn Total and notes stock stock

II reqrstratrons (estimated value) 77 457 38452 2376 36630

For account of Issuer for cash sale 70260 37557 2201 30502

Immediate ottermq 45477 37169 2190 6117

Corporate 42856 34 549 2190 6117

altered to

General public 42 109 34 527 2184 5,398

Security holders 747 21 6 719

Foreign governments 2621 2621 0 0

Extended cash sale and other

Issues 24 783 387 11 24 384

For account of Issuer for other than

cash sale 5925 836 137 4951

Secondary otterrnqs 1 273 59 37 1 177

Cash sale 637 0 0 637

Other 636 59 37 540

A

201
EFFECTIVE REGISTRATIONS CASH SAlE FOR ACCOUNT OF ISSUERS

Oollors Bt llre ns

40

30

20

10

o

"

,

"

,,

, I

, ,

, \

I

,

J

I Common Stock l I

~\I

, ,

,

,

,

}

\ I

\I

•

........,.. Preferred Stock :' ......

c.;> <. .. 1-.••••..•.•••.••••••••.••....•.....••...........•...•.•••...•

202

1935 40 45 50 55 60 65 70 1975

~
Regulation A Offerings

During fiscal year 1975, 265 notifications were filed for proposed offenngs

under Regulation A. Issues between

$400,000 and $500,000 In size predominated

Table 24

OFFERINGS UNDER REGULATION A

FIscal Year

1975 1974 1973

Size

$100,000 or less 28 40 69

$1 00,OOG-$200, 000 42 79 107

$200, 00G-$300, 000 39 66 96

$300,OOG-$400,OOO 24 39 86

$40000G-$500,OOO 132 214 459

Total 265 438 817

Underwriters

Used 44 115 402

Not Used 221 323 415

Total 265 438 817

Offerors

Issuing companies 227 394 787

Stockholders 7 34 18

Issuers and stockholders jomf ly 31 10 12

Total 265 438 817

Real Estate Investment Trusts

Dunng the fiscal year, the Office of

Economic Research published three economic staff papers covenng real estate

Investment trusts (REITs), condominiums

registered under the Securities Act of

1934 and the Cost of Flotation of Registered Issues, 1971-1972.

Early In the fiscal year, the staff conducted an analysis of condominiums

registered under the 1933 Secuntres Act

Trus report IS believed to be the most

complete statistical profile of condominium

reqrstrattons assembled to date. It contains a concise analysis of management

organization and compensation, with a

listing of all registrations studied According to the figures compiled In the

paper, In the penod from 1967 to June,

1974, there were 75 condominiums registered with the Commission valued at

$7133 rrulhon. Since that time, registered

offenngs In condominium projects have

declined sharply.

The REIT paper contains an analysts

of the REITs and discusses management

organization, compensation plans and

Secuntles Act registrations Since 1968,

REITs have become a large source of

construction loans Statistics compiled In

the report indicate that REIT Industry

assets total about $21.2 billion In contrast, Industry assets were Just $4.7 billion as of year-end 1970. Recently, however, a large segment of the Industry

shows a leveling off In asset growth, with

any Increases In loanable funds pnrnanly

coming from sources other than secuntres

reg istratrons

203
Cost of Flotation of Registered

Issues, 1971-1972

This report examines Initial costs of

flotation of all effectively registered debt

and equity secuntres offered for Immediate cash sale dUring the period 1971-

1972. It covers Issues offered to the general public by corporate-Issuers (primary

offerings) and those being sold by existIng shareholders (secondary offerings)

which encompass Issues offered through

securities dealers, Issues offered directly

by the ISSUing corporation as well as ISsues offered through privileged subscnpnon, The five most prevalent types of

secuntres covered are common stock,

preferred stock, limited partnership interests, nonconvertrble and convertible

debentures.

Costs covered by the analysis are those

strictly associated with transmitting funds

from the investor to the Issuer. There are

two major categories of costs covered

compensation paid to secuntres dealers,

finders or agents for the services they

provide In merchandising registered secunties offerings; and "other expenses"

associated with the preparation and ISsuance of new securities; e.g., legal,

accounting and engineering fees, Securities and Exchange Commission registration fees, printing and engraving

expenses etc. Noncash compensation In

the form of warrants or option IS covered

to a slightly greater extent than has been

the case In the past.

List of All Foreign Corporations

on the Foreign Restricted List

The complete list of all foreign corporations and other foreign entities on the

Foreign Restricted list on June 30, 1975,

IS as follows

Alan Mac'Favrsh, Ltd. (England)

Allegheny Mining and Exploration

Company, Ltd (Canada)

Allied Fund for Capital Apprecratron

(AFCA, SA) (Panama)

Amalgamated Rare Earth Mines, Ltd

(Canada)

204

American International Mining (Bahamas)

American Mobile Telephone and Tape

Co., Ltd (Canada)

Antel International Corporation, Ltd.

(Canada)

Antoine Silver Mines, Ltd. (Canada)

Atlantic and Pacific Bank and Trust

Co., Ltd. (Bahamas)

Banco de Guadalajara (MeXICO)

Bank of Sark (United Kingdom)

Briar Court Mines, Ltd. (Canada)

British Overseas Mutual Fund Corporation Ltd. (Canada)

California & Caracas Mining Corp.,

Ltd. (Canada)

Canterra Development Corporation,

Ltd. (Canada)

Cardwell 011 Corporation, Ltd. (Canada)

Caribbean Empire Company, Ltd.

(British Honduras)

Caye Chapel Club, Ltd. (British Honduras)

Central and Southern Industries Corp.

(Panama)

Cerro Azul Coffee Plantation (Panama)

Cia. RIO Banano, S A. (Costa Rica)

City Bank A.S (Denmark)

Claw Lake Molybdenum Mines, Ltd

(Canada)

Claravella Corporation (Costa Rica)

Compressed Air Corporation, Limited

(Bahamas)

Continental and Southern Industries,

S A (Panama)

Crossroads Corporation, S.A. (Panama)

Darien Exploration Company, S A.

(Panama)

De Veers Consolidated Mining Corporanon, S.A. (Panama)

Durman, Ltd., formerly known as

Bankers International Investment

Corporation (Bahamas)

Ethel Copper Mines, Ltd. (Canada)

Eurotorerqn Banking Corporation,

Ltd. (Panama)

Finansbanken ajs (Denmark)

First Liberty Fund, Ltd. (Bahamas)

Global Explorations, Inc. (Panama)

Global Insurance Company, limited

(British West Indies)
Globus Anlaqe-Verrmttlunqspesetlschaft MBH (Germany)

Golden Age Mines, Ltd (Canada)

Hebrlla Mining Corporation (Costa

Rica)

lnternanonal Communications Corporanon (Brtttsh West Indies)

Ironco Mining & Smelting Company,

Ltd (Canada)

James G Allan & Sons (Scotland)

J P Morgan & Company, Ltd., of

London. England (not to be confused with J. P Morgan & Co,

Incorporated, New York)

Jupiter Explorations, Ltd. (Canada)

Kenilworth Mines, ltd. (Canada)

Klondike Yukon Mining Company

(Canada)

Kokanee Moly Mines, Ltd. (Canada)

Land Sales Corporation (Canada)

Los Dos Hermanos, S A (Spain)

Lynbar Mining Corp, Ltd (Canada)

Norart Minerals Limited (Canada)

Norrnandre Trust Company, S A

(Panama)

Northern Survey (Canada)

Northern Trust Company, S A (SWitzerland)

Northland Minerals, Ltd (Canada)

Obsco Corporation, Ltd (Canada)

Pacrtrc Northwest Developments. Ltd

(Canada)

Pan amen can Bank & Trust Company

(Panama)

Paul pre Gold Mines, Ltd (Canada)

Pyrotex Mining and Exploration Co,

Ltd (Canada)

Radio HIli Mines Co , Ltd. (Canada)

Rodney Gold Mines Limited (Canada)

S A Valles & Co , Inc. (Ptulhprnes)

San Salvador Savings & Loan Co,

Ltd (Bahamas)

Santack Mines Limited (Canada)

Security Capital Fiscal & Guaranty

Corporation, S.A. (Panama)

Silver Stack Mines, Ltd (Canada)

Societe Anonyme de Refmancement

(Switzerland)

Strathmore Distillery Company, Ltd.

(Scotland)

SWISS Caribbean Development &

Finance Corporation (Switzerland)

Tam O'Shanter, Ltd (Switzerland)

Timberland (Canada)

Trans-American Investments, limited

(Canada)

Trrhope Resources, Ltd (Canada)

Trust Company of Jamaica, Ltd

(West Indies)

United Mining and Milling Corporanon (Bahamas)

Urutrust Limited (Ireland)

Vactlonland (Canada)

Valores de lnversron. S.A. (Mexrco)

Victoria Oriente, Inc (Panama)

Warden Walker WorldWide Investment

Co (England)

Wee Gee Uranium Mines, Ltd. (Canada)

Western lnternatronal Explorations,

Ltd (Bahamas)

Yukon Wolvenne Mining Company

(Canada)

205
ENFORCEMENT

Types of Proceedings

As the table below reflects, the securities laws provide for a wide range of

enforcement actions by the Commission

The most common types of actions are

injunctive proceedings instituted In the

Federal district courts to enjorn contrnued or threatened secuntres law violators, and administrative proceedings

pertaining to broker-dealer firms and/or

individuals associated with such firms

which may lead to various remedial sanenons as required In the public interest.

When an injunction is entered by a court,

violation of the court's decree IS a oasis

for criminal contempt action against the

violator.

Table 25

TYPES OF PROCEEDINGS

I ADMINISTRATIVE PROCEEDINGS

Basrs for enforcement action Sanction or relief

Broker-dealer, mvestment adviser

or associated person

Wilful violation of secunties acts provisron or Revocation suspension, or denial of broker-dealer

rule aiding or abetting of such violation failure or Investment adviser registration, or censure of

reasonably to supervise others willful misstate- broker-dealer or Investment adviser (1934 act, rnent In filing with Commission. conviction of or sec 15(b)(5) Advisers Act, sec 203(d))

injuncnon against certain secuntres or secuntres- related vrotatrons

Member of registered securoties association

v.otanon of 1934 Act or rule thereunder willful Expulsion or suspension from assoc.anon (1934

vrolanon of 1933 act or rule thereunder act sec 15A(1)(2»

Member of national securities exchange

VIOlatIOn of 1934 act or rule thereunder Expulsion or suspensron from exchange (1934 act,

sec 19(a)(3))

Any person

Same as first Item Bar or suspension from assocratron with a brokerdealer or Investment advrser, or censure (1934

act sec 15(b)(7) Adviser Act sec 203(1)

v.oianon of 1934 act or rule thereunder Willful Bar or suspension from assocranon with member

viotanon of 1933 act or rule thereunder of registered securrtres assocranon (1934 act.

sec 15A(1)(2))

Willful vroianon of secunnes acts provisron or Prohibition, permanently or temporarily. from serv- rule aiding or abetting of such violation Willful Ing In certain capacities for a registered Invest- misstatement In filing with Commission ment company (Investment Co Act, sec 9(b)

Principal 01 broker-dealer

Appomtrnent of SIPC trustee for broker-dealer Bar or suspension from associ all on with a brokerdealer (Securities Investor Protection Act, sec

10 (b»)

Registered securities assocratron

Rules do not conform to statutory requirements Suspension of registration (1934 act, sec 15A(b))

Violation of 1934 act or rule thereunder failure Revocation or suspension of reqistration (1934 act,

to enforce compliance WIth own rules engagmg In sec 15A(1)(1))

activity tending to defeat purposes of provrsron of

1934 act autnorrz.nq nanonal secuntres assocra- nons

206
Table 25-Conlinued

Basis for enforcement act.on Sanction or relief

NatIonal seeunnes exchange

vrotanon of 1934 act or rule thereunder failure Withdrawal or suspension of registratIon (1934)

to enforce cornpuance tber ewuh by member of act sec 19(a)(1))

Officer or director of registered secunnes association

Willful failure to enforce aSSOCiatIOn rules or Removal from office (1934 act sec 15(AI(11(3))

willful abuse of authority

OffIcer of national seeuntres exchange

Violation of 1934 act or rule thereunder Exputsron or suspension from exchange (1934 act

sec 19(a)(3))

1933 Act regIstratIon statement

Statement materially Inaccurate or Incomplete Stop order suspending effectiveness (1933 act

sec 8(d))

Investment company has not attained $100 000 Stop order (Investment Co Act sec 14(a))

net worth 90 days after statement became effectIve

1934 Act reporting requirements

Materra! noncornpnance Order directing compliance (1934 act sec

15 (c)(4))

Securities issue

Noncompliance by Issuer with 1934 act or rules Denial suspensron of effectIve date suspension

thereunder or WIthdrawal of reqrstr atron on national secuntres

exchange (1934 act sec 19(a)(2))

Pubuc mterest requrres fradlng suspensron Summary suspension of over-the-counter or

exchange tradIng (1934 act secs 15(c)(51 and

19(a)(4))

Registered Investment company

Failure to file 1940 act reqistrauon statement or RevocatIOn or suspension of reqistratron (Investrequrred report fIling materially Incomplete or ment Co Act sec B(el)

misleading statement or report

Company has not attained $100 000 net worth 90 RevocatIon or suspension of registratIon (Investdays after 1933 act regIstratIOn statement became ment Co Act sec 14(a))

effectIve

Name of company or of security Issued by It ProhIbitIOn of adoption of such name (Investment

deceptive or misleading Co Act sec 35(d))

Attorney, accountant, or other profeSSIonal

or expert

Lack of requisite quauticancns to represent Permanent or temporary denial of privilege to

others lackrnq In character or Integrity unetruca! appear or practice before Co rnrruasron (RuleS of

or Improper protessronal conduct willful vrotanon Practice Rule 2(e)(1))

of secur me s raws or rules or aiding and abetting

of such VIOlatIOn

Allorney suspended or disbarred by court ex- Automatic suspension from appearance or prac nce

perf s license revoked or suspended convrcuon of before Co rnrru s s ron (Rules of Practice Rule

felony or misdemeanor rnvotvmq moral turpitude 2(eI121)

Permanent rruuncnon 01 finding of vrol an on In Temporary suspension from appearance or practice

Comrru ss ron-c--m su tuted action finding of Violation before CommiSSIon (Rules of Practice Rule

by Cornrrus sron In adrrurustranve proceeding 2(e)(3))

207
Table 25-Continued

II CIVIL PROCEEDINGS IN FEDERAL DISTRICT COURTS

Basra for enforcement action

Any person

Person engaging or about to engage In acts or

practices violating secunties acts or rules thereunder

Noncompliance with provrsrons of law, rule or

regulation under 1935 act order Issued by Comrrussron, or undertaking In a registratIOn statement

Issuer subject to reporting requirements

Failure to file reports required under section

15(d) of 1934 act

Registered Investment company or affiliate

Name of company or of security Issued by It

deceptive or misleading

Officer, director, adviser, or underwnter engagIng or about to engage In act or practice constituting breach of nducrary duty involving personal

misconduct

Breach of nducrarv duty respecting receipt of

cornpensation from Investment company by any

person havinq such duty

Sanction or relief

Injunction against acts or practices which constitute or would constitute violations (plus ancillary relief under court s general equity powers)

(1933 act sec 20(b) 1934 act, sec 21(e) 1935

act, sec 18(f) Investment Co Act, sec 42(e)

Advisers Act, sec 209(e»

Writ of mandamus drrecnnq compliance (1933 act

sec 20(c) 1934 act sec 21(1) 1935 act, sec

16(g»

Forfeiture of $100 per day (1934 act, sec 32(b»

I njunction against use of name (I nvestment Co

Act, sec 35(d»

Injunction against acting In certain capacmes for

Investment company (I nvestment Co Act sec

36(a»

Award of damages (Investment Co Act, sec 36(b)

III REFERRAL TO ATTORNEY GENERAL FOR CRIMINAL PROSECUTION

BaSIS for enforcement action

Any person

Willful vrotauon of secunties acts or rules

thereunder

Sanctron or relief

MaXimum penal lies $5,000 fine and 5 years imprrsonrnent under 1933 and 1939 acts, $10,000 fine

and 2 years' rrnnnsonrnent under other acts An

exchange may be tined up to $500,000, a publicutrh ty holding company up to $200,000 (1933 act

secs 20(b), 24 1934 act secs 21(e). 32(a) 1935

act secs 18(f) 29 1939 act, sec 325 Investment

Co Act, secs 42(e), 49 Advisers Act, secs 209(e)

217 )

Table 26

INVESTIGATIONS OF POSSIBLE VIOLATIONS OF THE ACTS ADMINISTERED BY THE

COMMISSION.

Pending June 30 1974 1 115

New Cases 490

Total 1605

Closed 317

Pending June 30 1975 1288

208
During the fiscal year ending June 30,

1975, 277 formal orders were Issued by

the Commission upon recommendation of

the Drvisron of Enforcement

Table 27

ADMINISTRATIVE PROCEEDINGS

Admrrustratrva Proceedings Instituted DUring Fiscal Year Ending June 30, 1975

Broker Dealer Proceedings

Investment Adviser Proceedings

SlOP Order Reg A Suspension and Other Disclosure Cases

85

15

42

Injunctive Actions: 1974-1975

Durmg fiscal 1975, 174 SUits for inJunctions and 18 miscellaneous actions

were instituted In the United States district courts by the Commission, and 19

district court proceedings were brought

against the Commission. DUring the year

15 appellate cases mvolvrnq petitions for

review of Commission decisions were

handled, as well as 11 appeals In reorganization matters and 55 appeals In injunction and miscellaneous cases. SEC

participated as Intervenor in 1 case and

filed 12 amicus curiae briefs rn 12 cases

DUring fiscal 1975, the General Counsel

referred to the Department of Justice 88

cnrmnal reference reports. (This figure

Includes 12 criminal contempt actions)

Table 28

INJUNCTIVE ACTIONS

Injunctions Defendants

FIscal Year Cases Instituted Ordered Enjoined

1966 67 63 258

1967 68 56 189

1968 93 98 384

1969 94 102 509

1970 111 97 448

1971 140 114 495

1972 119 113 511

1973 178 145 654

1974 148 289 613

1975 174 453 749

209
Criminal proceedings: 1974-1975

During the past fiscal year, 88 cases

were referred to the Department of Justice

for prosecution. (this figure Includes 12

criminal contempt actions). As a result

of these and prior referrals, 53 indictments were returned against 199 defendants dUring the fiscal year There

were also 116 convrctrons In 33 cases

Convrotions were affirmed In 6 cases that

had been appealed, and appeals were

stili pending In 5 other criminal cases at

the close of the period Of 17 defendants

in 17 criminal contempt cases handled

durrnq the year, 10 defendants were convicted, and 7 defendants In 6 cases are

stili pending. Twenty-three cases are

pending In a Suspense Category. (ThiS

figure Includes 2 criminal contempt

cases)

Table 29

CRIMINAL CASES

Number of Cases

Fiscal Referred to Number of Defendanfs

Year Justice Dept Indictments Indrcted Convicnons

1966 44 50 193 76 1967 44 53 213 127 1968 40 42 123 84 1969 37 64 213 83 1970 35 36 102 55 1971 22 16 83 89 1972 38 28 67 75 1973 49 40 178 83 1974 67 40 169 81 1975 88 53 199 116

210
PUBLIC UTILITY HOLDING

COMPANIES

Assets

At the end of calendar 1974, there were

17 active holding companies registered

under the Public Utility Holding Company

Act of 1935 There are 175 companies

within the 17 active holding company

systems Aggregate consolidated assets,

less valuation reserves, approximated $39

billion at December 31, 1974.

Table 30

PUBLIC-UTILITY HOLDING COMPANY SYSTEMS

Electnc Aggregate

Solely Registered and/or gas Non- In- System Assets

registered hOldmg utility utility active Total Less Vatuanon holdmq operating subsrd- subsid- com. com- Reserves at

companies cornpanres lanes lanes parues parues Oec 31 1974"

Allegheny Power

System Inc 1 2 1 6 0 10 $ 1 758437000 Arnencan Electnc Power

Company, Inc 1 0 9 17 2 29 5923 106000 Amencan Natural Gas

Company 1 0 2 5 0 8 2340526000 Central & Soulhwest

Corporation 1 1 3 2 1 8 1 788 708000 Columbia Gas System

Inc. The 1 0 8 11 0 20 2838138000 Consolidated Natural

Gas Company 1 0 5 4 0 10 1 635751 000 Delmarva Power & Light

Company 0 1 2 0 0 3 801 946.000 Eastern Utilities Associates 1 0 4 1 2 8 269.970000 General PubliC Utilities

Corporation 1 0 5 3 1 10 3.424 555.000 Middle South unnnes Inc 1 0 6 4 3 14 3124342000 Nanonal Fuel Gas Company 1 0 1 3 0 5 415626000 New England ElectriC

System 1 0 4 2 0 7 1 562.580000 Northeast Utilities 1 0 5 8 6 20 2551 482.000 Otuo Edison Company 0 1 1 0 0 2 1 835267.000 Philadelphia Electrrc

Power Company 0 1 1 0 1 3 57.591 000 Southern Company The 1 0 5 2 0 8 6574 744 000 Utah Power & Light

Company 0 1 1 0 0 2 798.954000

Subtotals 13 7 63 68 16 167 $37 701 723000 Adjustments <a) to take

account of JOlOtly.owned

companies (b) to add net

assets of eight jornttyowned companies not

Included above' . 0 0 ra) -8 0 0 a) +8 894050000

Total companies and assets

In ac uve systems 13 7 71 68 16 175 $38 595 773.000

.Aepresenls the consolidated assets less valuation reserves of each of system as reported to the

Commission on torm U5S for the year 1974 The figures for National Fuel Gas Company are as at

September 30 1974 .. These eight companies are Beechbotlom Power Company Inc which IS an indirect suosrdrarv of

American ElectriC Power Company Inc and Allegheny Power System Inc orno Valley ElectriC Corporatron and Its subsrdiary Indiana-Kentucky ElectriC Corporation which are owned 378 percent by American

Etectrrc Power Company Inc 165 percent by Otuo Edison Company 125 percent by Allegheny Power

System Inc and 332 percent by other companies The Arkanorna Corporation which IS owned 32 percent by Central & Southwest Corporation system 14 percent by Middle South unnnes Inc system and

34 percent by an eiectnc uu lrfy company not associated With a registered system Yankee Atomic

Company Connecticut Yankee Power Company Vermont Nuclear Power Corporanon, and Mame Yankee Atormc Power Company. which are statutory utruty subsidranes of Northeast

unnnes and New England ElectriC System

211

El ectr rc Atomic Yanke e
Financing

The volume of external financing by

these companies aggregated $2.79 billion

In fiscal 1975, an Increase of 11 percent

from the previous year Bonds Issued and

sold decreased 24 percent, and preferred

stock 11 percent However, the amount of

common stock and debentures Issued and

sold Increased 148 percent and 78

percent, respectively.

Table 31

FINANCING OF HOLDING-COMPANY SYSTEMS I

(Fiscal 1975)

Holdmq-Cornpany Systems In MillIOns of Dollars'

Preferred Common

Bonds Debentures stock stock

S S S S Alleghany Power System Inc

Monongahela Power Co 546 I

West Penn Power Co 399

American Electric Power Co 1638

Appatactuan Power Co 891 I

Indiana & MichIgan Electric Co 150

Ohio Power Co 298 650

American Natural Gas Co 723

Michigan Consolidated Gas Co 794 I

Michigan WisconSin Pipe Line Co 494

Central and South West Corp 688

PublIC Service of Oklahoma 496

Transok PIpe line Co 119

Columbia Gas Co 739 1012

Consoudated Natural Gas Co 992 510

Delmarva Power & light Co 298 150

General Public Utili lies Corp 322

Jersey Central Power & light Co 601 I 500

Metropolitan Edison Co 503

Pennsylvania Electric Co 250

M,ddle South Utilities 980

Arkansas Power & light Co 600

Loursiana Power & light Co 500

Nanonal Fuel Gas Co 208

New England Electric System 400

Narragansett Electric Co The 401 I

New England Power Co 803

Northeast Utilities 732 I

Connecticut light & Power Co The 844

Hartford Electric light Co The 199

Western Massachusetts Electric Co 100

Ohio Edison Co 1487 400 565

Pennsylvania Power Co 50 80

Southern Co , The 3038

Georgia Power Co 1288

MISSISSIPPI Power Co 139

Utah Power & LIght Co 398 419 529 I

Tolal 12398 1939 3821 9765

I The table does not Include securities Issued and sold by Subsidiaries to therr 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 nonatnnated companies Transacuons of this nature also require authorization by the Commission except. as provided by Sec '(b) of the Act, the Issuance of notes havmg a

maturity of 9 months or less where the aggregate amount does not exceed 5 percent of the pnncrpat

amount and par value of the other secunnes of the Issuer then outstanding

s Debt securrues are computed at prrce to company preferred stock at offering prrce common stock

at offerrng or subscrrption price

Two or more Issues

I Private placement

212

'

'

'

'

~
Table 32

The table below shows statistical data relatIng to sales of about $1 2 billion of secunues by negotiation

du"ng fiscal 1975 Nine common stock Issues between November 13 1974 and Ap,,1 23 1975 were sold

durmg the temporary suspension of the competitive bIddIng requrrements on common stocks and the

remaining Issues were sold pursuant to exceptions granted by order under the Pubuc Utility Holdmg

Company Act of 1935

Dollar 0;'

Number of Total Prtceto Compen- PIE %

Shares Dollars Company san on RdtlO Yield

First Mortgage Bonds

I 8/01/74 Georgia Power Co NA s 130 000 000 $99 08 93 NA 110

Preferred Stocks 12112/74 Jersey Central

Power" Light 250 000 25 000 000 96 05 3 95 NA 135

12/20/74 Ohio Power Co 250 000 25 000 000 96 05 395 NA 14 a 6/17/75 Jersey Central

Power & Light 250 000 25 000 000 9650 350 NA 110

Common Stocks

9/18/74 The Southern

Company 17500 000 166250 000 874 80 48 147

10/01/74 Utah Power &

light 1 000 000 22 250 000 20 84 63 61 10 6

10/23/74 Northeast Utilities 4 500 000 27 563 000 549 10 4 44 167

11/13/74 Delmarva Power &

light 1 500 000 15000000 925 75 61 12 a 1/21/75 Middle South

UtIlities 7 000 000 98 000 000 1326 53 63 90

2/04/75 Central s Southwest 4300 000 68800 000 1522 49 91 73

2/25/75 Arnerrcan Natural

Gas 2 000 000 72250 000 3436 49 7 2 70

3/19/75 General PubliC

Utilities 2300 000 32200 000 1332 49 62 12 a 3/26/75 Arnencan Erectrrc

power 10 000 000 163 750 000 1552 53 84 122

4/08/75 New England

Electflc System 2500 000 40 000 000 1522 49 7 a 111

4/15/75 Onio Edison 4 000 000 56500 000 1344 49 85 118

4/23/75 Utah Power & Light 1 200 000 30 600 000 2431 47 79 93

6/10/75 Northeast Utilities 5 000 000 45625 000 858 60 63 111

6/17/75 The Southern

Company 11 000 000 137500 000 1189 49 73 11 2

$1 181 288 000

N A Not Applicable

213

=
CORPORATE

REORGANIZATIONS

Commission Participation

DUring fiscal 1975, the Commission

entered 14 new Chapter X proceedings

involving companies with aggregate

stated assets of approximately $657 million and aggregate Indebtedness of approximately $686 million. Including the

new proceedings, the Commission was a

party In a total of 129 reorganization

proceedings dunnq the fiscal year During

the year, 9 proceedings were closed,

leavmq 120 pending

Table 33

REORGANIZATION PROCEEDINGS UNDER CHAPTER X OF THE BANKRUPTCY ACT

IN WHICH THE COMMISSION PARTICIPATED

Fiscal Year 1975

Debtor

Air Industrial Research Inc

Aldersgate Foundation Inc I

American ASSOCiated Systems Inc

American Land Corporation

American Loan & Finance Co :

American Mortgage & Investment Co I

American National Trust !.

Arizona Lutheran Hospital I

Arlan s Dept Stores Inc

Atlanta tnternanonat Raceway Inc

Bankers Trust I

Beck Industries Inc

Bermec Corp

Beverly Hills Bancorp

Bubble Up Delaware Inc

Burreson & Co Inc I .!

BXP Construction Corp

C I P Corp I

Calvin Christian RetIrement Home Inc I

Carolina Caribbean Corp I

Coast 1nveators I nc I

Coffeyville Loan & Investment I

Combined Metals ReductIOn Co

Commonwealth Corp I

Commonwealth Fmancral Corp I

Community BUSiness Services Inc

Continental Land Development One Inc I

Continental Vending Machine Corp

Cosmo Capital Inc I

Cybern Education Inc.!

Davenport Hotel Inc

Drver srtred Mountaineer Corp

Dumont-Airplane & Manne I

E T & T Leasrnq Inc I

Eastern Credit Corp'

East MolIne Downs rnc :

Educanonal Computer Systems Inc

EIchler Corp I

Et-Trorucs Inc I

Equrtable Plan Co I

214

District Court

N D Cal

M 0 Fla

ED Ky

SO Ohio

ED Va

D SC

S D Ind

D Arrz

SDNY

N D Ga

S D lnd

SDNY

SDNY

CD Cal

CD Cal

CD Cal

SONY

S D Ohio

W D Mlch

WD N C

W D Wash

D Kans

D Nev

N D Fla

ED Pa

ED Cal

S D Fla

EDNY

N D III

N Dill

ED Wash

S D W Va

SDNY

D Md

ED Va

S D III

D AriZ

N D Cal

ED Pa

S D Cal

Petition Flied

March 14 1974

Sept 12 1974

Dec 24. 1970

Aug 8 1973

July 31 1972

Dec 13 1974

Feb 13 1968

May 11 1970

March 8 1974

Jan 18 1971

Oct 7 1966

May 27 1971

April 16 1971

April 11 1974

Aug 31 1970

June 10 1974

Jan 15 1974

May 23 1975

Aug 8 1974

Feb 28 1975

Apnl 1 1964

July 17 1959

Sept 30 1970

June 28 1974

Dec 4 1967

June 8 1972

Nov 27 1974

July 10 1963

July 22 1963

Sept 11 1970

Dec 20 1972

Feb 8 1974

Oct 22 1958

Dec 20 1974

March 4 1974

Sept 11 1973

April 26 1972

Oct 11 1967

Nov 25 1958

March 17 1958

SEC Notice of

Appearance Filed

May 6 1974

Oct 3. 1974

Feb 26 1971

Sept 25 1973

Aug 30 1972

Feb 6 1975

March 27 1968

May251970

March 8 1974

Feb 3 1971

Nov 1 1966

July 30 1971

April 19 1971

May 14 1974

Oct 19 1970

Aug 1 1974

June 10 1974

June 26 1975

Nov 4 1974

April 17 1975

June 10 1964

Aug 10 1959

Sept 7 1972

July 17 1974

Dec 13 1967

April 30 1973

May 8. 1975

Aug 7 1963

April 22 1963

Sept 25 1970

Jan 26 1973

April 24. 1974

Nov 10 1958

June 5 1975

April 22 1974

Oct 17 1973

Nov 3 1972

Oct 11 1967

Jan 16 1959

March 24 1958
Debtor

Table 33-Continued

Drstnct Court Peu uon Flied

SEC Notice 01

Appearance FIled

EQUIty Funding Corp of Amenca

Farr mqton Manufacturing Co

First Baptrst Church tnc of Margate Fta

First Home Investment Corp of Kansas Inc

First Research Corp

Wm Gtuckin Co Ltd

Gro-Plant incusmes Inc

Gulfeo I nvestrnent Corp

Gulf tjruon Corp I

Harmony Loan Inc

Hawkeye Land ltd

R Hoe & Co Inc

Home-Stake Pr oductron Co

Houston Educational Foundation Inc

Human Reianons Research Foundation

lmperiat-Amenc an Resources Fund Inc

Impenal '400 Natrcnat Inc

Indiana Business & Investment Trust

Interstate Stores Inc

Investors Associated rnc:

Investors Funding Corp of New York r

Jade Od & Gas Co I

J D Jewell Inc

Ktng Resources Co

Krrchoter & Arnold I

Lake Winnebago Development Co Inc

lIt1le Mtssoun Minerals Assn Inc

Los Angeles Land & Investments Ltd

LOUISiana loan & Thrrtt Inc

Lusk Corp

Lyntex Corp

Dolly Madison Industries Inc

Magnolia Funds Inc

Mammoth MountaIn Inn Corp

Manufacturer s Credu Corp,

Maryvale Cornrnuruty Hospital I

Mayer Central Burldrnq I

MId-CIty Baptrst Church

Morehead CIty Shrpbuudmq I

Mount Ever e st Corp

NatIonal VIdeo Corp!

Nevada Industrial Guaranty Co

North American Acceptance Corp

North Western Mortgage tnvestors Corp

Omega-Alpha Inc I

Pan American Financial Corp

Parkvrew Gem Inc

Parkwood inc :

Pno eru x Mortgage Co .!

RIC rnternanona: rndustnes Inc

John Rich Enterprises Inc

Riker Delaware Corp (

Roberts Company I

Royal I nns of American I nc I

Scranton Corp'

Sequoyan Industries Inc

Edward N SIegler & Co

Sierra Trading Corp I

60 M .nure Systems Inc.!

Sound Mortgage Co Inc

Southern Land Title Corp

Stanndco Developers Inc

Stuf rnq Homex Corp

Sunset International Petroleum Corp

Swan-FInch all Corp .!

CD Cal

ED Va

SOFia

D Kan

SOFia

SONY

NO Fla

W 0 Okla

M 0 La

EO Ky

S D Iowa

SDNY

NO Okla

S D Tex

S D Cal

D Colo

D N J

S D rno

SDNY

W 0 Wash

SDNY

CD Cal

N D Ga

D Colo

ED N C

W D Mo

D N D

D Hawau

ED La

D ArIZ

SDNY

ED Pa ED La

CD Cal

D N J

D Anz

D A"z ED La

ED N C

ED Pa

N Dill

D Nev

N D Ga W D Wash

N D Texas

D Hawau

WD Mo

D DC

D Aoz

NO Tex

D Utah

D N J M D N C

S D Cal

M D Pa

W D Okla

N D Ohro

OCala

M D Fla

W 0 Wash

ED La

WDNY

WDNY

N D Texas

SDNY

Ap,,1 5 1973

Dec 22 1970

Sept 10 1973

Ap"l 24 1973

March 2 1970

Feb 22 1973

Aug 30 1972

March 22 1974

Aug 29 1974

Jan 31 1973

Dec 19 1973

July 7 1969

Sept 20 1973

Feb 16 1971

Jan 31 1964

Feb 25 1972

Feb 18 1966

Oct 10 1966

June 13 1974

March 3 1965

Oct 21 1974

June 28 1967

Oct 20 1972

Aug 16 1971

Nov 9 1959

Oct 14 1970

July 18 1966

Oct 24 1967

Oct 8 1968

Oct 28 1965

Ap"l 15 1974

June 23 1970

Nov 18 1968

Sept 16 1969

Aug I 1967

Aug 1 1963

July 15 1965

July 30 1968

Nov 9 1959

May 29 1974

Feb 26 1969

May 7 1963

March 5 1974

Dec 12 1973

Jan 10 1975

Oct 2 1972

Dec 18 1973

June 13 1966

Aug 14 1967

Sept 16 1970

Jan 16 1970

Ap,,121 1967

Feb 12 1970

Ap,,124 1975

Ap,,1 3 1959

Jan 21 1974

May 23 1966

July 7 t 970

July171970

July 27 t965

Dec 7 1966

Feb 5 1974

July 1I 1972

May 27 1970

Jan 2 1958

Ap,,1 9 1973

Jan 14 1971

Oct 1 1973

Ap"l 24 1973

Ap,,114 1970

March 6 1973

Sept 13 1972

March 28 1974

Nov 5 1974

Jan 31 1973

Jan 21 1974

July 14 1969

Oct 2 1973

March 2 1971

Feb 14 1964

March 6 1972

Feb 23 1966

Nov 4 1966

June 13 1974

March 17 196b

Oct 22 1974

Aug 16 1967

Nov 7 1972

Oct 19 1971

Nov 12 1959

Oct 26 1970

Jan 29 1968

Nov 28 1967

Oct 8 1968

Nov 15 1965

Jan 28 1974

July 6 1970

May 26. 1969

Feb 6 1970

JUly 30 1968

Sept 11 1963

Jan 19 1966

Oct 23 1968

Nov 12 1959

June 28 1974

March 26 1969

JUly 2 196:1

March 28 1974

Dec 12 1973

Jan 10 1975

Jan 9 1973

Dec 28 1973

June 17 1966

Ap"l 17 1968

Sept 23 1970

Feb 6 1970

May 23 1967

March 2:1 1970

June 24 1975

Ap"l 15 1959

Jan 30 1974

June 7 1966

July 22 1970

July 29 1970

Aug 31 1965

Dec 31 1966

March 7 1974

July 24 1972

June 10 1974

Jan 23 1958

TMT Trader Ferry Inc'

Tele- Tr oruc s Co

Texas Independent Coffee Orcatuz auon Tlleo Inc

Tower Credit Corp

S D Fla

ED Pa

S D Tex

o x ans M 0 Fla

June 27

July 26

Jan 5

Feb 7

April 13

1957

t962

1965

1973

1966

Nov

Sept

Jan

Feb

Sept

22 1957

12 1962

13 1965

22 t973

6 1966

215

t

~

t

t
Table 33-Continued

SEC Notice of

Debtor District Court Petition Filed Appearance Filed

Traders Compress Co W 0 Okra May 12 1972 June 6 1972

Trans-East Air Inc o Me Aug 29. 1972 Feb 22. 1973

Trans-International Computer Investment NO Cal March 22 1971 July 26. 1971

Trusters Corp' CD Cal Sept 13. 1961 Oct 9 1961

U District BUilding Corp I W 0 Wash Dec 9 1974 Dec 9 1974

uruservrces, Inc SO Ind Dec 4.1970 Jan 28. 1971

v.atron Computer Systems Corp o Mass April 29. 1971 April 29. 1971

Vinca Corp I ED M,ch March 29 1963 April 9.1963

Virgin Island Properties, Inc o V I Oct 22.1971 April 11. 1972

Waltham Industries Corp CD Cal July 14. 1971 Aug 19 1971

Webb & Knapp Inc I SONY May 7 1965 May 11. 1965

HR Weissberg Corp , NO III March 5 1968 April 3.1968

Westec Corp I SO Tex Sept 26 1966 Oct 4.1966

Western Growth Capital Corp o Am Feb 10 1967 May 16 1968

Western National Investment Corp I o Utah Jan 4 1968 March 11. 1968

Westgate-Callforma Corp SO Cal Feb 26. 1974 March 8.1974

Wonderbowl Inc CD Cal March 10. 1967 June 7 1967

Wood moor Corp o Colo Feb 25 1974 March 25 1974

Yale Express System Inc I SONY May 24 1965 May 28. 1965

I Cornrmssron filed notice of appearance In fiscal year 1975

.! Reorganization proceedings ctoseo during fiscal year 1975

: Plan has been substantially consummated but no final decree has been entered because of pending

matters

SEC OPERATIONS

Net Cost

Altogether, fees collected by the Comrrussron In fiscal 1975 amounted to 54

percent of funds appropriated by the Congress for Comrrusston operations, The

Comrnrsston IS required by law to collect

fees for (1) registration of secunties ISsued; (2) qualmcatron of trust Identures,

(3) registration of exchanges, (4) reqistranon of brokers and dealers who are registered with the CommisSion but are not

members of the NASD, and (5) certification of documents filed with the Commrssion In addition, by fee schedule, the

Oornrrussion Imposes fees for certain ttlinqs and services such as the filing of

annual reports and proxy material.

216

With reference to the fee schedule, on

March 29, 1974, the Commission announced the repeal of certain provisions

of Rule 203-3 under the Investment Advisers Act of 1940, which required each

Investment adviser to pay an annual fee

to the Commission during the period of

ItS registration. The Cornrrusston subsequently announced, In Release 1A-486,

that all fees affected would be refunded

to those advisers and former advisers who

paid them In any of the years In which the

fee was imposed. The acnon was taken

following the Commission's consideration

of recent decisions of the United States

Supreme Court With respect to the Independent Offices Appropriation Act of

1952,31 USC 483(a), which was thought

to provide the statutory baSIS for

establishing these fees.

~
APPROPRIATED FUNDS vs FEES COLLECTED

Dollors Millions

-

-

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APPROPRIATION

-

NET COST OF

COMMISSION I- OPERATIONS •

- "}

FE ES

COll ECTED

'-

50

40

30

20

10

o

1969 70 71- 72 73 74 1975

217

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